For those of you who are confused over the recent introduction of more stable coins, I don’t blame you. It seems like everyone is throwing their ideas into the hat. So, let me break them down for you to make it a little simpler.
What are stable coins? Why are they important?
A stable coin is simply a way of pegging a cryptocurrency to another stable asset like the U.S Dollar or gold. Crypto assets are highly volatile which makes them difficult to trade against with just Bitcoin. Stable coins provide a way of trading crypto assets without the high risk of holding the volatile assets.
The most well-known stable coin to date is Tether (USDT). Tether is pegged to the U.S Dollar and is traded on all the largest crypto exchanges. The concept is simple, for every USDT in existence Tether claims to hold one U.S Dollar in the bank. This is without its fair share of controversy within the crypto space as Tether have never actually proven that these Dollars exists. The last auditors (Friedman LLP), hired to put everyone’s mind at ease, ended their relationship with Tether causing a significant drop in the total crypto market cap when the news was released.
Similarly to Tether, this is a USD backed token which has been implemented as an ERC20 token on their Trust Token Platform. The main difference in terms of security is that they have USD in multiple escrow accounts to reduce the users risk and provide protection for token holders with regular auditing. The team do not have access to the funds, it is controlled by the third-party trust companies. The Trust Token platform also plan to build out other fiat currency and asset backed crypto tokens e.g. Gold, TrueYen, TrueEUR etc. The decentralized nature of the token does come into question here as it is still pegged to centralized fiat currencies.
In contrast to Tether and TrueUSD, the idea behind Havven is to have a fully decentralized stable coin which is not pegged to a fiat currency. The Havven network will consist of two tokens:
- The Haven Token — intended to provide collateral and its value is generated by the fees from the network.
- 2. Nomins (the stable coin) — will be backed by the collateral of the Havven token. Participants will need to lock their Havven tokens into a smart contract in order to be issued Nomins. The transaction fees from the Nomins will then go back to the Havven token holders as a reward for backing the system.
So far this is an unproven concept as the coin is not directly tied to a centralized currency. However, if successful Havven will have found a solution for keeping a decentralized token on the blockchain completely stable.
Dai is created to be pegged to the U.S Dollar and backed by an asset. To create and obtain Dai, users need to lock up their valuable asset e.g. ETH into the Maker system. The stability is obtained by dynamic and autonomous interest rates which react to the emerging market conditions and change the fees and incentives to use the system.
The system uses a smart contract called CDP (Collateralized Debt Position). Users create a CDP, the system then issues Dai which is then spent by the user. The user then repays the Dai back plus a fee to retrieve the collateral. If the value of the pegged asset drops the system will liquidate the CDP, in order to maintain the integrity of the network and value of the Dai to the one U.S Dollar.
Basis has recently raised a whopping $133 Million through private investment. They plan to use the same economic principles that central banks use today to create an algorithmic central bank. Similar to the system we use today, participants will be able to buy a bond of Basis when the price goes below one USD. The Basis coin will then be destroyed to reduce the supply and increase the value of the Basis coin back to one USD. If the opposite scenario occurs and the value needs to be reduced then Basis can increase the supply. Their main selling point here is that it will be controlled by algorithms instead of a central bank. It will require trust in the algorithm and a less radical change to the current system (which a lot of crypto enthusiasts got into the space to change).
So, what’s the best option?
As you can tell by now there are many different ideas differentiated by the amount of decentralization within the protocol and whether the coin is pegged to a centralized asset. What we can be sure is that from the possibilities provided to us so far there is going to be a trade off on what users prefer. For example, a more centralized exchange may prefer a more centralized USD pegged stable coin such as Tether and a decentralized exchange may prefer a more decentralized option such as Havven, which is not pegged to a fiat currency. It also remains to be seen whether these stable coins will be used as a store of value or a true medium of exchange for goods and services. The crypto market downturn in recent months may make stable coins a much more appealing option.