New Stablecoins: Innovators or Copycats?
Stablecoins are generally categorized into fiat-backed, over-collateralized, and algorithmic stablecoins. But this type of classification has no longer been accurate as the market evolves. For one thing, the distinction between the latter two has been blurred: most algorithmic stablecoins are now over-collateralized, so probably the two can be referred to together as decentralized stablecoins; for another, there are new types of stablecoins emerging in the market, which, using other stablecoins as reserves or offering new features, cannot be justifiably classified as any of the above three types.
Most of us are no strangers to fiat- or crypto-backed stablecoins, over which there are abundant articles, so Truly will not discuss these tokens in detail. Today, Truly is about to introduce a few alternative stablecoins, some of which have introduced new concepts or technology while others are unborn yet promising stablecoins with their underlying concepts already proposed. Truly will also give an analysis of their prospects.
In October 2022, crypto payment company MobileCoin, in partnership with stablecoin Reserve, launched a new type of stablecoin, Electronic USD (eUSD). The company claims that the fully collateralized eUSD, encrypted by using zero-knowledge proof, has been designed for the protection of private transaction data. According to the company, eUSD is backed by other stablecoins such as USDC, TUSD, and USDP.
There are two main features of eUSD. First, as its whitepaper argues, eUSD is “a native stablecoin with privacy properties”, which has been made possible by the new progress in cryptography; second, its reserve is not the U.S. dollar, Treasury bonds, or cryptocurrencies such as ETH and BTC but a basket of regulated, highly transparent stablecoins.
Metal Dollar ($XMD)
Another example of stablecoin using other compliant stablecoins as its reserves is Metal Dollar ($XMD). In November 2022, the digital asset banking network Metallicus announced the launch of the Proton Blockchain Decentralized Exchange (Proton DEX). The firm claims that “following the collapse of FTX.com… Proton DEX effectively removes the middleman risk posed by both centralized exchanges (CEX) and lending platforms”. It is worth noting that Proton DEX plans to launch a decentralized stablecoin index Metal Dollar ($XMD), which “runs on the Proton Blockchain and will become available on more chains soon”.
To be governed by the Metal DAO ($MTL), the reserves of Metal Dollar $XMD reportedly mainly consist of stablecoins including USDC, BUSD, TUSD, and USDP. Proton DEX users will be able to mint XMD at metaldollar.com.
Also in October, blockchain development house Laguna Labs launched a testnet for its Nuon flatcoin project. According to the company, unlike other stablecoins, “the value of a Nuon flatcoin is based on daily unbiased, authentic, and on-chain inflation data” rather than on fiat tokens or commodities. As per the Nuon whitepaper, the pegged exchange rate is calculated by an oracle, and the token is over-collateralized to offset inevitable inflation.
In fact, the concept of stablecoins being associated with inflation already exists. In April, Frax Finance launched its stablecoin Frax Price Index (FPI) to track the U.S. Consumer Price Index (CPI) using ChainLink’s oracle data. However, it is hard to tell whether FPI is inflation-resistant as it has existed for less than one solid year.
Cardano said its first-ever decentralized stablecoin Djed will be launched in January 2023. Djed is an over-collateralized stablecoin (collateral ratio: 400%-800%) jointly developed by COTI Group and the Cardano builder Input Output. Users can mint Djed by collateralizing ADA, Cardano’s native token. On top of that, Shen will be introduced as Djed’s reserve token to maintain its price stability. The market will see whether it will turn out to be a success.
Technically, Djed is not a new stablecoin. It is rather similar to DAI in terms of design philosophy, with an improved marketing strategy. According to COTI’s CEO Shahaf Bar-Geffen, Djed will be integrated into 40 applications in the Cardano ecosystem upon its launch. They will also roll out DjedPay to facilitate payments in Djed for merchants and crypto investors.
Strictly speaking, JPM Coin is not a new stablecoin. News about its development goes back to 2019, but it is still yet to be launched.
Endorsed by JPMorgan, one of the world’s most prominent banks, JPM Coin enjoys an inherent advantage in the financial industry where trust is everything. The U.S. dollar-backed stablecoin issued by JPMorgan is still a prototype. JPMorgan is reportedly conducting tests on the stablecoin with its institutional clients. According to the bank, the trading procedure follows three steps：
- A client sets up a deposit account at JPMorgan, instructs a debit of U.S. dollars in the account, and receives an equivalent number of JPM Coins.
- The client can transfer JPM Coins globally to any other JPMorgan institutional clients. The transfer can be currency transactions or securities transactions paid with JPM Coins.
- Recipients may redeem JPM Coins for U.S. dollars.
However, the project has not yet been approved by the authorities, so JPM Coins have not been officially launched at the moment.
What to make of the changes brought by new stablecoins?
Cryptocurrencies look promising since they, in particular stablecoins, are not only an important buffer against serious inflation and economic downturns for investors but also essential in facilitating smooth interaction between Web3 and compliant finance in the future. The prospects for various new stablecoins are down to the ways in which they innovate, which can be summarized as follows:
New forms of reserves
Many new stablecoins are backed by other compliant and transparent stablecoins. For example, Metal Dollar ($XMD) and eUSD have chosen TUSD as their reserves. The reason for such a decision is that TUSD, as the first digital asset verified by an independent party, receives independent on-chain verification in real time and is pegged to the U.S. dollar. It is being audited in real time by Armanino, one of the top accounting firms in the US, to ensure it is fully backed by the U.S. dollar. In addition, it has a Money Services Business (MSB) license. All of these features guarantee the credibility and transparency of its data.
Taking a basket of compliant stablecoins as reserves is obviously advantageous. First, being backed by other quality stablecoins with a decent reputation ensures that the new stablecoin shares similar good qualities. Second, such a move eliminates the need to take extra measures to improve transparency and security, such as applying for a license and conducting audits. Third, it reduces the risk of holding a single stablecoin, as the holders of the new stablecoin are literally holding several other compliant stablecoins simultaneously. Therefore, the emergence of such stablecoins, to some extent, meets the current market demand.
However, it is worth noting that taking high-quality stablecoins as reserves could also be risky. For example, most of DAI’s reserves are USDC. In addition, it is important to keep in mind that the security and transparency of its reserves do not guarantee the reliability of the protocol itself, and the reserves could still be misappropriated. In fact, after consulting the websites and white papers of both Metal Dollar ($XMD) and eUSD, Truly has not found any professional audit report regarding their reserves.
New technologies and payment options
As cryptography develops, eUSD now uses zero-knowledge proof to encrypt users’ identities; meanwhile, the Nuon flatcoin adopts an oracle to calculate pegged exchange rates to offset inevitable inflation.
On the other hand, JPM Coins has created a new way to make payments through stablecoins. Naturally, many financial institutions would be happy to accept this payment option because it charges lower transaction fees than traditional banks do and is endorsed by JPMorgan. But obtaining regulatory approval would be a formidable challenge for JPMorgan: previously, Facebook (Meta) failed to launch its stablecoin Libra as the authorities refused to give the green light to the project.
Truly believes that these pioneering efforts are beneficial to the development of the market. However, mitigating inflation with data tracked by an oracle is still being tested, and it is difficult to tell the effectiveness of such a practice. Also, it is unclear whether over-collateralization would be adequate to avoid de-pegging when and if the value of the collateral collapses. Zero-knowledge proof is indeed an innovative and practical technology that is likely to be an invaluable supplement to stablecoin payments in the future. Yet still, it is up to the market to tell whether such advancement may be a success.
Practicality and multi-chain deployment
Initially, stablecoins were only used as a means of making payments. But as the market evolves, their practicality and multi-chain deployment have become the focus of competition. Many new stablecoins have made great efforts to improve on these two fronts. For instance, Djed has been integrated into applications to enhance user experience, while Metal Dollar ($XMD) has promised that it will soon realize multi-chain practicality.
TUSD has made major headway on these fronts as well. So far, TUSD has been listed on more than 100 trading platforms, such as Binance, Huobi, and Poloniex, and has been deployed on 12 major public chains, including Ethereum, TRON, Avalanche, BNB Chain, Fantom, and Polygon. The Commonwealth of Dominica, a Caribbean country, issued its Crypto Ordinance in October 2022. As per the Ordinance, TUSD (TRC20) was granted statutory status as an authorized digital currency and a medium of exchange and was authorized as legal tender in Dominica. It means TUSD can be used in all domestic economic activities in Dominica, such as paying taxes.
Opportunities and risks
Only when explorers see exciting prospects in an area will they be drawn to it. New stablecoins have been emerging non-stop, which undoubtedly shows that the stablecoin sector is considered highly promising by all. From the USDT domination at its initial stage to a diversified landscape by now, the industry has made steady progress.
But due to overall market conditions, launching new stablecoins does not always go well without a hitch. Ardana, a stablecoin ecosystem based on Cardano (ADA), announced the project had been halted not long ago; the Djed project concerns the community that it may collapse as the next UST; the XMD generated from a basket of stablecoins only has a supply of over 100,000; as you can see, not all stablecoins are in the same position. Only excellent projects will win people’s recognition and survive in the future.
That’s all for today’s Truly Crypto 101 Lesson! Please comment if you’d like to know more. Truly values every comment.
Disclaimer: The aforementioned views do not constitute recommendations for any investment product or trades.