Why are stable coins good and how stable are they?
Digital currencies have lost their lustre in 2018, with valuations plummeting after last year’s cryptomania – but there’s a new kid on the block: the stablecoin.
The stablecoin aims to eliminate the volatility that saw Bitcoin plunge from $17,000 on 6 January to under $7,000 on 5 February. And while many cryptocurrencies are still being shunned by the financial establishment, two new stablecoins have just been approved by the New York Department of Financial Services.
Paxos Standard Token (PAX) and Gemini (GUSD) are similar to other stablecoins such as market leader Tether and Canadian VC startup Stably, which are pegged to a hard or ‘fiat’ currency such as the US dollar.
The aim is to retain all the advantages of a digital currency – easy electronic trading underpinned by solid openledger foundations – but without the volatility of bitcoin and other normal cryptocurrencies.
Stablecoins now fall into three main categories: those backed by a fiat currency; crypto-collateralised, and non-collateralised. Crypto-collateralised coins are still usually pegged to a fiat currency, but hold reserves based on a cryptocurrency, while non-collateralised coins use complex algorithms to maintain value.
Market leader Tether (USDT) was the first stablecoin to launch and is the eighth largest cryptocurrency of any type, with a market cap of $2.4bn and $1.9bn daily trading volume, according to coinmarketcap.
However, it has come in for criticism over a lack of transparency. Claims have been made that the currency is not physically backed by the number of US dollars it claims to have in its account – something the company behind it strongly denies.
On 15 October Tether’s live price slipped away from its dollar peg for the third time since launch. In August 2016 it briefly fell to $0.96 before recovering almost immediately. It dropped much further to $0.91 on 24 April 2017 and did not recover until mid-May. The latest fall was a brief intraday spike to $0.92, but at the time of writing (17 October) it had failed to recover parity with the dollar, trading at $0.97.
Need for transparency
Not bitcoin territory in terms of volatility, but it does show that to be truly stable, a stablecoin must be 100% transparent about its processes.
Leonardo Real, chief compliance officer at Tether, told OpenLedger: “We would like to reiterate that although markets have shown temporary fluctuations in price, all USDT in circulation are sufficiently backed by US dollars (USD) and that assets have always exceeded liabilities.
“In June 2018, a report from Freeh Sporkin & Sullivan, LLP (FSS), based on a random date balance inspection and a full review of relevant documentation of bank accounts, confirmed that all Tethers in circulation as of that date were indeed fully backed by USD reserves.”
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.
At the start of 2018, Tether had just a handful of competitors such as Dai, Basis, Havven and True USD. However, in recent months a profusion of new alt stablecoins has been emerging. In addition to Paxos, Gemini and Stably, others either launched or in the pipeline include Kowala, Rockz, Steem Dollars, USDvault, Nubits, BitUSD, CK USD, Mile, Carbon and Circle (USD-Coin).
Those that are already up and running are usually available for trading in binary pairs, usually against bitcoin or ether, on crypto exchanges. A few can be bought directly from the maker.
Some of these projects may not see the light of day, but let’s look at some of the more likely candidates to topple Tether.
Dai, set up by the Maker organisation, is a decentralised stablecoin pegged against the dollar, but claims to have improved on the basic model.
Dai (DAI) uses automated software (smart contracts) to automatically exchange the tokens for Ethereum. Buyers effectively create Dai in exchange for ether, 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.
Dai is ranked 95th in terms of market cap ($62.8m) and has a circulating supply of 62.6 million. It is widely available for trading on exchanges such as Ethfinex, Bancor, Coinchanex and Kyber.
Havven (HAV) uses a dual-token ecosystem to maintain stability. 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 is ranked at 395 with a market cap of $8.2m and has a circulating supply of 64 million. It is available for trading on exchanges such as KuCoin, Gate, Cryptology and Tidex.
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 the project, claims TrueUSD is the first “USD-backed stablecoin that is 100% collateralised, legally protected, and transparently audited”.
True USD is ranked 47th by market cap ($161.4m) and has a circulating supply of 158.5 million. It is available for trading on exchanges such as Binance, Digifinex, Bittrex and Upbit.
While most stablecoins are tied to the US dollar, bitCNY seeks to take advantage of the burgeoning Chinese economy by pegging the token to the Chinese yuan, or renminbi.
BitCNY was set up by BitShares inventor Daniel Larimer and Cardano founder Charles Hoskinson, and initially only available via the opensource BitShares blockchain platform. However, the new bitCNY token issued by OpenLedger is now available on other Ethereum-based trading platforms, including ForkDelta, Ethen and Everbloom.
It is the latest such asset-token issued by BitShares, following on from BitUSD, BitEUR, BitGOLD and BitSilver. It has a market cap of $22m, and 24-hour trading volume of $16.27m.
Basis (formerly Basecoin)
Basis is another 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, but no launch date has yet been scheduled.
To keep the price-peg stable, Basis plans to use traditional financial market mechanisms to expand and contract demand, underpinned by blockchain. The long-term vision is also to peg the coin to an index such as the consumer price index.
New kids on the block
Paxos has built a strong head of steam since launch on 4 October, with the token (PAX) currently showing an impressive daily trading volume of $19.6m. The token is aimed at offering liquidity to investors trading in crypto assets, and is fully backed by the US dollar. The company is already regulated and approved by the US Securities and Exchange Commission to hold client funds.
Paxos has a market cap of $54.4m and circulating supply of 53.9 million. Trading volume (24-hour) is high for a new coin at $30.8m. It is currently trading at a slight premium to the dollar ($1.03) on exchanges such as Binance, Digifinex, OKEx, Gate and ZB.com.
Launched in September by the Winklevoss twins, who famously sued Mark Zuckerberg over the creation of Facebook, Gemini (GUSD) claims to be “the world’s first regulated stablecoin”. Built on the Ethereum network, it comes under the oversight of the New York State Department of Financial Services and is subject to the same capital reserve, cybersecurity, and banking compliance standards as financial institutions.
“Send and receive US dollars like email,” says the slogan on its website. It is trading at $1.03-$1.06, and volume currently stands at just over $8.1m, with a total supply of 1.23 million GUSD. It is available for purchase from Gemini, as well as for trading via third-party exchanges such as Bibox, BitForex, BTEX, BCEx, and DigiFinex.
Circle’s USDC has been trading at a premium to Tether on some exchanges since launching at the end of September and is aimed at investors, traders and consumers. It is currently trading at $1.03, and has a daily trading volume in excess of $1.3m with a total supply of 33.5 million tokens.
Backed by merchant bank Goldman Sachs, USDCs can be exchanged and redeemed for US dollars on a one-to-one basis, though Circle will charge a 0.1% redemption fee. Circle has also created a consortium called CENTRE, which aims to lay down standards for stablecoins. It is widely available for trading on exchanges such as Coinex, LAToken, OKEx, KuCoin and Digifinex.
CK USD is a dollar-pegged token developed by CK Fintech of Cascadia Blockchain Group, a Canadian-listed company. CK’s workings are a bit of a mystery, with some even wondering if it was a scam – it has no website, there is no known market cap and the circulating supply is a mystery.
However it is popular, ranking as the 10th most traded coins with a daily traded volume of $156m. At the moment it is only traded on two exchanges, BCEX and BCX.
Nubits (USNBT) is an example of a failed stablecoin, having abandoned the dollar peg in January 2018. It is still trading on Bittrex and Upbit for $0.098, with a daily volume of just $19,500. The circulating supply is 10.9 million.
Kowala is another dual-token project. Miners will run the computer nodes that do the work of the Kowala blockchain. For this work, miners can earn block rewards in the form of newly minted kUSD stablecoins.
In order to mine kUSD, a miner will need to own and control a minimum number of mUSD mining tokens (currently set at 30,000 mUSD). New kUSD will be minted automatically by the blockchain to satisfy market demand. The total number of kUSD coins is not pre-set, but is constantly and automatically adjusted by the blockchain.
Touted as the “world’s most bulletproof cryptocurrency”, Rockz is a stablecoin with a difference – it’s backed by one of the world’s most stable currencies, the Swiss franc. It is slated for launch this quarter (Q4 2018) with 175 million tokens being issued – 105 million during the initial coin offering (ICO).
For each Rockz issued, the company will keep one swiss franc in a protected client account, which will be verified monthly by an independent auditor. Anyone holding at least 900 Rockz tokens will be able to apply for a credit card. In the event the company collapses, token holders’ cash will still be safe.
Also due for public launch this quarter is VC-funded Stably, which has already raised $0.5m this year. Unusually, this centralised token it will be available on multiple blockchains, including Ethereum and Stellar. It charges no fees for purchase or redemption and will be independently audited to ensure that each StableUSD token is fully backed 1-to-1 with the US dollar.
Mile is planning a decentralised system that still claims to be transparent. It will use a two-token approach, with a stable price token, the XDR, and a separate supply token, the Mile. It claims to be fast, has no transaction fees, and is also slated for use as a real-world business-to-business (B2B) payment system.
Carbon (not to be confused with Carboncoin, an eco altcoin) plans to start with a fiat-backed stablecoin, the WT0, that is backed 1-to-1 with US dollars in a trust account. When there is enough liquidity the plan is to switch to a ‘trust-minimised’, algorithmically-controlled stablecoin that uses an automatically adjusted, demand-based supply.
Here to stay
The sudden proliferation of stablecoins is no surprise. The cryptomania of 2017 may have passed, but the concept of digital currencies based on a safe, secure blockchain platform is here to stay.
What cryptocurrencies need to replace hard cash as a reliable, everyday exchange mechanism is stability – and that revolution is very much under way.