What Makes e-Money’s Currency-backed Stablecoins Different?

Of all the great promises of cryptocurrency, perhaps the greatest is that it would allow individuals to enjoy more personal control and to better fulfil their financial freedom. While Bitcoin and its many successor cryptos successfully provided an alternative means of exchange, the relative immaturity of these assets leaves them vulnerable to price swings, volatility and market manipulation. For some this is of no concern, but for the average individual this makes cryptocurrencies such as Bitcoin a poor direct swap for traditional cash. Indeed, this very issue is one of the biggest barriers to mass adoption.

Stablecoins were created to address this underlying issue. Stablecoins have always promised to be “the best of both worlds”, as peer-to-peer money without the price volatility. They have sought to inject some stability into the cryptocurrency market and to assure users that crypto need not be high risk money. There is some evidence to suggest that this strategy may be enjoying success, as in 2020 the aggregate market value of Ethereum-based stablecoins increased by 95.38% to reach $6.25 billion¹. Here we examine the two main forms that existing stablecoins take, and look at what sets e-Money’s stablecoin apart from those.

Algorithmic stablecoins

Crypto-collateralized stablecoins which are pegged to a fiat currency are said to be algorithmic. The tension at the heart of this proposition lies in backing the stablecoin in one more volatile asset, and pegging it to another less volatile asset. In order to make this proposition possible, algorithmic stablecoins rely on over-collateralization to support their peg.

The main weaknesses of crypto collateralized stablecoins are:

1. They don’t hold collateral in the form of the instrument they are pegged to, so they are constantly at risk, lacking the purchasing power required to support their peg.
2. Over-collateralisation is inherently ineffective, essentially acting as a bet that the value of the collateral will not decrease substantially.
3. They don’t scale to global economies due to insufficient market liquidity. For instance, when a large company might require $100 million equivalent for immediate delivery.
4. There is no frictionless way to move between fiat and token, inevitably incurring trading costs, crossing the spread and slippage.

The issues inherent in algorithmic stablecoins also leave them prone to “black swan” events. When the value of an underlying crypto asset falls suddenly as the markets did in March of 2020, the stablecoin becomes under-collateralized. This can lead to vaults being liquidated and a cascade event ensues.

Collateralized Stablecoins

Collateralized stablecoins are much as their name would suggest. These types of stablecoins hold a reserve of bank deposits and/or government bonds in the currency of the issued tokens. Since there is no divergence between the asset class and the token, the inherent issues which surround algorithmic stablecoins do not apply.

In this paradigm the collateralized stablecoin seeks to maintain a 1:1 peg with the underlying asset. The main point of concern for any stablecoin of this variety is the requirement of maintaining a good relationship with the banking sector. Further, in zero or negative interest rate environments such as the Eurozone or in Japan, the long term feasibility of maintaining a 1:1 peg is uncertain. Potentially this could lead the issuers of collateralized stablecoins to adopt additional risks, tap into the reserve, or charge issuance redemption fees to cover their shortfall.

e-Money’s Currency-backed Stablecoins

e-Money stablecoins are a further stage in the development of collateralized stablecoins, but with some great advantages of their own which truly set them apart.

Firstly, e-Money stablecoins are not prone to the many drawbacks and inherent instability of algorithmic stablecoins. e-Money stablecoins are collateralized in the same currency as which they are issued so the eEUR stablecoin is collateralized in Euros and the eUSD stablecoin is collateralized by US dollars. The simplicity of this system also means that currency-backed stablecoins are highly efficient and liquid.

Perhaps the most unique feature of currency-backed stablecoins is that they are interest bearing, making them similar in some regard to a bank deposit. Further, this very interest-bearing mechanism makes e-Money’s stablecoins more resilient to the vagaries of the economic climate in which they operate, giving them a great advantage over collateralized stablecoins.

This is made possible because currency-backed stablecoins will not seek to employ a 1:1 peg to their underlying fiat currency. Instead, the exchange rate between the two will subtly differ depending on the interest accrued on the fiat reserve held by e-Money. Every year the supply of e-Money stablecoins will be inflated by 1% and a managed divergence of the two asset classes will occur.

To make things as simple as possible for the end user, and since users are more concerned with the real world value of their stablecoins rather than how many tokens they hold, any exchange rate between the stablecoin and its underlying fiat reserve is calculated automatically. In other words, users need not worry or think about the matter should they not wish to.

Lastly, the fidelity and transparency of e-Money stablecoins will be ensured by E&Y quarterly audits to ensure Proof of Funds. This will give complete peace of mind to all users who utilize the e-Money ecosystem.

For further details on e-Money please visit:
Twitter: https://twitter.com/emoney_com
Telegram: https://twitter.com/emoney_com
LinkedIn: https://www.linkedin.com/company/e-money/
GitHub: https://github.com/e-money

References:

[1]https://www.theblockcrypto.com/linked/62550/ethereum-based-stablecoins-market-capitalization-has-nearly-doubled-year-to-date-to-6-25b