Why Fiat-collateralised 1SG is Built to Last the Crypto Winter

“Bitcoin Drops to a New Yearly Low at USD3,200”, “EOS, Bitcoin Cash Drop Biggest as Top Cryptocurrencies Correct Lower”, “A Year After the Crypto Bubble Burst, Will Bitcoin Ever Recover?”; regardless of what the optimists prefer to put out, it is undeniable that the crypto winter of 2018 has proven to be a very depressing time for both investors and creators in the crypto space.

In this state of chaos, many has pointed out that the trusty stablecoin is where asylum lies in this uncertain state of affairs. However, it is important to first understand the bedrock mechanisms behind the stablecoins out there before actually putting your chips on one.

An Illustration: Basis Stablecoin

Basis was first introduced to us in the middle of 2017, as a stable cryptocurrency protocol with an algorithmic central bank designed to remove volatility. It quickly gained favour amongst crypto enthusiasts, allowing the project to secure $133 million in funding which then earned them the title of the most well-funded stablecoin startup. Unfortunately, on 13 December 2018, the Basis team issued a statement confirming that it will be shutting down and returning all of its remaining funds to investors.

What is the problem here?

Whilst the team has used “Regulatory Constraints” as a convenient excuse for the shutdown, many believe that difficult securities regulations by the U.S. Securities and Exchange Commission (SEC) is not the main problem, let alone the only one.

Will a Stablecoin Backed by Seigniorage Shares Actually Work?

Stablecoins like Basis are backed by Seigniorage Shares and have structures more complicated than most others. They are controlled by an algorithm engineered to match supply with demand in order to achieve price stability. Using smart contracts, supply (through the issuance of additional units) is increased when the coin’s price goes up and decreased (through a buyback using the seigniorage profits) when it goes down, thereby maintaining a steady price point.

This structure has been largely unproven and it is not difficult to understand why. The success of a seigniorage-backed stablecoin depends entirely on the future growth in demand for the coin. In the occasion that the seigniorage shares run out, or the seigniorage shares fail to sell to raise funds, there will be no way to maintain the steady price that is, the essence of the stablecoin.

Fiat-collateralised Stablecoins: Back to Basics

Fiat-collateralised stablecoins such as 1SG are different. They are backed by real world assets and rely on the value of a real reserve of fiat currency, which is owned and held by a central entity — one whose primary responsibility is to maintain a 1:1 backing with the stablecoin tokens. In other words, the intrinsic value of a fiat-backed stablecoin such as 1SG will always be what was promised.

If you are one who prefers certainty in stablecoins, you are right where you need to be.

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