Top FAQs on stablecoins

January 17, 2019

Stablecoins form an essential part of Bitspark’s ecosystem. As we regularly receive questions on what they are and how they work, we wanted to take this opportunity to explain things in more detail.

What are stablecoins?

Along with bitcoin and altcoins, stablecoins belong to the family of cryptocurrencies. What makes them different, however, is that their price is stable. Most cryptocurrencies are prone to fluctuations, sometimes dramatically so. This can be great for speculators who quickly trade in and out of currencies to make a profit, but when it comes to everyday use, like paying for a meal or transferring money to a relative, a stable price is crucial.

Why are stablecoins ‘stable’?

Actually, it is important to realise that no asset out there is ever completely stable. Whether we are talking about gold, real estate, the US dollar or bitcoin, price discovery is an ongoing process. However, unlike cryptocurrencies that are completely exposed to whatever the market dictates, stablecoins are designed in such a way that they can absorb reasonable fluctuations while retaining a fixed value. In a way, when it comes to real-world applicability, they behave more like strong fiat currencies such as the US dollar, but then with the benefits of crypto.

What types of stablecoins are there?

Generally speaking, there are three types of stablecoins:

  • Fiat collateralised
  • Crypto collateralised
  • Non-collateralised

Fiat collateralised
This type of stablecoin is collateralized by an equal amount of fiat currency, usually held by a central custodian. Simply put, you send one USD to the custodian and get one crypto token in return. Holders of these tokens are then guaranteed the option, at any time, to redeem their token for fiat again. This type of stablecoin includes tokens such as Tether and TrueUSD, but also Digix, which is backed up by an equal value in gold.‍

Crypto collateralised
Basically, these stablecoins are backed up by another cryptocurrency which unlike their fiat collateralised counterparts makes it possible to keep third parties (i.e. a central custodian) out of the equation. Crypto collateralised stablecoins are generally over-collateralised. This means that as the price of the base cryptocurrency fluctuates, the price of the stablecoin in unaffected. A good example of this type is BitAssets which includes stablecoins like BitUSD, BitCNY and BitEUR. Each of these stablecoins is backed up through a smart contract at all times by at least 200% of their value in Bitshares (BTS).

This type of stablecoin is still in its experimental phase. It maintains stability using smart contracts which are programmed in a way to increase and decrease the supply of the stablecoin in question to counter fluctuations on the market: when the stablecoin trades too high, it creates more tokens, and when the stablecoin drops in price, it buys up circulating coins to reduce the supply and thus increase the value. NuBits is a good example of this type of stablecoin. While promising, so far, it has not yet proven itself stable enough for mass adoption.

What type of stablecoin does Bitspark work with?

We work exclusively with crypto collateralised stablecoins, BitAssets to be precise. We are strong believers in a decentralised economy, which is reflected in pretty much everything we do. BitAssets are trustless stablecoins: unlike with fiat collateralised stablecoins, there is no need to trust another party to be ‘good for the money’, so to speak. Also, working with BitAssets is especially convenient because it allows us to create stablecoins pegged to any of the world’s 180+ fiat currencies.

How do Bitspark’s stablecoins enable cross-border money transfers?

If, say, you want to send money from Nigeria to Ghana, one option is to transfer funds by a bank. In this case, it is assumed that both you and the recipient have a bank account. The downside is that it often entails waiting days for the funds to be channelled through multiple originating and correspondent banks with the need to be converted by way of strong fiat currencies in the process. Another option is to send funds through a retail transfer business such as Western Union. This likewise works through complicated and expensive exchange mechanisms.

Bitspark offers an alternative: Our stablecoin-based system is easy, fast, cheap and inclusive of cash-based economies. To continue our example, simply exchange your Nigerian Naira in cash for a Ghanaian Cedi-stablecoin, send the tokenised funds from your mobile app directly to the receiver and a micro-second later the recipient can exchange those stablecoins for Ghanaian Cedi in cash.

Since crypto collateralised stablecoins are backed up by cryptocurrencies, is there a ‘breaking point’ — how reliable are they really?

Our stablecoins are initially collateralized by 300% of their value in BitShares (BTS). 100% is put in by the consumer, who exchanges cash for a token of equal amount, and 200% is put in by BTS investors at the back-end.

Example: Upon creation, 100 BitUSD, which can be redeemed at any time for 100 USD by the consumer, is actually collateralized by 300 USD worth of BTS. If the value of BTS drops by 10%, that same amount of BitUSD is still backed up by 270 USD in BTS and thus unaffected. If the collateral were to drop by 33% (300 USD to 200 USD), the smart contract is programmed to immediately release the collateral converting the BitUSD back to BTS, leaving the consumer who bought 100 BitUSD for 100 USD unscathed. Only if the value of BTS were to drop by a staggering 67% (from 300 USD to 100 USD) would there be a risk of loss for all parties. This is known as a Black Swan event.

It is important to know that this is an incredibly unlikely event that has seldom happened, even to the most volatile cryptocurrencies. More importantly, due to the built-in margin call which releases the collateral well in advance of any such event, the stablecoins we use keep Bitsparkers safe.

Do I need to know how stablecoins operate from a technical point of view?

Although it is always good to familiarise yourself with the protocols and mechanisms underlying cryptocurrencies, using Bitspark’s services does not require technical know-how. For everyday users who want to send money to someone else through our platform, simply download our mobile app, locate one of the many inclusion points in your area to exchange cash for its tokenised counterpart or to convert your received stablecoins for cash.

Which stablecoins are currently supported by BitSpark?

We are working hard to create stablecoins pegged to the world’s 180+ fiat currencies to completely revolutionise cross-border money transfers and currently support BitGold, BitEUR, BitUSD, BitCNY, BitJPY, BitRUBLE, SparkDex.ETH, SparkDex.BTC and Sparkdex.HKD, along with a number of altcoins such as our native ZEPH.

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