Stablecoins - crypto-currencies with a fixed rate, or are stable to significant fluctuations. This class of digital assets adds to the well-known merits of crypto-currencies and low volatility of the rate (or its almost complete absence). It can be achieved by linking Stablecoins to various assets (including fiat currencies, gold, digital currencies or crypto-active baskets), or by reproducing on a decentralized basis some of the monetary policy elements used by central banks (the Seigniorage Shares concept)
What are Stablecoins for?
Stable coins perfectly perform not only the function of the medium of exchange - thanks to the stability of the course they can also effectively act as a unit of account and a means of saving. This can allow a lot of people to receive a salary in the crypto currency, without fear of a sharp decline in its rate. Stable coins can become an alternative to the currency for residents of economically unstable countries, where high inflation and significant currency restrictions. Also, "stable coins" can be effectively used in the market of crypto-currency loans and derivatives. In addition, for a long time Stablecoins are popular among traders who buy more volatile crypto-currencies "at the bottoms", and then sell them more expensively during periods of market recovery.
What are Stablecoins by type of provision?
Depending on the underlying security, you can distinguish three main categories of "stable coins":
- backed by fiat currencies (examples: Tether, TrueUSD)
- provided with digital currency or a basket of crypto-currencies (BitUSD from Bitshares, created on the MakerDAO platform and secured by Ether Dai tokens)
- unsecured (Seigniorage Shares)
How are Stablecoins provided with fiat?
Stable coins of this type are debt obligations. Each such Stablecoin corresponds to a unit of a phiathic currency held by a third party (for example, in a depositary bank). For example, a user makes a deposit in USD to a bank account and receives Stablecoins in a 1: 1 ratio. When he wants to return his dollars, the issuer will liquidate the corresponding amount of his Stablecoins and return the required amount in this fiat currency.
DigixDAO works in a similar way, except that gold is the collateral for it, and not a currency.
What is the peculiarity of Stablecoins provided with crypto currency?
To provide Stable of this type, a crypto currency or a basket of digital currencies is used. Such coins, as a rule, are provided with cryptoactives in a ratio exceeding 1: 1. As crypto currencies are highly volatile, such high collateral requirements minimize the risks of insolvency of the issuer Stablecoins during periods of market collapse.
How is the course of unsecured Stablesoins supported?
Stable coins may not be provided with Fiat, Crypto currency or any other assets.
Seigniorage Shares is a concept of crypto-currencies tied to fiat that does not require collateral in other assets. It involves the reproduction on a decentralized basis of receptions similar to those used by central banks.
For example, to maintain the price of a "stable coin", the issuer algorithmically changes the supply of such Stable coins.
So, if the price of "substitute USD" is higher than $ 1, the smart contract will issue additional "stable coins". They will sell them on the open market until the price drops to the target mark. On the other hand, the issuer redeems tokens in order to maintain the price of a "stable coin" during periods of excessively low rates. If the opportunities for supporting the exchange have already been exhausted and the Stablecoins price is still below $ 1, the issuer issues the so-called "Seigniorage Shares". The latter enable Stablecoins holders to receive in the future income from seigniorage (the issuer's profit).
It is not difficult to guess that the stability of such a system directly depends on the demand for this kind of Stable coins. This scheme can collapse if users lose confidence in such coins (especially if their rate continues to fall, the opportunities for buying coins are exhausted, and the demand for Seigniorage Shares is negligible or absent).
What are the advantages and disadvantages of the Stablecoins provided by Fiat?
Benefits:
- easy to understand
- 100% stability (subject to full security)
- Low susceptibility to vulnerabilities and risks of hacker attacks on the network (since the pledge is not contained in the blockade)
Disadvantages:
- the need to trust a third party - a custodian holding a fiat currency
- another third party is required to participate - an auditor who would check the compliance of the volume of collateral with the offer of the tokens put on the market
- costly and slow withdrawal to fiat
- high degree of regulation
What are the pros and cons of StableCoins, secured by crypto currency?
Pros:
- there is no need to rely on a third party to ensure the storage of collateral;
a higher level of decentralization - on-line transactions provide an opportunity to more quickly regulate the offer of "stable coins"
- higher liquidity than those provided by Fiat Stablecoins (only one cash transaction is sufficient to pay off "stable coins" with the corresponding amount in the crypto currency)
- a high level of transparency when there is no need for an external auditor (monitoring is available for everyone)
Minuses:
- not so high degree of stability of the course compared to Stablecoins, provided by Fiat;
the probability of automatic repayment to the security deposit with a sharp fall in the rate of "stable coins - dependence on the viability of another crypto currency (or a basket of digital assets)
- higher liquidity than those provided by fiat Stablecoins (only one cash transaction is sufficient to pay off "stable coins" with the corresponding amount in the crypto currency)
- a somewhat more complex system compared to the Stablecoins provided by fiat.
What are the advantages and disadvantages of unsecured Stablecoins?
Benefits:
- there is no need for collateral
- theoretically, a higher degree of decentralization and independence, since there is no linkage to any fiat currencies or crypto-active assets (however, with a general decline in the Crypto-currency market, the demand for Seigniorage Shares may be reduced)
Disadvantages:
- more complex monetary mechanism
- the need for sustainable demand for this kind of Stablecoins
- a high degree of vulnerability to shocks in the crypto currency market (so, in case of a market collapse, it may be difficult to pay off such coins)
- complexity of analysis and assessment of the viability of such monetary systems
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