Stablecoins are quickly becoming the holy grail in cryptocurrency, promising both a safehaven where value can be stored during volatile periods in the market, and a trustworthy means to transact.
Volatility hinders both the mainstream and decentralised economies, where 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.
Yet in the face of these gross inadequacies, the search for stability is gaining traction. Dozens of projects cite volatility as their arch-nemesis and have become known as “stablecoins”, with the crypto-fiat hybrid Tether among the earliest and most prominent.
The quest for an ultimate stablecoin is well underway, and this article offers a brief analysis of the most honorable mentions.
As one of the most successful stablecoins to date, Tether’s USDT achieves stability simply by pegging the value of each token to 1 US Dollar. Reportedly, for every USDT in existence Tether holds a US Dollar counterpart in the young company’s bank account.
While a fiat-backed cryptocurrency is a simple and effective approach to protecting its holders from the market’s notable volatility, it is clearly a rudimentary solution given its conceptually centralised premise and reliance on the US Dollar. Despite Tether’s claims of decentralisation, a recent hack resulting in a $30 million loss clearly discredits any defence.
The legitimacy of Tether’s USD holdings has been repeatedly questioned, with many pointing to a lack of transparency or proof of financial standing; and crucially, their terms of service states no legal obligation to convert USDT into USD. Furthermore, the centralised, permissioned nature of USDT and its link to fiat currency has attracted widespread criticism in the cryptocurrency community.
Nonetheless, with a market cap of nearly $2.3 billion, traders still continue to utilise the stability of USDT for arbitrage opportunities, free transactions, and a level of stability vastly superior to that of the majority of cryptocurrencies.
Pointing to the inadequacies of “traditional stable coin” projects, USDX offer a coin that avoids the pitfalls of using fiat currency as collateral. Their USDX token matches the value of the US Dollar using an innovative algorithmic protocol, erasing the risks associated with using USDT or other fiat-backed coins.
USDX generates stability via its algorithmic central bank, which expands and contracts the supply of the USDX token to match the US Dollar’s real-time value. Market rates are delivered via Oracle Feed, their decentralised, third-party service using authenticity proofs to derive data from a range of exchanges. To ensure reliability and transparency, exchange rates must be accepted or dismissed by randomly chosen token holders. Using this mechanism, the system has a decentralised, trustworthy means to accommodate any value indicator; with plans underway to utilise other prominent currencies.
While USDX is not the only contender on this list utilising an ‘elastic supply’ mechanism, it claims superior decentralisation and stability on account of eliminating the need for collateral, and its more robust mechanism. The Singapore-based project is in its humble beginnings, yet the creative vision may well deliver a stable coin that is ideal both for trading and exchange within Dapps.
The dependence on external assets such as fiat or alternate cryptocurrency presents an obvious challenge to a pegged cryptocurrency; placing reliance on a third, potentially centralised party. Unlike the majority of stable coins, Havven has crafted an autonomous approach to solve volatility.
Both a decentralised payment network and stablecoin, the project has inherent utility; as an incentivised rewards system and stable means to transact. This is achieved through a dual-token economy, where each Nomin token is backed by the system’s collateral token, Havven. In return for staking Havvens and providing stability, collateral holders are compensated whenever users transact. Naturally, Havven holds 80% of the collateral tokens in escrow to eliminate the volatility during large-scale sell-offs.
While most stablecoins seem to compromise on the premises of decentralisation and divergence from fiat, Havven is in line with these ideals. The dynamics of the Havven ecosystem make it one of the very first truly decentralised stable coins.
Where USDT paved the way for USD-backed cryptocurrencies, TrueCoin’s TrueUSD goes further; citing transparency, regular auditing, full collateral, and legal commitments to exchange the token for USD.
While USD will be utilised to achieve stability for the company’s first stablecoin, the roadmap details plans to expand to the Euro, Yen, and eventually precious commodities (gold, silver) and assets (stocks, real estate, etc.).
In stark contrast to the centralised and questionable architecture of Tether, TrueCoin partners with a number of listed trusts and banks to maintain a transparent pool of USD backing its tokens. TrueCoin itself has no access to these holdings, using smart contracts to ensure decentralisation. Lastly, their strong legal framework is a clear improvement on the somewhat-opaque nature of Tether- upon purchasing TrueUSD you are the legally recognised owner of 1, fully-redeemable per token in holding.
Despite being a robust alternative to the questionable USDT, TrueUSD is nevertheless a fiat-backed cryptocurrency. For the centralised economy this may suffice, but those who value the fundamental principles of decentralisation will invariably dismiss any tie to fiat.
MakerDao / DAI
In a similar vein to Tether and other stable coins, the Dai token aims to hold stability relative to the US Dollar. Yet beyond first glance, Dai recognises several of the problems plaguing fiat-pegged cryptocurrencies. Namely, so long as any stable coin is backed by real fiat currency existing in bank accounts, foul play or legal action involving the account holder will invariably place the token’s value in jeopardy.
The coin’s creator MakerDAO bypasses this possibility, using smart contract technology and Ethereum’s value to achieve stability. Users do not purchase Dai, but instead create it in exchange for Ether; locking up their ETH within the Maker system. Upon returning their Dai, the CDP smart contract returns the same quantity of ETH as originally put up as collateral. To debase the volatility of Ether, Dai has an automated process of liquidation in the event of a downwards ETH price movement. A CDP’s Ether is proactively auctioned off before it drops below the quantity of Dai it backs.
Basecoin’s unique solution to stability has drawn wide acclaim, with a team of prominent investors backing the team’s highly creative solution. While the project is in its infancy, their intuitive approach offers a short-term alternative to volatile cryptocurrency, and a grander vision of an economy independent of fiat currency.
Unlike other stablecoins, the premise of Basecoin is relatively simple to grasp; whereby the coin’s protocol is pegged to either an index or asset (e.g. Consumer Price Index or Euro, USD, etc.). By constantly monitoring reliable data sources, Basecoin’s token supply is automatically adjusted to offer a constant value.
To compound this process, the project will utilise two additional currencies: Base Bonds, and Base Shares. These create an economic incentive for Basecoin holders to contract the coin supply-by selling their Basecoins for bonds, users can gain interest on their investment. Shares are issued in the event the supply must be expanded; both of these processes maintain an equilibrium of value for Basecoin.
While initially the currency will be pegged to fiat as a “bootstrapping mechanism”, the mid to long-term vision details the intention to shift to an index- offering decentralisation, stability and independence from fiat currency; all of which make Basecoin highly attractive for usage in both the decentralised and centralised economies.
A number of promising stablecoins appear on this list, but to pick the strongest contender depends almost entirely on how cryptocurrency makes the transition to mass adoption.
While both corporations and governments alike shift to utilising digital assets, fiat-backed stablecoins may be the answer to achieving mass adoption. In spite of this, the decentralised economy will inevitably dismiss these currencies, instead choosing stablecoins that adhere to the principles offered by blockchain technology: decentralisation, immutability and security. Yet the current quest is not bipolar; with projects such as Basecoin realising the complexity of this centralised/decentralised dichotomy, opting for a more dynamic solution.
Smart minds are working tirelessly on this problem, with unlimited effort and resources being poured into the search for an ultimate stablecoin. While this effort is in its humble beginnings, the speed at which new solutions are being offered will soon see the stability of cryptocurrencies and their mass adoption.