Comprehensive overview of STABLECOINS

Current state of Stablecoin projects (June 2018) — Update (October 2018)

For those of you who still don’t know, “Stablecoins” as they are called by the greater blockchain community, are crypto coins that are intended to provide measurable stability in a price change. These crypto coins are“designed to be used as a unit of account and even as a store of value.”

Stablecoin is a cryptocurrency with a fixed price.

The price of most cryptocurrencies is determined by the marketplace, where buyers and sellers exchange coins and a price is discovered by supply and demand. In contrast, stablecoins seek to achieve a fixed price, which happens through a variety of means that will be explored in this piece.

How do Stablecoins work?

Typically, most stablecoins are pegged against the USD, but some implementations intend to move over to a basket of currencies or an index such as the CPI (consumer price index) in time. This is in hopes of having a currency independent of fiat in the near future.

There are three categories of approaches to developing a price-stable cryptocurrency:

  1. fiat-collateralized
  2. crypto-collateralized
  3. non-collateralized (essentially an independent, non-collateralized currency maintained by an “algoritham”)

Also, here are a couple meaningful things a stablecoin could enable:

  • Increased global access to a stable monetary system

A digital, decentralized currency that is widely accessible and price stable would offer a much needed alternative for people living in countries with unstable monetary systems and restrictive capital controls.

  • A currency for financial liabilities and derivatives

One promising use case for cryptocurrencies/blockchains is to serve as theinfrastructure for a modern financial ecosystem with fewer intermediaries, fees, and inaccuracies. For capital markets to form around a cryptocurrency, however, it is a requirement that price levels be fairly stable.

  • Mass adoption in real life

One of the primary factors driving merchants away from accepting cryptocurrencies is the volatile price coupled with rising transaction fees. This has caused several mainstream companies to drop bitcoin as a form of payment. In comparison, stablecoins can potentially serve as the backbone of financial applications on the blockchain, especially considering that some of them are compatible with smart contracts.

FIAT COLLATERALIZED STABLECOINS

This is a FULL centralized approach to stablecoins wherein a central entity holds money as collateral and issues a token that represents the money held by the entity. This is probably the most straightforward method of creating a stablecoin.

Fiat collateral for creating a token represents reserves held by a central entity.

How it works: The mechanics for implementation are fairly straight-forward. A third party takes deposits in US Dollars (or another desirable fiat currency) and issues a unit of stablecoin for every dollar deposited. To cash out a unit of stablecoin, the third party wires US Dollar to the holder and burns a unit of the stablecoin.

  • Pros:
    *
    Easy to conceptualize
    * Value will match USD with certainty if properly implemented (digitized dollars without capital controls)
  • Cons:
    * Must trust third-party to hold fiat collateral
    * Need additional third-party for audit to make sure appropriate collateral is being held and units of stablecoin match deposits
    * Expensive and slow to audit

Projects with this structure:

  1. Tether,
  2. TrueUSD,
  3. DigixDAO,
  4. Globcoin,
  5. AAA reserve,
  6. Stably,
  7. X8 currency

TETHER — Claiming that every USDT has one USD as reserve stored in Tether’s bank account. This guarantees Tether’s ability to redeem the legal currency at any time. Yet the model is 100% centralized because the company is in full control of the money supply and reserves. Because its US dollar reserve must be stored in regulated bank accounts, it is subject to government regulations. https://tether.to/

TrueUSD — TrueUSD is a USD-backed ERC20 stablecoin that is fully collateralized, legally protected, and transparently verified by third-party attestations. TrueUSD uses multiple escrow accounts to reduce counterparty risk, and to provide token-holders with legal protections against misappropriation. TrueUSD is the first asset token built on the TrustToken platform. https://www.trusttoken.com/trueusd/

DigixDAO — The overall project will allow users to buy gold through owning an ERC20 token called DGX. For every DGX a person owns, they own 1 gram of 99.9% LBMC approved gold which is stored in a Singapore vault. DGX is created on their market place and they are accredited and a key player in the gold . This means that DGX is completely stable and will not move unless the price of gold does. Therefore 1 DGX is capped to the price of 1 gram of gold.https://digix.global/dgd/

Globcoin — Globcoin’s GLX are ERC-20 tokens that function as a store of value and a medium of exchange. Every token represents 1 unit of a basket — the GRCI® basket — consisting of the national currencies of the 15 largest economies and Gold, as measured by GDP, adjusted by PPP. GLX token smart contract will be deployed in Spring 2018 and will be 100% backed on a 1 X 1 ratio. The assets will be in custodian with a Prime Bank meaning that for every GLX issued there will be the collateral in fiat currencies and Gold held at the Bank. GCP Utility Token will be the privileged access to exchange GLX for fiat currencies. https://globcoin.io/

AAA Reserve — AAA coin is an asset-backed cryptocurrency — collateralised by cash, gilts and AAA-rated credit investments. Proceeds from the issuance of AAA coins are placed into Arc Fiduciary Ltd — a ring-fenced Jersey-registered company — and invested into cash, gilts (government-backed bonds) and fixed income; across multiple fiat currencies to support the value of AAA coins. https://www.aaareserve.com/

Stably — Stably is a reserve-backed stablecoin that is designed to work across multiple blockchain protocols which will initially include Ethereum and Stellar. Stably will utilize a proven centralized model to fully back every token issued with an equivalent unit of hard currency (e.g. Canadian or US dollar) in a transparent reserve managed by Stably, Inc., the central issuer of Stably tokens. https://www.stably.io/

X8 Currency — X8 Project developed two Ether Tokens: X8Currency (X8C) that is fully backed with 8 fiat (cash) currencies + gold and X8X Utility Token, that is used as a key to issuing and exchange process of X8C with 0% fee at a fair value. Cash & gold assets, used for backing of X8Currency are activelly managed by AI propriety software, that was tested and approved. X8X Utility Token is offered on Whitelist pre-sale and will enable early contributors to obtain their own X8Currency with no additional costs at the issuer, a Swiss based and legislation complient company X8 Capital AG. X8Currency is not backed with only one fiat currency, but uses a combination of 8 fiat currency baskets and gold. It is stable and exchangeable directly at the issuer, offering distributed exchanges a suitable solution for fiat exit point. X8X is a pure utility token, a key to access the X8Currency exchange services. Dual Token Model separates the value preservance role of X8Currency and utility role of X8X. https://x8currency.com/#product

CRYPTO COLLATERALIZED STABLECOINS

If we were to look into a much more decentralized approach, we arrive at crypto collateralized stablecoins wherein the stable coin is backed by cryptocurrency reserves. This is usually from a decentralized perspective. However, given the fact that cryptocurrencies are extremely volatile, this approach requires over-collateralizing which means that there is a huge rate of capital, and this sort of an approach can’t get through to the entire crypto audience and cannot satisfy the idea of a new form of money.

Instead of backing units of a stablecoin 1:1 with fiat, crypto-collateralized stablecoins hold a ratio greater than 1:1 of a cryptocurrency (or basket of cryptocurrencies) and issue units of a stablecoin supported by the cryptocurrency held.

Implementation: This method is conducted on-chain using a cryptocurrency, like Ethereum, as collateral and avoids the issue of trusting a third party involved in the fiat-collateralized method. The concern for crypto-collateralized offerings, however, is that the underlying collateral is highly volatile and, to be secure against significant price drops, a significant amount of collateral must be held — as much as 2:1 or even greater.

Pros:
1. Does not rely on third-party custody like fiat-collateralized
2. Conducted on-chain which enables a faster increase/decrease of stable coin units and liquidity than fiat-collateralized
3. Transparent to external parties without the need for auditors
Cons:
1. Not capital efficient
2. Complex selection process if a basket of cryptocurrencies; questionable price stability/security if just one cryptocurrency

Projects with this structure:

  1. Bitshares
  2. MakerDAO
  3. Aurora
  4. Havven
  5. CP Processor

Bitshares — BitShares (symbol BTS), formerly known as ProtoShares (PTS), is an industrial grade “crypto-equity”, peer to peer distributed ledger and network based on a Delegated Proof of Stake (DPoS) algorithm. BitShares is based on Graphene, an open source C++ blockchain implementation, which acts as a consensus mechanism. https://bitshares.org/

MakerDAO — Maker is able to maintain the price stability of the Dai through the Dai Credit System, which backs the Dai with collateral stored in Ethereum smart contracts, while simultaneously functioning as an internet-based, p2p credit market that commoditizes credit by allowing anyone with valid collateral to take out loans that have low transaction costs and no middle man fees. Anyone can generate Dai on the Maker platform with a collateral value of twice Dai’s Pooled Ether (PETH). https://makerdao.com/

Aurora — Boreal is the stablecoin of the Aurora network. Inspired by free banking, each boreal is backed by a combination of ether reserves, debt from loans, and dapp endorsement. Dapp support begins with IDEX, as Boreals will always be accepted at their target value as payment for trade fees. Guaranteed redemption on IDEX will help maintain the price as traders are incentivized to purchase boreals and lower their trading costs whenever the currency falls below target. Boreal will also serve as a base asset, allowing traders on IDEX to minimize risk by trading against a stable base currency.https://auroradao.com/platform/boreal/

Havven — Havven is a decentralised payment network where transaction fees are collected from users of the network. These fees are allocated to collateral token holders, which is where the collateral token derives its value. There are two tokens in the system: havvens, the collateral token; and nomins, the stablecoin. Nomins are backed by havven tokens, as nomins can only be issued by locking havvens into a smart contract. Against the value of havvens a fraction of nomins can be issued, which ensures the network is overcollateralized and is resistant to price shocks. They establish the initial value of the system through a token sale. Because there are no transactions yet, participants in the sale are predicting the value of the Havven network, factoring in some risk premium. Collateral tokens are purchased on the basis that if the network grows and transaction fees increase, the value of the collateral token will increase and users will be rewarded for collateralising the system. https://havven.io/

CP Processor — CP Processor will go beyond all of the above mentioned projects in order to achieve a higher goal — “world’s single coin” with a global open payment protocol (GOPP). Also, CP Processor by default integrated almost all process and functions that we can find here. The most interesting thing is that this project will link missing parts and use a sinergy to create a new dimension of global payments, and the Stable Token System is just the first stage of that road. CP Processor uses stable token system with personal loan & conversion. STABLE TOKENS = ETH & ERC20 TOKENS COLLATERAL + (ETH & ERC20 TOKENS CONVERSION + SUPPLY-DEMAND ADJUSTMENT BY SUPPLEMENTS) www.coinpaymentprocessor.org

NON COLLATERALIZED STABLECOINS

Non collateralized stablecoins are price stable cryptocurrencies that aren’t backed by any collateral. It is the most complex, but potentially the most impactful for the ecosystem. To maintain the price level, a “central bank” is created that algorithmically maintains the supply of currency, increasing it when price goes up and decreasing it when price goes down.

This is based on the Quantity Theory of Money which states that ’the general price level of goods and services is directly proportional to the amount of money in circulation, or money in supply’. Within the context of non-collateralized stablecoins such as Basecoin and Carbon, it means that the supply of the coin will be dictated by the price of the stable coin. If the price is above $1.00 the supply increases, and when the price is less than $1.00 the supply decreases. This sort of mechanism exists in hopes of creating upward and downward pressure on the price, as required.

Pros:
-Does not require collateral
-Theoretically risk-independent of other currencies (though if there is a general decline in cryptocurrencies as an asset class there would likely be a decline in demand for seigniorage shares)
Cons:
-Not as intuitive or easily explained as other structures
-Input of future expectations for seigniorage shares means that it cannot be known how resilient a coin is to downward pressure
-Require always increasing future demand

Projects that implement this method are:

  1. Basecoin
  2. Carbon
  3. Kowala
  4. Fragments
  5. Minexcoin
  6. CP Processor

Basecoin — Basecoin uses a three-token model, which includes Base Share, Basecoin and Base Bond. The supply of Basecoin is elastic while the supply of Base Share is fixed. When the supply of Basecoin contracts, it triggers the Base Bonds to recycle and destroy the Basecoin. When the Basecoin supply expands, the new Basecoin repays the Base Bonds and the rest is assigned to the Base Shareholders. Three-token models present complex problems when traded on exchanges and implement network effect so they are not in public use yet. http://www.basis.io/

Carbon — Carbon is a trustless stable cryptocurrency which closely correlates with the US Dollar. This is achieved through algorithmically adjusting coin supply based on the demand. https://www.carbon.money/

Kowala — kUSD is a stable cryptocurrency pegged to the US dollar. For the first time, you can run real life and real businesses in cryptocurrency. All with a stable value you can rely on. https://www.kowala.tech/

Fragments — Fragments is an algorithmic reserve and monetary supply policy for creating low volatility Ethereum Standard tokens, and our mission is to produce a fair and stable money for the world. The protocol offers downside protection using a dynamic reserve, while maintaining upside interest through currency splits. Our first token will be the USD Fragment, a cryptocurrency targeted to the US dollar. https://www.fragments.org/about/

Minexcoin — MinexCoin (MNX) is a global payments system based on a low volatility cryptocurrency which is a part of Minex ecosystem. Thanks to its stable exchange rate, MinexCoin is a reliable means of payment, while controllable growth of coin price makes it an attractive means of value storage. Containment of volatility and price growth are maintained by the system’s autonomous algorithm acting like a central bank, hence the name MinexBank. https://minexcoin.com/

CP Processor — CP Processor will go beyond all of the above mentioned projects in order to achieve a higher goal — “world’s single coin” with a global open payment protocol (GOPP). Also, CP Processor by default integrated almost all process and functions that we can find here. The most interesting thing is that this project will link missing parts and use a sinergy to create a new dimension of global payments, and the Stable Token System is just the first stage of that road. CP Processor uses stable token system with personal loan & conversion. STABLE TOKENS = ETH & ERC20 TOKENS COLLATERAL + (ETH & ERC20 TOKENS CONVERSION + SUPPLY-DEMAND ADJUSTMENT BY SUPPLEMENTS) www.coinpaymentprocessor.org

Conclusion

Right now, coins such as Tether pose great risks to the entire ecosystem, potentially posing as a bubble (if Tether is unable to back up the ~2.2 Billion tokens in circulation, insolvency has far ranging consequences towards the crypto economy).

The stablecoin landscape is slowly growing, and has experienced a lot of development in 2017. We should see several important things crop up in 2018, with the launch of non collateralized stablecoins, which can potentially direct the ecosystem in a new direction, depending on their effectiveness.

Overall, stablecoins are an extremely interesting and upcoming thing that might as well dictate the trend for the rest of 2018.

This overview is the product of an extensive research and analysis on Stablecoins that was performed in May 2018. Stablecoins are gaining momentum right now, and the future will show which one of these projects will win the race.

UPDATE (AUGUST 2018) — As part of our efforts to educate community about the importance of stablecoins, we have made a public spreadsheet with relevant information on stablecoin projects. Feel free to share it — https://docs.google.com/spreadsheets/d/17giG2v5I7CrtiftvXooTFWoHqA0NKnHyOoy5fE8Tfms/edit#gid=0 …
If you wish to add something about your project, please contact us!

UPDATE (OCTOBER 2018) — More stablecoins emerger in the past months. We want to share with you updated report on current StableCoins — https://docs.google.com/spreadsheets/d/e/2PACX-1vTf2gZZJrpSXCxcx_pE4Sjta2lDnDXWbK0ARgoIw_HkYGoIdFtfi0QRJs3DFMnoaQm47cOxeS-0gSiI/pubhtml# Feel free to share it and contact us if some information are missing!

Dear readers, hope you enjoyed reading this overview of current Stablecoin projects. We will update this article periodically, as we expect to see many interesting changes, innovations and improvements in the Stablecoin sphere!