Stable coins – Stable Coin, one of the hot topics of the Cryptocurrency, is the basis for investors’ confidence as well as practical application of Cryptocurrency.
What is Stable Coin?
This is a Cryptocurrency that is anchored to another stable asset like gold, dollars … This currency must be global, less volatile and independent of any central bank.
The essential characteristics of a Coin Stable are
- stable prices ,
- expansion capacity ;
- decentralization .
There are currently no currencies that meet all of the above criteria but many projects are aiming to achieve these properties.
As a bridge and almost unique between the Crypto market and other financial markets and asset markets, there is doubt about the most common currency: Tether (USDT); is considered to have triggered a decline in momentum during the first 6 months of 2018 then of the Cryptocurrency market.
The skepticism with this currency focuses on two main points:
- Tether announced to stop cooperating with his auditing company (Friedman) on January 27, 2018. Thus, Tether rejected the only third-party source of verification that proved they had the same amount of dollars as the USDT issued;
- The USDT “print” is related to the pace of price volatility of Bitcoin (refer to the report ). The author reports fears that USDT has become a tool to manipulate the Cryptocurrency market.
Tether’s restrictions – USDT have raised the need for alternative solutions to a wide range of competitors. Although these currencies are not yet popular, considering potential options will help investors diversify options and keep up with future trends.
Types of StableCoin
There are two types of stablecoin:
- Stablecoin is supported by the property it is attached to . These are stablecoin legally backed. If something goes wrong, the owners of this stablecoin enjoy basic assets.
- Stablecoin is kept stable compared to the price of the property but does not represent property ownership . This type of stablecoin is kept stable through complex, clever systems that prevent divergence between asset prices and stablecoin.
It is not easy to create a stablecoin supported by the properties that its value is attached to. This is due to a number of reasons.
The issuer must own the underlying assets and everyone must believe that the company actually owns these assets. In addition, there are major security threats addressed, logistics issues, profit issues and handling costs.
How will a company make a profit if it costs 15% of the value of an asset to transport it, secure it and pay for it?
On the other hand, the stablecoin represents the value of an asset that is not supported by the property which requires extremely complex mechanisms to ensure that stablecoin is still really stable in value compared to that property.
Stablecoin has the potential to promote the use of electronic money and push them into mainstream use. This is due to the huge price volatility that most crypto are vulnerable while taking advantage of the benefits of blockchain technology.
This great benefit is particularly evident in the money transfer market. Remittances are financial transactions conducted by people working abroad who send their money home to the family. This large financial sector is very inefficient due to the high cost of these remittances.
Blockchain technology provides a way to make this industry much more efficient. However, due to the fluctuation of electronic money prices, they are still far from the ideal solution for migrant workers. If an immigrant worker sends Bitcoin to his family, the sudden drop of 15% still means that 15% of the value has evaporated.
Stablecoin solves this problem by allowing anyone to open a wallet and allow almost instant trading of currencies, with no price fluctuation.
The benefits described above apply to many other industries that want to take advantage of electronic money but do not want to be affected by price risk.
For example, retailers may start accepting stablecoin for purchases, individuals can use stablecoin and do not need to go through third parties to transfer and store these digital assets, and any Anyone with access to the internet can open a stablecoin wallet.
These are the advantages that will help stablecoin become useful in the future, when crypto finds its way into the formal market, but they also bring great advantages to parties such as investors, traders and service providers. crypto-related case.
For investors and traders, stablecoin provides a safe haven in a market collapse without having to transfer their capital back to fiat currencies. Through stablecoin, this protection can be done within minutes without having to deal with issues related to fiat currencies like:
- Lack of fiat monetary support in trading : Only a few fiat currency support trading floors are due to strict regulations. However, dealing with stablecoin is much easier.
- Slow transaction time : Sending money back and forth between your bank accounts takes several days.
- Limitations on crypto transactions : Banks are blocking crypto-related transactions, which means you can be prevented from sending crypto-related deposits.
Stabilization Solution of Stable Coin
Currently there are 03 solutions:
- Issuance of debt assets guaranteed by an intermediary: 1 intermediary stands out to convert this currency to another asset at a fixed rate. For example: USDT is held by Tether Limited to convert to USD at a ratio of 1: 1
- Other crypto collateral on the blockchain: A bit.USD example on the decentralized Bitshare platform, generated by having a corresponding amount of locked BTS (mortgage)
- The currency has a mechanism to regulate supply and demand: The mechanism is that when the price is reduced, it reduces the supply so that the price increases, when the price increases, it increases the supply to reduce the price.
The famous representative of this currency is Tether. Accordingly, an organization will accept this currency guarantee and allow the holder to convert to another asset at a fixed rate.
This mechanism is dependent on an organization, less decentralized, placing investors at risk when real assets are converted entirely by the issuing organizations.
This mechanism also makes it difficult to harmonize the benefits of issuing organizations and management costs to ensure service delivery and deal with central bank intervention efforts.
The most prominent representative for the second mechanism is Bitshare. This mechanism allows all participating individuals to issue these coins by mortgaging their other cryptos through smart contracts.
The value of crypto collateral is usually greater than the total value of the issued Stable Coin according to a specified percentage. As the value of collateral drops, smart contract will automatically liquidate the mortgage crypto to reimburse individuals who hold the issued coins.
The greatest strength of this approach is decentralization. However, this option cannot ensure safety for investors in the context of strong fluctuations in collateral value (black swan event). For example, when the collateral value suddenly returns to zero, investors will still lose money when holding the issuing currencies based on that collateral.
Regulating Supply and Demand
The currency when issued comes with the mechanism of automatically balancing supply and demand to keep the value of money stable.
Basically, an initial amount of Stable Coin will be issued with a guarantee in USD. After that, when the demand for this currency increases, it will be “printed” more corresponding to the demand. To withdraw money when demand decreases, it is possible to use a ” smart bond contract ” form. Accordingly, who owns this bond will be paid some of this amount in the future (with interest). Therefore, at a time when currency prices fall, holders are encouraged to convert into bonds and reduce the amount of money in the system.
The drawback of this solution is that in the case of a large amount of money to be drawn, prices fall sharply, interest rates for bonds increase (bond prices fall), and the number of Stable Coin is less attractive for each bond The larger the amount of bonds to issue, the lower the bond price. Therefore, this mechanism does not maintain supply and demand balance immediately when large price fluctuations occur and destabilize the market.
Another solution (typically Carbon dong), in which users vote to freeze or issue proportionally additional money to all accounts in the system.
Each of these approaches has its own advantages and disadvantages. Although not perfect, a competitive Stable Coin market will certainly benefit investors.
Summary table of some typical types of Stable Coin:
- Debt assets: Tether, TrueUSD, Arccy, Stably
- Mortgages: BitShares, Maker, Sweetbridge, Havven, Augmint
- Regulation of supply and demand: Basecoin, Fragments, Carbon, Kowala