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A stablecoin is a type of cryptocurrency that is pegged to another asset like US dollars, Euros or gold.
The peg between the stable coin and the asset is maintained either by fiat reserves, crypto reserves, or smart contracts. There are several stable coins available on different exchanges and finding out which ones are the most reliable can be a daunting task. So here’s a quick guide to understanding stable coins with an overview of where they are traded.
Cryptocurrencies are highly volatile, which is great for speculation but not so much for everyday payments. Intraday prices often make big jumps or drops on a regular day and nobody wants to be exposed to that sort of risk when running a business or paying for a dinner. Save a few courageous companies that proudly display We Accept Bitcoin stickers, widespread adoption of crypto for everyday use has been somewhat minimal. Besides volatility, deflationary incentives also play a role as consumer spending is discouraged because constant value increase means spending in the future is more beneficial.
Stable coins on the other hand are designed to have a stable price or value over a period of time and are therefore less volatile. In a way, they behave more like regular fiat currency without a central authority controlling the coin. That means stable coins have the real-world applicability of regular money but still provide the practical benefits of cryptocurrencies.
As cryptocurrencies continue to struggle to achieve mass adoption and widespread circulation for the purposes of everyday use, it seems more and more likely that stable coins will take over as the preferred crypto for everyday spending.
We can group the types of stable coins into three distinct categories:
With this form of stable coin, each token is collaterised by an equal amount of fiat currency, usually held by a central custodian. Holders of these tokens are guaranteed to redeem their token at any point for the stable value in fiat, say 1 token for $1.
The Tether token (USDT) is perhaps the most famous example of this type of stable coin. It also one of the most heavily criticised as many people doubt the token is sufficiently collaterised, and the centralised Tether company has obstructed official audits of their reserves. Another example of this type of fiat collaterised stable coin is TrueUSD, built on top of the tokenisation platform TrustToken.
Within this category, we can also include stable coins that are pegged to the value of physical goods. Digix is a stable coin collaterised by gold, where every DGX token is equal to 1 gram of gold.
The downside of fiat collaterised stable coins is that a central authority must still be entrusted with keeping the collateral and maintaining the peg. It’s exactly the opposite of what we want to achieve with cryptocurrencies which is why the next category makes a lot more sense.
Crypto collaterised coins are backed up by reserves of another cryptocurrency, which makes it possible to create decentralised and more trustworthy stable coins. To counteract the volatility of the reserve crypto pool, the stable coins are often over-collaterised to absorb major price fluctuations.
The best example of this type of stable coin is BitAssets, which are traded on the Bitshares DEX. BitAssets are backed up 200% by the native Bitshares (BTS) token, using smart contracts to guarantee the reserve pool and exchange ratio. Anyone can create a BitAsset on the Bitshares blockchain to create a stable coin for any type of asset. Existing stable coins on the DEX include BitUSD, BitEUR, BitCNY, BitGold and many more.
Next to the superior capabilities of the Bitshares DEX, the possibility to create multiple stable coins pegged to different fiat currencies played a key role in Bitspark switching to Bitshares in 2017. BitAssets pegged to fiat currencies are central to the Bitspark ecosystem across our remittance platform, mobile app, and SparkDEX.
This type of stable coin maintains stability using smart contracts, mimicking the monetary policy of a centralised authority like the Federal Reserve but replacing it with lines of code. The smart contracts are programmed to increase and decrease the supply of the stable coin in order to maintain stability and stay as close as possible to the pegged asset, such as USD for example.
Much like a reserve bank, if the stable coins are trading too high the smart contract creates more tokens to increase supply and reduce value; if the coins are trading too low the smart contract will buy up circulating coins to reduce supply and increases value. This is a newer generation of stable coins and most projects still need to prove the stable aspect of their stable coin.
NuBits for example implements algorithmic stability with a two-token model consisting of network tokens and currency tokens, where one is the actual stable coin and the other allows owners to vote for or against monetary policies. Although sound in principle, NuBits collapsed once in 2016 and then rebounded. In March 2018, the coin dropped again and has not recovered since. It doesn’t mean all stable coins in this category are unstable, but it doesn’t help build the case for successful adoption either.
Source: Coinmarket cap
Now that you know more about the types of stable coins, and you’re ready to hold a few for yourself, here’s an overview of where some of the more popular stable coins are traded: