What are stable coins and which cryptos are stable coins
Cryptocurrencies – almost unheard of by the public before last year – shot into the headlines during 2017 as Bitcoin rose, and rose, and rose… before finally crashing back to earth.
In just three, frenetic weeks from the beginning of December, the price rocketed from $10,000 to nearly $20,000 – before plunging back to $13,000 just before Christmas.
Little wonder that economists and bankers are so dismissive of digital currencies. Agustín Carstens, head of the Bank of International Settlements – known as the ‘central bank for central banks’ – has dismissed them as “a bubble, a Ponzi scheme and an environmental disaster”.
Stable not volatile
But what if there were another way – a stable digital currency with all the benefits of regular cryptos in terms of blockchain security and transparency, but none of the crazy volatility?
Such cryptocurrencies do exist: a new breed backed, mostly, by a hard or ‘fiat’ currency, such as the dollar. Perhaps unsurprisingly, they are called stablecoins. The aim is to reduce volatility and increase credibility by grounding the digital currency with something whose value is already a given.
“Rapid price fluctuations nullify the utility of cryptocurrency as a means to transact for businesses and consumers, and their prospect as a long-term store of value for investors,” says Kingsley Advani, a partner at ChainfundCapital, writing on medium.com. “In the face of these gross inadequacies, the search for stability is gaining traction.”
Technology analyst David Wither makes the point that stablecoins offer particular hope to people living in evolving markets such as Argentina and Zimbabwe, who have seen wildly fluctuating national currencies and hyperinflation over the past decade.
Stablecoins have “the potential to make a serious impact in these developing economies, providing citizens with a highly accessible, transferable and stable asset”, he says.
A number of stablecoins have already established a foothold in the crypto market – although not without controversy.
One of the earliest contenders, and the market leader, Tether, pegs the value of each token to the US dollar. Tether’s monthly trading volume ranks third among cryptocurrencies after Bitcoin and Ethereum, which shows there is market demand for stablecoins.
However, the currency has been accused of not being backed by the number of US dollars it claims to have in its account – something the company behind it strongly denies.
It has released a statement saying categorically that “all Tethers in circulation are fully backed by USD reserves. Full stop. Memoranda, consulting reports, industry leaders, cryptocurrency pioneers, and competitors have all confirmed this. Reserves have always, and will always, match the number of Tethers in circulation.”
However, critics say Tether’s single-hub structure, with all its tokens sitting in one centralised (and unaudited) account, is dangerous – and it suffered a hack in November 2017 leading to a $31m loss.
The company also makes no guarantees about exchanging Tethers for cash – in fact, just the opposite. “There is no contractual right or legal claim against us to redeem or exchange your Tethers for money,” it says on its website.
These issues have failed to dent its popularity among financial traders looking to buy and sell cryptos, though, and its market cap now sits at $2.6bn, a rise of more than $1bn since the beginning of November.
In contrast to Tether, TrueUSD makes a legal commitment to exchange its tokens for US dollars, and is also looking to expand the model to other fiat currencies such as the euro and the yen, and even commodities such as gold, diamonds and real estate.
TrustToken, the company behind TrueUSD and the TrueCoin project, also promises complete openness and claims to be the first “USD-backed stablecoin that is 100% collateralised, legally protected, and transparently audited”.
“We’re doing this in response to huge demand for a trustworthy stablecoin from the crypto community,” said TrustToken co-founder Stephen Kade at TrueUSD’s launch in January 2018.
“We believe that creating a trustworthy, USD-backed stablecoin is a powerful application of our platform, and addresses an important problem for the crypto community.”
He added that TrueUSD “opens the door for mainstream commerce to use digital currencies, and for blockchain-based applications to trade and transact with confidence”.
TrueUSD’s market cap currently stands at just under $80m.
Dai, set up by the Maker organisation, is a decentralised stablecoin pegged against the dollar, and also claims to have improved on the basic model.
A normal stablecoin is at risk from external threats to the issuer such as legal action or criminality that could affect its value. Dai gets around this by using a smart contract to automatically exchange the tokens for Ethereum.
Buyers effectively create Dai in exchange for Ethereum, locking ether into the system. When the Dai are returned, the smart contract returns the same quantity of ether tokens as originally put up as collateral. There is an automated liquidation process if the Ethereum price moves down.
Dai has a market cap of $52m and a circulating supply of 52.8 million.
Havven takes a different approach to providing stability by using a dual-token ecosystem.
Each Nomin token bought and sold is backed by the system’s collateral token, the Havven. To reward people for holding Havvens, they receive a payment every time a user makes a transaction. To remove volatility during major sell-offs, 80% of the collateral tokens are held in escrow.
Havven launched an initial coin offering (ICO) in February and the system is slated for rollout during Q3 2018.
Basis (formerly Basecoin)
Basis is a stablecoin project pegged to the dollar. So far, big name private equity investors such as Bain Capital and Andreesen Horowitz have pumped $133m into the project, though no launch date has yet been scheduled.
To keep the price-peg stable, Basis will use traditional financial market mechanisms underpinned by blockchain. The plan is to allow the blockchain to expand and contract the supply of Basis tokens in response to deviations of the exchange rate.
If Basis is trading for more than $1, the blockchain creates and distributes new Basis. These Basis are given to holders of bonds and shares, two separate classes of tokens.
If Basis is trading for less than $1, the blockchain creates and sells bond tokens in an open auction to take coins out of circulation.
Basis founder Nader al-Naji, a Princeton graduate and former software engineer at Google, told the Financial Times: “At a high level, by marrying traditional monetary theory with cryptocurrency, Basis is trying to deliver all the benefits of crypto but without the volatility.”
The long-term vision, however, is to peg the coin to an index such as the consumer price index.
“Imagine that one day, Basis is so widely used as a medium of exchange that it actually starts to displace the USD in transaction volume. Were this to happen, Basis would present the world with both the technology and the opportunity to develop an independent, transparent, and potentially more stable monetary policy than anything that’s ever been possible via central bank,” says the Basis white paper.
“In such a world, the Basis protocol could be updated to a peg that is independent of any local currency – for example, Basis could stabilise against the Basis-denominated prices of a basket of goods. This would be similar to how the Fed stabilises against a consumer price index (CPI) to maintain the purchasing power of the dollar.”
USDX Protocol is another stablecoin project set for release by the Singapore-based New Money Labs Foundation that also plans to match its tokens against the US dollar.
The currency claims it will go one better than its rivals by using an algorithm to avoid some of the inherent volatility risks in crypto trading. The USDX’s own ‘central bank’ will automatically expand and contract the supply of tokens in line with the value of the dollar, in real-time.
Exchange rates on the platform will be accepted or dismissed by randomly chosen token holders, ensuring reliability and transparency.
Again, plans are in hand to launch tokens in other fiat currencies, too, though there is, as yet, no launch date for the dollar-based token.
Stablecoins are undoubtedly in their infancy, but the concept of having a blockchain-based currency that is not prone to wild fluctuations has huge potential, particularly in the developing world.
Being able to buy and sell goods and services in a currency known to be stable could transform the lives of many people, allowing them to lift themselves out of poverty in a way that would have been unimaginable in years gone by.