Guide: Stable Coins
Stable coins are crypto assets maintaining a stable value against a certain target price. They are designed to minimize the effects of price volatility and aim to combine advantages of cryptocurrencies and the price stability of fiat currencies. Stable coins can have either centralized or decentralized governance. They can also be divided into collateral-backed and non-collateralized. The value of collateral-backed coins can be pegged to fiat currencies, cryptocurrencies or exchange-traded commodities or, such as gold, silver, etc.
The first ever stable coin was Bitshares launched in July 2014. Currently there are 3 stable coins in TOP-5 list of tokens by market cap. All of them are backed by US dollars:
✔ Tether: $1,9 billion (TOP-1 token)
✔ TrueUSD: $214,5 million (TOP-4 token)
✔ USD Coin: $193,9 million (TOP-5 token)
Fiat-collateralized stable coins
Tokens backed by fiat currencies are the most common type of stable coins on the market. They are centralized as they have a backing asset and third party involvement. The value of such stable coins is based on the value of the fiat currency used for their backing and held by a financial entity. The main risks connected with this type of coins are loss of value of the backing fiat currency or loss of trust into the centralized government. Fiat-collateralized coins generally peg 1:1 to the US dollar, but sometimes they peg to other major fiat currencies, such as Euro and more.
Features:
✔ The value is pegged to one or several fiat currencies in a fixed ratio
✔ The peg is executed off-chain through financial institutions
✔ The circulating supply is defined by the amount of the collateralized currency
✔ The price stability is achieved by maintaining the banking reserve and certain infrastructure
Examples:
✔ Tether: USD-backed stable coin built on Omni (February 2015, rank: 5)
✔ TrueUSD: USD-backed stable coin built on Ethereum (March 2018, rank: 23)
✔ USD Coin: USD-backed stable coin built on Ethereum (October 2018, rank: 26)
✔ STASIS EURS: EUR-backed stable coin (July 2018, rank: 82)
Crypto-collateralized stable coins
The main difference between coins backed by fiat currencies and coins backed by cryptocurrencies is in collateralization that typically happens off-chain in case of fiat currencies and is done on-chain with the use of smart contracts in a decentralized manner in case of cryptocurrencies. The technical implementation of this type of stable coins is more complex comparing to fiat-collateralized stable coins.
Features:
✔ The value is pegged to some cryptocurrency or a cryptocurrency portfolio
✔ The peg is executed on-chain via smart contracts
✔ The supply is regulated on-chain with the use of smart contracts
✔ The price stability is achieved through production of supplementary instruments and incentives
Examples:
✔ BitShares: stable coin with value backed by multiple assets with the use of derivative instruments. (July 2014, rank 40)
✔ Synthetix Network Token: stable coin issued against a collateral pool of SNX tokens. (March 2018, rank 400)
Metal-collateralized stable coins
Such coins are quite similar to centralized fiat backed stable coins. They are backed mainly by gold, silver or other precious and industrial metals. The holders of such coins can redeem them at the conversion rate to take possession of real assets. The cost of maintaining the stability of the stable coin is equivalent to the cost of maintaining the backing reserve and the cost of legal compliance.
Features:
✔ The value is pegged to an exchange-traded commodity in a fixed ratio
✔ The peg is executed off-chain through financial institutions.
✔ The circulating supply is defined by the amount of the collateralized commodity
✔ The price stability is achieved by maintaining the reserve and certain infrastructure
Examples:
✔ Digix Gold Token: each token is 100% backed by physical gold (May 2018, rank: 434)
✔ GoldMint: each token 100% backed by physical gold (February 2018, rank: 924)
Non-collateralized stable coins
Such stable coins are linked to a DAO that controls issuance and pricing. They are fully digitalized and do not rely on any types of collateral. Their supply and target price are based on supply and demand economic principle.
Features:
✔ The value and supply are controlled by program code only
✔ The peg is executed on-chain
✔ Decentralized governance
✔ The price stability is achieved algorithmically
Examples:
✔ Basis: aims to peg to a consumer price index, following Quantity theory of money.
✔ Kowala: the total supply of kUSD tokens depends on real-time market conditions.
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