Replacing Your Need for Tether with Decentralized Stablecoins
Although cryptocurrencies have potential to be used as a medium of exchange and are observed by market participants as a potential store of value (bitcoin in particular), they are far from a perfect unit of account. This is where stablecoins, coins with a value ‘pegged’ to a stable asset like gold or more commonly the US Dollar, come in. The advantage of stablecoins is that, unlike traditional cryptocurrencies, they have comparatively less volatility. Therefore stablecoins have a more universal use case and potential for real-world applications. For instance, payment of wages or buying groceries, or in the case of recently announced project Bifrost, sending aid across the globe where it’s most needed.
One such example of a stablecoin is Tether, currently the most commonly used blockchain bridge between cryptocurrencies and fiat currency. Tether is a fiat-collateralized stablecoin, and it’s pegged, or in this case tethered, to the US Dollar. Hence, one Tether token (USD₮ is the ticker) equals $1. Simply put, Tether is a digital representation of dollars held in the vaults of the issuing company. In addition to the dollar, Tether also supports Euros (EUR₮) and the Japanese Yen (JYP₮). It is an idea to store, send, and receive currency in a 1 to 1 ratio across exchanges, platforms, and wallets quickly with minimal to zero transaction fees.
Tether is created by Tether Limited, which keeps these fiat currencies in reserves that are, according to the company, regularly assessed, verified by professional auditors, and then posted public. Tokens in circulation should therefore always match the reserves. Many concerns have been raised, such as Tether’s centralization, the 30 million dollar hack, the speculative nature of the relationship with popular exchange Bitfinex, release of more coins than actual reserves to back them up, and more recently, the cancellation of the very audit that was supposed to negate all these fears. These are the exact reasons why there needs to be better decentralized solutions. Luckily there are more emerging every day. Here’s a list of a few alternative stablecoins to Tether.
After two and a half years of development, DAI was officially launched in December 2017. Unlike Tether, Dai is a decentralized crypto-collateralized stablecoin created by the MakerDAO community. DAI is an ERC20 token whose value is soft-pegged to the USD and is backed by collateral Ether. The token offers more decentralization because it is created via smart contracts on the Ethereum blockchain. Together with currency collateralization and interest adjustments, Dai ensures stability relative to the US dollar.
DAI provides the benefits of blockchain technology without the volatility experienced by cryptocurrencies. Merchants and end users don’t have to worry about the price fluctuations. In simplest terms, DAI is just a loan against Ether (ETH). Although the token can be easily bought on exchanges, the system also has a clever way of creating DAI. Using the MakerDAO platform, users can leverage their ETH holdings into smart contracts known as Collateralized Debt Position (CDP) by first converting the ETH into Pooled ETH (PETH) through a series of steps.
This locked PETH enables the user to draw out DAI, which they can trade or spend as any other ERC20 token. The collateralized PETH cannot be used until the outstanding debt is paid off in DAI. Tokens used to pay down the debt are destroyed, consequently removing them from the circulating supply. It is important to note that generating DAI also accrues an annual interest fee of 1%, called the Stability Fee.
Creating DAI is understandably complicated, but it reaps many benefits. For example, you can easily get a loan using your ETH or buy ETH on margin. Users are also incentivized to sell DAI on exchanges when it reaches over $1 (which essentially is free money. Woot!) When DAI is valued under $1, one can also purchase DAI and pay off the debt at a discount. Important to notice that these types of arbitrage opportunities are very rare since the system uses an ingenious mechanism of creation and destruction coupled to supply and demand of DAI to ensure that it matches the $1 peg. A demand for DAI raises its price to greater than $1, incentivizing users to create more DAI. When DAI is less than $1, the supply is an incentive to pay down CDP at a cheaper rate, thus removing DAI from the system.
The system also cleverly manages ETH price fluctuations. Multiple oracles work to provide price data, and if the value of ETH goes below a certain threshold, the CDPs are liquidated. Maker auctions the locked ETH to any DAI holder who can pay off the debt on a particular under-collateralized CDP.
Another token in the system is the Maker Token (MKR), which serves as a fail-safe to the entire system in case of a coordinated attack. MKR has three distinct uses:
- Remember the Stability Fees accrued on a CDP? This is only payable in MKR. The token is ‘burned’ when fees are paid, removing MKR from the system. This encourages the value of MKR to increase over time.
- Furthermore, if the collateral in the system is less than DAI in existence, new MKR tokens are automatically created and sold to raise additional collateral.
- Lastly, MKR holders can also vote on the governance of the system and on proposals to implement changes in the network.
All in all, DAI is a promising solution to volatility. This stablecoin uses collateral to back its value and interest rate adjustments to stabilize its price, thus providing a number of financial opportunities, in addition to benefiting other ‘addressable markets’ such as minimizing risk in gambling markets, promoting international trade at minimal cost without interference, and in building transparent accounting systems.
DigixGlobal, a Singaporean based company, has brought a refreshing take on stablecoins with a new initiative called DigixDAO. Their crowdsale exceeded all expectations when it met its 5.5 million USD hard cap in just twelve hours, instead of the intended thirty days!
DigixDAO harnesses the power of blockchain technology for its immutability, transparency, and security to tokenize gold. Gold has been the safest and most stable store of value since time immemorial. It is therefore a gold-backed stablecoin protected from the inherent price volatility of cryptocurrencies.
DigixDAO is built on the Ethereum blockchain and incorporates the use of smart contracts. Digix has developed a unique protocol called Proof of Asset (PoA) verification (also known as Proof of Provenance) for proving the existence of assets and ownership.
The DigixDAO network uses two tokens:
- The Digix Gold Token (DGX) represents 1g of physical 99.99% London Bullion Market Association (LBMA) standard gold that is stored in a custodian vault. PoA is a process that records possession of an asset. It establishes a chain of custody using digital signatures from the listed Vendor as well as receipts of purchase and deposit, which is then stored in a decentralized database. This successfully creates a Proof of Asset Card (‘Gold Asset Card’). Using smart contracts, these PoA Cards can then be minted into existence to create fungible DGX tokens. Each token equates to 1g of gold and is divisible up to 0.001 grams. DGX token provides the means to liquidate gold assets for easy spending and trade and to stabilize the inherent volatility seen in cryptocurrency.
- DigixDAO token (DGD) enables token holders to pledge the token, and reap the rewards, for vetting and approving proposals related to the growth of the network. DGD holders also receive quarterly rewards on the total DGX collected through transaction fees. There are 2,000,000 DGD tokens in existence, with 15% allocated to developers.
Both DGX and DGD work together and are a key component to the DigixDAO infrastructure. After the partnership with DAI, Digix is also looking to expand to other metals and commodities. DGX can be used as a store of value for escrow services, in-game currency, allow wealth inheritance to be passed automatically to heirs, for crowdfunding opportunities, and P2P lending and microfinance.
eUSD by Havven
Havven, an Australian based cryptocurrency, is a decentralized payment network that employs the use of a stablecoin to enable day-to-day transactions. According to the company, Havven’s 30 million USD token sale, which ended in February, was the largest of any Australian blockchain-based startup.
Havven uses a unique system of two tokens — The Havven token acts as collateral, while nomins serve as the stablecoin. Nomins are issued by Havven token holders who lock up Havven as collateral.
Havven recently released the first iteration of Ether-backed nomins called eUSD — an ERC20 token that is designed to hold the value of nomins stable at $1 USD.
The release of eUSD is intended to act as a test to allow the Havven team to observe and extract data that will assist in strengthening the network, as explained by the founder of Havven “The launch of eUSD demonstrates that we are committed to releasing a working version of the platform as soon as possible.” It is therefore the initial step in the launch of the next project of Havven-backed nomins (nUSD). Havven backed nomins pegged to other currencies such as EUR, GBP or YEN, to name a few, is expected to be released by the end of this year.
This is how the network works: Alice uses ETH to acquire havvens. A collateralization ratio only allows 20% of the Havven tokens to be issued as nomins by escrowing the rest of the Havven tokens. These nomins are then sold for ETH by the system, and the ETH is deposited into Alice’s wallet. The value of Havven comes from the fees generated from the network that completes a transaction in nomins. The issuance system then keeps the price of the nomins stable at $1, enabling everyday payments.
There is a simple conversion tool to convert ETH into eUSD, which in turn is also redeemable for ETH. This can be done through a Chrome or Brave browser and the MetaMask extension at a 0.5% conversion fee. Once nUSD is launched, there will be a window for converting eUSD back into ETH.
Cryptocurrency market participants have multiple decentralized solutions to choose from when it comes to using asset and dollar value backed tokens. MARKET Protocol team is a strong proponent of scaling the blockchain and its native assets through price stability, and therefore we have recently announced a partnership with all the projects mentioned above. We look forward to enable the future decentralized derivatives traders with the best tools for proper risk management and decoupling price volatility from token utility.