For digital currencies to be mass adopted, the crypto world needs stable coins
Cryptocurrencies like Bitcoin and Ethereum are known for their sharp price swings and volatility. They can rise and drop as much as 10–20% in less than a day, which makes them store-of-value currencies, as opposed to money that can be used to buy common goods on a daily basis.
A 2013 paper published by David Yernack, a professor of finance at New York University, explained that for any currency to be useful to society, it should be able to function as a medium of exchange, a store of value and a unit of account.
With current standards, however, if the price of a cryptocurrency drops 20% overnight then by the time you wake up everything will have been ⅕ times more expensive, which makes them highly unlikely to be used for everyday purchases.
That is the reason we created COTI Dime, a fiat-pegged stable coin, as well as a globally decentralised digital currency. COTI Dime will be utilized by COTI Pay, the first internally developed application on the COTI platform, which enables consumers to pay merchants with COTI Dime tokens in exchange for merchandise sold on e-commerce sites. The COTI Dime bears the value of $0.1 and can be used with merchants accepting COTI Pay.
The case for stability
For any cryptocurrency to be mass adopted, it should be stable, scalable, decentralized and secure. Other characteristics that will encourage mainstream adoption include ease of use, regulation and the presence of an exchange to facilitate transactions. While a handful of digital currencies were created to address such features, stability remains a major shortcoming for many. Stable coins have arisen to keep the price of cryptocurrencies fixed, providing short-term stability for daily use and long-term stability for holding to encourage widespread usage.
As Brigitte Luginbühl, CEO of SwissRealCoin, explained: “Unlike cryptocurrencies such as Bitcoin, which are highly volatile, stable coins provide people with the pragmatic, helpful benefits of a cryptocurrency, without having to worry about distressing price changes since they are grounded in the real world.”
Breaking down stable coins
There are three primary types of stable coins:
1. Fiat-collateralized
These types of coins are tied to a fiat currency like the USD. In Tether’s case, for example, each Tether coin is guaranteed to equal 1 USD. In other words, 1USDT = 1 USD. This maintains the relative price stability of fiat currencies while providing the benefits of cryptocurrencies, such as decentralization and security.
In order for a stable coin to be pegged to a fiat currency, there needs to be an equal reserve of fiat money for each crypto coin that is issued. This scheme has come under a great deal of scrutiny because the reserve is generally held in a bank, thus defeating the purpose of decentralization.
2. Crypto-collateralized
While it may seem counter-intuitive to peg one cryptocurrency to another volatile cryptocurrency, crypto-collateralized stable coins are supported by 200% collateralization. This means that for every $1 of stable coin deposited, there is a backing of $2 worth of another cryptocurrency. This creates more than enough leeway should price volatility arise, although it necessitates enormous amounts of capital.
3. Non-collateralized
Non-collateralized stable coins work much like fiat currencies by not requiring any asset-backed collateral. Price stability is achieved through a process known as seigniorage shares, which was conceived by Robert Sams, founder, and CEO of Clearmatics Technologies LTD.
Through this approach, smart contracts are programmed to function very much like a reserve bank by increasing or decreasing the supply of stable coins so their value is as close as possible to that of the pegged asset, such as the USD.
This is based on the fundamental principle of supply and demand. If the stable coin is trading too high, then the smart contract will mint more coins to drive down the value. These excess profits in the smart contract are known as the seigniorage and are used to buy back stable coins should their price drop below that of the pegged asset. This decreases supply and, in turn, increases the value of the stable coin.
In situations where the seigniorage is too low to buy back stable coins, users can buy future shares in the excess profits. For this to be a sustainable system, however, there will need to be enough user growth to maintain the stable coin’s pegged market value.
The promise of price stabilization mechanisms
Price stability is a core requirement if traditional financial services are to make their way onto the blockchain. Nevertheless, stable coins and decentralized payment networks are currently using an unsuitable blockchain, which is not geared towards payments and stability. This brings about numerous challenges of scalability, transaction costs and the absence of key features that slow down adoption rates. COTI, Currency of the Internet, is the first platform optimized for stable coins and payment systems. It can be used by a slew of third parties, including merchants, payment service providers (PSPs), enterprises and governmental bodies.
COTI’s MultiDAG, together with COTI smart contracts, offers the possibility of multiple genesis transactions and the COTI-X exchange allows for the creation of high performance stable coins. Most stable coins are essentially ERC-20 tokens, which make them hardly usable for everyday payments. For COTI, the situation is different as high throughput, quick confirmations and low fees enable the creation of highly usable stable coins. In COTI, each stable coin’s transactions constitute its own Cluster with its own confirmation rules. The COTI MultiDAG allows for the origination of stable coins of all known types: fiat collateralized, gold (or other asset) collateralized, crypto collateralized and non-collateralized. Stable coins can be originated by COTI itself or, more commonly, by third parties.
For major online merchants like Amazon, this could mean saving millions by building their own payment network and stable coin using the COTI platform. This effectively puts them in the driver’s seat, saving millions of dollars in fees and absorbing market share from the private Visa and Mastercard network duopoly, as well as PayPal. If such online merchants wish to further detach themselves from traditional payment institutions, they can also develop their own currency in the form of a stable coin using COTI’s platform.
What’s more, COTI integrates seamlessly with PSPs like Processing.com, one of its largest partnerships to date, providing access to over 10,000+ international merchants who will be able to build their own payment systems with a branded stable coin. Merchants can also alternatively use COTI Pay’s stable coin, the COTI Dime, which sits at the centre of the COTI Pay network and fuels the interactions between consumers and merchants.
As for enterprises, such as Kakao, Rakuten, Shopify and Magento, they can all use the COTI platform to expand their business-to-business (B2B) offering. COTI enables enterprises to build their own price-stable crypto payment platform on the COTI Trustchain protocol.
COTI also provides the required infrastructure needed for governments to provide stability and usability in their networks, as governmental bodies that adapt blockchain technology typically integrate stable coins into their efforts. COTI will enable governments to develop a price-stable coin pegged to their currency of choice in order to meet current demands in the crypto sphere.
The future of stable coins
Sustainable stability mechanisms will need to be implemented for stable coins to trade much like fiat currencies and to effectively deal with volatile markets. This in addition to features of both traditional and digital payment systems, such as decentralization, security, ease of use and regulation. With these measures in place, digital currencies like COTI will be able to achieve mass adoption, providing millions around the globe with the confidence to use cryptocurrencies for daily transactions.
Stay tuned for more updates!
