We understand three types of stable coins
Stablecoin (Stable Coin) is a cryptocurrency asset with a mechanism that ensures price stability.
Given the volatile nature of cryptocurrency assets such as Bitcoin and Ethereum, stable coins offer many transactional benefits specific to digital assets with much greater stability.
Tether is currently the most dominant and famous “stablecoin.’
However, there are actually three different types of stable cryptocurrency assets.
- Centralized stablecoins of the IOU type (debt obligation);
- Stablecoins with cryptocurrency collateral;
- Unsecured stablecoins.
Centralized ‘stablecoins’ type IOU (debt obligation)
Centralized “stablecoins” of the IOU type are the simplest kind of stable coins.
Simply put, centralized “stablecoins” like the IOU are backed by fiat money or precious metals like the US dollar or other state currencies.
Centralized stable “stablecoins” like IOUs are valuable because they represent another asset.
Criticism of this type of stable coins is usually associated with their centralized nature, requiring trust in the issuing side and fairly intensive regulation.
When you deposit fiat money into a bank account associated with a stablecoin, the network minted new coins. Conversely, when you want to liquidate coins, the network burns them, and you get your deposit.
TrueUSD (TUSD) is one of the most popular centralized stablecoins of IOUs.
TrustToken, a company specializing in traditional asset tokenization, launched TrueUSD in March this year.
In TrueUSD, several trusted companies store US dollars in their bank accounts.
This system differs from Tether, where the deposit is held by one banking partner.
In addition, TrueUSD provides transparency by publishing the contents of its bank accounts every day and subject to monthly reviews.
To date, TrustToken has raised $ 21.7 million, most of which came from the initial coin offer (ICO), which brought in $ 20 million and ended in June 2018.
ICO participants include Andreessen Horowitz (main investor), DHVC, BlockTower Capital, 8 Decimal Capital, Foundation Capital, ZhenFund and others.
Gemini Dollar and Paxos Standard Token
Gemini Dollar (GUSD), released by the Gemini Exchange, and Paxos Standard Token (PAX), released by Paxos, are also popular centralized IOU type stablecoins.
Both Gemini Dollar and Paxos Standard debuted in early September after approval by the New York Department of Financial Services (NYDFS).
Both coins are ERC-20 tokens, secured in a ratio of 1: 1 US dollars, which are stored in banks located in the USA and insured by the FDIC.
Gemini and Paxos received BitLicenses licenses in October 2015 and May 2015, respectively.
According to the rules, any stable GUSD or PAX coin that you use for illegal activities may be subject to seizure or confiscation by law enforcement agencies.
Digix Gold (DGX) is another project of a centralized stable coin like IOU with a pledge in the form of gold instead of fiat money. Each DGX token is supported by one gram of gold.
Digix uses the Proof of Asset (PoA) consensus mechanism, which includes validation of ownership on the Ethereum blockchain.
The company stores gold acting as collateral at The Safe House’s custodian vault in Singapore.
This store can hold up to 30 tons of gold, but Digix plans to open several stores around the world in the future.
Stablecoins with cryptocurrency collateral
Stablecoins with cryptocurrency collateral are supported by a digital asset through the blockchain.
This kind of stablecoins is provided by other cryptocurrency assets such as Ethereum.
MakerDAO is a very interesting project that uses this model and is the company behind the stable Dai coin. MakerDAO uses a model with two coins: Makercoin (MKR) and Dai (DAI).
Makercoin is a management token for the Maker platform. Dai is a stable coin project in which users block their funds in a secured debt position or CDP.
You block your ether in CDP as a “combined” ether (PETH). Then Dai is generated for you, while interest is calculated in PETH over time.
MakerDAO recently hit the headlines when Andreessen Horowitz bought 6% of all MKR tokens in a round of venture financing.
Prior to this, MakerDAO raised $ 12 million from various participants, including 1confirmation, Polychain, FBG Capital, Wyre Capital, Distributed Capital Partners, etc.
Havven is another stable coin using the cryptocurrency security mechanism. Like MakerDAO, Havven also uses a two-coin model: nomins (nUSD) and havven (HAV).
The number of Nomin is floating, which allows it to stabilize its price, while havven have a stable offer, providing a guarantee for the system.
Predicted network charges determine the cost of havven. If you own havven tokens, you can receive dividends from blocking funds in a smart contract.
The stability of nomins coins is based on the value of havven coins, which act as collateral. In March, Havven completed the ICO, raising $ 30 million.
Having studied both stable coins secured by traditional assets and stable coins provided by cryptocurrencies, let’s look at a completely different type of stable coins, not provided with absolutely nothing.
How can something achieve a stable price without collateral? The answer is with “Seniorage shares” – a concept invented by Robert Sam in 2014.
Seniorage shares use a smart contract to mimic the Central Bank, whose monetary policy has only one obligation – to issue a currency worth $ 1.
In other words, the network issues new coins if the price of the stablecoin rises too high, and burns the coins if the price drops.
Basis is a well-known project that has its own unsecured stable coin. The Basis token is stabilized by controlling the number of coins on the blockchain.
When the Basis price is not in equilibrium, the smart contract increases or decreases the offer to return the price to $ 1.
The contract reduces the number of coins by burning them if the price is too low. Conversely, it increases supply if Basis’s price is too high.
At the beginning of 2018, Basis raised $ 133 million through the ICO. Tour participants included Digital Currency Group, Polychain, GV, MetaStable Capital, Ceyuan Ventures, Stan Druckenmiller, Naval Ravikant and others.
CarbonUSD, created by Carbon, is another stable coin that implements a mechanism for ensuring stability without collateral.
The project began as a coin with fiat software, but eventually switched to a hybrid model, as it reached a sufficient scale as a fully stable stable coin.
According to Sam Trautwein, co-founder and CEO of Carbon, the final strategy is to have Carbon contain a basket of verified stable coins, including non-trusted algorithmic stable coins.
Carbon currently uses the Ethereum blockchain, but the team plans to eventually migrate it to Hedera Hashgraph, a high-throughput protocol under development.
To date, the Carbon project has raised $ 2 million. Carbon investors include First Mark, General Catalyst, Digital Currency Group, Plug and Play, and many others.
A couple of thoughts in the end
In a report entitled “Status of a stable coin system”, Blockchain Luxembourg SA estimates that Tether holds 98% of the total stablecoin daily trading volume.
All of the above coins from this article are just trying to grab some of the trading volume from Tether.
Growing demand for centralized stablecoins like IOU increases demand for traditional assets such as fiat money, while stablecoins with cryptocurrency collateral increase demand for cryptocurrencies such as ether.
In other words, centralized coins such as IOUs strengthen the traditional financial system, while coins with cryptocurrency collateral support the growing cryptocurrency industry.