Stablecoins in 2019 (Are we are not there yet ?)
Traditional e-money still dominates
In 2017 USDT (Tether USD) is no doubt an undeniable market dominant. A year later — 2018 there were a bit more than several dozen projects reported. As of 2019, there are now more than two hundred of them. Some projects out of the “first pack” have already shut down, some are for the time being are still only news of intentions, but it can be safely said that at least hundreds of stablecoin projects are at different stages of development now.
As for the stablecoins that are in production and live, those traded on the exchanges, there isn’t much to track as well. With the help of CoinMarketCap, I managed to find data on the 23 stablecoins so far. It will be easier to group the coins by the binding object and the collateral type. The categories would be as following.
by type of security:
👉 traditional assets
👉 crypto assets
and by currency:
The US dollar is still the most popular peg currency among traditional and alternative stablecoins.
In January 2019, the total supply of the stablecoins almost returned to its peak value, despite the USDT supply reduction for almost a billion dollars. If earlier the opacity of Tether gave food for suspicion, now there is no doubt that part of the USDT may be provided from time to time not by US dollars, but by debt obligations of borrowers Tether Limited or Tether International Limited. New stablecoins managed to take advantage of the Tether trust crisis and take away part of the market from the USDT — Tether Dominance is already less than 75% for five consecutive months.
Tether continues to dominate despite competitor success.
For supporters of experimental projects of non-state money, the picture is not very pleasant: traditional electronic money, even if landed on the blockchain, can hardly be called the vanguard of monetary thought.
Although many stablecoin projects dream of helping the people of Venezuela, so far, trading remains the main use case of stablecoins.
If you are interested in other blockchain projects aimed for social good, you can check this article.
The digital currency on the blockchain, secured by the US dollar, has the lowest volatility among the stablecoins and can be redeemed in national currency at face value — it is not surprising that this type of stablecoins unconditionally leads in terms of daily exchange turnover.
Almost the entire exchange turnover of stablecoins is the turnover of digital currency secured by the US dollar.
Any news on gold?
As for the coins secured by gold, the main event of 2018 was the launch of the stablecoin DGX from the Digix DAO project — the first ICO project on the Ethereum blockchain. In the wake of the tokenization of assets, we can expect an increase in the number of stablecoins backed by gold, but so far there are few such tokens on the market and their market is relatively small. So far only DGX maintains the relative price stability and increases the offer. The price history of the rest of the “gold” coins is not similar to the market history of stablecoins.
The price of the DGX is not as stable as the price of gold (GOLD), but there is simply no other “stable” 🤷♂️ gold stablecoin on the market.
Bad news for fans of the gold standard as well: there are golden Austrian-style banknotes on the market, but the market has no desire to use them as money. In contrast to national currency-linked stablecoins, they are not used on cryptocurrency exchanges as a quote currency. Among representatives of e-commerce, the use of gold as a unit of account and in other functions of money is not popular. The number of smart banknotes tied to gold did not increase.
DAI is the only successful smart banknote, i.e., a stablecoin secured by cryptocurrency collateral controlled by a smart contract. The ecosystem around this stablecoin is developing dynamically. DAI is traded with national currencies, Bitcoins, top Altcoins and other stablecoins on centralized and decentralized exchanges.
DAI provides loans and deposits, adopts DAI in electronic commerce, the project has attracted $15 million investment from A16Z. Maker is by far the most successful DAO at Ethereum with a capitalization of $700 million, and about 2% of the total ETH offer is in the pledges that provide DAI.
Despite the success of DAI, the number of stablecoins secured by cryptocurrency does not increase as rapidly as the amount of traditional digital currency on the blockchain. Smart banknotes projects which were launched several years earlier than DAI are experiencing hard times. The DAI market history began when the offer of the main smart banknotes on the BitShares blockchain, including bitUSD (the first smart banknote, from which both SBD and GBG and DAI) originate, was at its peak. Now the DAI offer is more than the offer of all the other smart banknotes combined.
DAI — is the only successful smart banknote (so far).
In BitShares, Steem, and Golos, stablecoin is just one of the platform tokens and the reason for the existence of this platform does not boil down to this token, which means there are not so many incentives to develop and promote the team and the community of these projects than the team and the Maker community. However, the main reason for the success of DAI is not that.
The main reason is the choice of collateral. The native Ethereum token is the second after Bitcoin, and the native tokens of the BitShares, Steem and Golos blockchains are lost against the background of new altcoins. As for such projects of smart banknotes as Synthetix (formerly Havven), they use not the native token of the blockchain, but the internal token of their system, which is much less liquid than the ETH, as a security for their stablecoin.
Stablecoins without full security
In the segment of stablecoins without full security, i.e., fiat stablecoins, stablecoins with partial reservation and vouchers, there were a few loud news out there, but there is no progress on the stablecoins market of this type yet.
The most important news in this segment was the closure of the Basis project — the first fiat stablecoin project with serious ambitions supported by $133 million investment from top venture capitalists. It was much easier to develop a concept for managing the supply of private fiat money by issuing and redeeming stocks and bonds and attracting investments under it than to implement it in the existing legal field.
Basis definitely pushed over other projects that were planning to use the issue of securities to manage the supply of stablecoin to abandon this model. Carbon, which originally planned to create a system with a fiat stablecoin and Carbon Credit security, limited to the creation of traditional digital currency on the blockchain. Fragments changed the model to a single-wall system with a fiat stablecoin and became known as Ampleforth. To control the offer of tokens, a stablecoin with the partial provision of cryptocurrency, it was also planned to use bonds and shares. Although the team of this project did not report a change in tokenomics, there was no news about plans to launch this stablecoin.
Another loss in this segment was NuBits — the first fiat stablecoin. After the rapid drop in the rate amid a sharp increase in supply, this stablecoin could not recover. The activity of the project team and its community is almost zero.
In contrast to the NuBits community, in the Minexcoin — a fiat stablecoin Telegram chat there are more messages per day than in the MakerDAO chat. However, MNX, whose offer is being increased by remunerating miners from the Minex blockchain, could not keep the market price at the target level. According to the plan, the price of MNX was predicted to grow, in fact, its dynamics has long been negative.
USNBT and MNX could not keep the target rate.
Despite this, fiat stablecoins remain the vanguard of monetary thought. If Basis and NuBits are only an attempt to create a private analog of modern national currencies, then BitBay and Ampleforth are experimenting with models that have no analogs in the history of money.
BitBay is experimenting with an approach that can be called “hodlers of last resort”. To push the price of BitBay up or just to keep it from falling, holders of this stablecoin vote to temporarily freeze a fraction of their balance sheets for a temporary reduction in BitBay’s market offer. At the same time, unlike the stablecoins in the traditional sense, BitBay does not have any fixed target price.
In Ampleforth, the reduction of the stablecoins supply will be carried out by a non-traditional market route (currency interventions, sale of bonds or shares, parking). Ampleforth supply reduction in order to increase its market price will occur by proportionally reducing the balance sheets of all Ampleforth holders. In return for seized coins, Ampleforth holders will receive nothing. On the other hand, when it becomes necessary to increase the Ampleforth offer, the newly created tokens will be distributed in the same “non-market” way: they will be distributed free of charge among all Ampleforth holders in proportion to their balances.
In search of global measure and stablecoins basket
Global money is, first of all, a global measure of value. The global market needs a global unit of measure. Cryptocurrencies claim the status of global money, and stablecoins are no exception. In search of such a global measure, stablecoins are tied to both the SDRs and the new baskets of national currencies and metals. Facebook is thinking of providing a stablecoin tied to a basket of national currencies. Tiberius Technology Ventures offers a token provided with a basket of metals used to produce modern electronics.
Such baskets may be attractive as a store of value, but using them as a global measure of value at this stage seems unlikely. The global measure of value remains the US dollar. The transition of the world monetary system to pegging national currency rates to SDRs or another basket is not yet planned. It is the peg of national currencies to a certain basket, as was the case with the ECU, that makes this basket a popular measure of value. SDRs were never used as a basis for the world monetary system, therefore, unlike the ECU, they were not recognized by the market. As for the basket of volatile cryptocurrencies, the global ecosystem of open public blockchains is still too young to make it necessary to use such a basket as a measure of value and money in general.
The Huobi exchange conducted an experiment to create a HUSD token, which was redeemed at par with one of four stablecoins (PAX, TUSD, USDC, and GUSD) to choose from. Redemption at face value was soon canceled and HUSD 2.0 can be exchanged for the mentioned stablecoins only at the weighted average market rate. CementDAO is developing a stablecoin aggregator, Reserve plans to switch to providing stablecoins with a basket of tokenized assets, Neutral and dForse reported on the development of a basket of stablecoins.
Two business cases: securities and commissions
At the end of this article, I would like to draw your attention to two issues related to the commercial daily work of stable projects.
The First: redesign of the second token after its primary distribution.
The second: charging additional fees for the use of stablecoins.
Let’s start with the first one.
If the ownership of a token generates income in the form of commissions for transactions, seignorage, loan interest or dividends, then this token is a security. Projects that attracted funding through the sale of tokens, which were securities, did not always have all the necessary official approvals. Perhaps that is why Maker and Chronobank changed the design of their second tokens (MKR and TIME, respectively) after their primary distribution. Now, these tokens do not give their holders the right to a share of the commission fees charged to the users of the corresponding stablecoins. Given the tightening of regulation of cryptocurrency, the legal aspects of such changes will inevitably be the subject of debate.
The clash between stablecoin projects and the reality of regulating the issue and circulation of securities leads to different results. Some close the projects, others completely change the design of their tokens, you may even find those who change only the design of the second token, some folks prepare for the issue of securities in compliance with the requirements of the current legislation.
The problem of charging additional fees for using a stablecoin is that a user must pay not only the commission to miners in the blockchain’s native token but also the project fees.
Carbon uses meta transactions to allow its users to pay a commission to Ethereum miners in CUSD, and not in ETH. This solution improves the user experience but does not resolve the issue of additional transaction fees. Regardless of the token in which this commission is charged, the user incurs additional costs. Off-chain transactions allow you to avoid these additional costs, but this solution is unlikely to appeal to the stablecoin project, which builds its business model on an additional commission.
Commissions affect the interchangeability of the stablecoins. Stablecoins may differ in fees charged for their issue, use, and redemption. Terms of issue, circulation, and redemption of stablecoins may differ. The same stablecoin launched on several blockchains may not be completely interchangeable for technical, economic or legal reasons.
UPD June 03, 2019
Since this article was published, I’ve also discovered project Neutral. Neutral token has been launched in May 2019, so it will be only a first month of its activity. NuSD Neutral Dollar is a stablecoin basket — fully collateralized by underlying stablecoins — with the ability to add new, future components to complement the growth of the stablecoin landscape. The Neutral Dollar serves to provide a lower volatility token with a more subdued risk profile, while facilitating the liquidity and interchangeability of its constituents.