StableCoins: cryptocurrencies … at a stable price!

StableCoins: cryptocurrencies … at a stable price!

The current trend in the world of cryptocurrencies is that of the so-called StableCoins, i.e. digital currencies linked to real goods such as a currency (euro, dollar) or precious metals (gold).

A report by Blockchain, the crypto wallet provider, indicated that there are currently about 50 projects under development and new StableCoins are expected to be launched in the coming months.

StableCoin what are they?

Fans of the world of Cryptocurrencies and Blockchain technology know well that alongside the remarkable application prospects in terms of innovation and investment, their value is extremely volatile.

The almost schizophrenic trend of this market represents one of the main barriers to their adoption. One of the tools developed to overcome this volatility is that of StableCoins.

How a StableCoin works

The StableCoins, in fact, the digital assets that enjoy guarantees and some characteristics. Their price is stabilized with respect to a reference asset that can be a fiat currency, such as the dollar, a reference asset such as gold, or an index, or a weighted average of good.

Stability, therefore, the meeting of two worlds and the offering of the union of the advantages of the two monetary systems: the versatility and programmability of cryptography and the stability of guarantees guaranteed by institutional services.

There are two types of StableCoins: reserve backed (anchored directly to the value of a given asset) and algorithmic.

Reserve-based StableCoins

These work a bit like paper money at the time of the gold standard, therefore supported by gold reserves in a central bank: they are supported in a 1 to 1 ratio by the reserves of the currencies to which they are anchored.

Coin issuers

Such as Tether (USDT) “tokenise” dollars by exchanging them for a StableCoin and depositing the dollars in a bank. Those dollars are therefore not touched until someone redeems the StableCoin for the dollars themselves.

This second type of StableCoin is not supported by any reservations but is controlled by an algorithm, which tries to balance supply and demand to maintain an anchor to something like the US dollar.

How the stability of a Cryptocurrency is guaranteed

There are three main methods for stabilizing the volatility of tokens and linking their value to that of a fiat currency.

Debt certificate

The first method is based on debt certificates (IOU). A central entity issues a token in exchange for a deposit of a fiat currency, which it undertakes to return for the transfer of a token. The stabilization offered by this system is guaranteed by a central body. It is the most used method. The currency with the greatest capitalization is Tether.

Seigniorage Shares

The second method is based on “seigniorage shares“. In this case, stabilization is obtained by executing an algorithm, which in the face of a price change, acts by injecting tokens or withdrawing them from circulation. Today there are no significant cases that use this method.

Colleteralized StableCoin

The third method is based on the use of collateralized StableCoin. In such a system, those who own a digital asset can use it as collateral to request the issuance of StableCoins, opening a debt position.

StableCoin and Smart Contract

One of the characteristics of the systems based on smart contracts, is that anyone can verify the extent of the guarantees, since these are registered on Blockchain.

An example of convergence between StableCoin and regulators is offered by a token called Gemini US Dollar. The mechanism used is the IOU, guaranteed by the Gemini Trust Company, and has been authorized by the New York Department of Financial Services, after receiving assurances from Gemini on the implementation of control measures to limit the risk that it will be used for recycling. or the financing of terrorist activities.

The most famous StableCoin: Tether

Tether (USDT) is by far the most popular StableCoin and is mainly used by exchanges to offer dollar-like liquidity.

Now, the USDT is the second most traded cryptocurrency (with about 60% of the volume of daily bitcoin exchanges) and is in the top 10 of the largest capitalization coins. Its volumes in this 2019 have been record-breaking, managing to surpass the volumes of Bitcoin itself.

Not only that, it seems that from its birth in 2015 to today, the project has adapted to the continuous developments of the crypto world resulting more flexible and open, a project inclined to its expansion in mainstream adoption.

In fact, Tether USDT was born as a StableCoin supported by the Omni protocol that adapts its use on the Ethereum and Bitcoin blockchains. In these 4 years, however, USDT tokens are also found on the blockchain of Tron, Algorand and EOS, and also on the bitcoin sidechain, Liquid Network.