What is a stable cryptocurrency? To answer this question, we will simulate a simple situation, of which a great many have already happened. During the ICO, funds are raised through the purchase of cryptocurrencies, usually tokens based on Ethereum. The amount to be collected is initially calculated in dollars because the value of tokens is set by the organizers of the ICO. Imagine a situation in which the organizers set $ 100,000 as of the final goal of the initial placement of coins.
During the ICO, this amount is collected in some tokens, but the market is falling. As we know, with the fall of the Bitcoin exchange rate, the rates of other cryptocurrencies also fall. It turns out that the organizers, having in their hands a certain amount of their tokens, already lack the funds needed for the further development of the project. The reason for this is the high volatility of cryptocurrencies. The so-called Stable Coins cryptocurrencies are called to solve the problem of volatility.
What is a stable coin?
Initially, you need to find out what a service such as a Lock account implies. This service allows cryptocurrency buyers to freeze its value in fiat currencies. A lock is not a new technology or protocol. It’s just that service with this service automatically sells the client’s cryptocurrency for fiat money, in which he created a Lock account. Fiat funds are stored on the Lock account until the client decides to withdraw his cryptocurrency. Next, cryptocurrency is bought back to fiat and returned to the client.
What is the point of such a service? In fact, the advantage is exclusively inconvenience – users do not need to register and conduct transactions on the cryptocurrency exchange. After withdrawing cryptocurrency from the Lock account, protection against volatility disappears.
Futures have become another stage in the fight against volatility, but only Bitcoin and Ethereumfutures are currently trading.
At the initial stages of development, stable coins began to be provided with real assets – silver, gold, fiat currencies. Thus, a stable first-generation coin appeared – cryptocurrencies that combine the advantages of a lock-service and futures, while backed by documents about providing coins with real assets. The first generation used the blockchain for transaction transparency and the publicity of token redemption statistics.
The benefits of a stable coin are often offset by a common problem – the lack of digital evidence of real assets.
The most stable first-generation cryptocurrency
The most famous example is Tether (https://bitcryptonews.ru/analytics/chto-ne-tak-s-tether) with a peg to the dollar. The issuer of USDT is Tether Limited, which is committed to providing USDT at a rate of 1: 1 against the US dollar. Despite the fact that this cryptocurrency has been criticized more than once and has not undergone an external audit, it can still be called the most stable cryptocurrency. To convince yourself of this, just look at the history of the USDT exchange rate.
In the spring of 2018, the Digix project was finally launched, which commits itself to provide DGX stablecoin with gold at the rate of 1 DGX = 1 gram of 999.9 gold. You can get real gold bullion if you have a “minimum amount for withdrawal” – 100 DGX.
Second generation Stable coin – Smartcoins
With the advent and rapid development of the concept of smart contracts, stablecoins began to appear, which used this technology as indisputable evidence of providing coins with real assets. If the first generation of stable coin made promises on securities, now tokens should be paid out according to the logic of a smart contract operating on the blockchain. Still, such cryptocurrencies are called trustless banknotes.
The difference between such a banknote and a classic one is that it guarantees the receipt of cryptocurrency in an amount equivalent to a fixed amount of fiat currency or another real asset. Recall that an ordinary banknote guarantees the receipt of an asset, for example, gold.
Second Generation stable coin examples
Bitshares is the issuer of the BitUSD smart coin secured by the dollar. The company has a stock of $ 8 million, which is growing due to transaction fees and growth in the company’s stock price. BitShares used a special concept to develop a new type of cryptocurrency, called BitAssets. These are stable cryptocurrencies that do not require a real asset. BitAssets are created only on bail and are paid for with a token that operates on the BitShares network, – BTS.
The concept that BitShares uses is called CFD – a contract for the difference in prices. The CFD concept resembles futures, but differs from it in several ways:
- CFDs are traded off-exchange;
- CFD price is set by the broker ;
- interest rate is lost.
Smart coins use smart contracts, which ensures the fulfillment of obligations from two parties entering into a price difference agreement.
PeerShares platform works with the Nubits token, the rate of which fluctuates around $ 1. A feature of Nubits is that stability is achieved by manipulating the number of tokens on the exchange. USNBT cannot be mined or mined using any of the existing cryptocurrency consensus algorithms. USNBT can only be bought on the exchange, and the volume of token issuance depends on the vote of owners of shares in the Nu system. As time has shown, this concept has not justified itself, which is clearly visible on the graph of the NuBits course.
Another project that has been mercilessly criticized for its concept of stable cryptocurrency is Basecoin.
A stable rate is shown by Dai smart coin, issued by MakerDao. Dai is pegged to the dollar through a smart contract system.
The disadvantages of stable cryptocurrencies
Based on the above information, the main disadvantages of a stable coin can be derived:
- The possibility of centralization. Yes, many ordinary cryptocurrencies have such a risk, but almost all stablecoins should be controlled by a separate organization, which is not in the classic concept of cryptocurrencies.
- The risk that the controlling organization will go bankrupt or fail to fulfill its obligations to cryptocurrency holders.
- Some stable tokens refuse to audit.
- It is difficult to make money on a stable cryptocurrency course.
Stably unstable cryptocurrency
Another concept of stable coin is binding to conventional cryptocurrencies. The technique seems a little strange. The stability of such cryptocurrencies is ensured by the airbag in the form of an excess of digital assets. For example, to keep the stable coin rate at $ 2, you need to have an unstable cryptocurrency worth $ 4 in reserve. Then, when the rate of unstable cryptocurrency drops by 50%, that is, to $ 2, the stable coin will still fulfill the obligation to pay the necessary amount.
In order not to look for examples for a long time, you can take the bitUSD smart coin, which is tied to its BTS cryptocurrency.
As you can see, solving the problem of saving funds after an ICO is quite simple if you carry out this procedure using a stable coin. It is enough to choose the most suitable concept.