Analyzing the Current Stablecoin Landscape
Originally published on: CoinSpeaker
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September 12, 2018
There are numerous benefits to such a stablecoin, but it has become increasingly apparent that achieving a balance of the three primary components typically comes with substantial trade-offs.
The traditional financial world may eventually become integrated with cryptocurrencies as speculative assets, but their volatility limits their use cases and mainstream adoption. So how exactly do you achieve the right stablecoin?
Goals of Stablecoins
The primary goal of a stablecoin is clearly to remain price-stable. Most iterations of cryptocurrency stablecoins today are pegged to specific assets, such as the USD. Although they have some slight variations between them, the goal is to create a cryptocurrency that is flexible and resistant to severe market volatility.
Market volatility is inherent in cryptocurrency markets and as a result, has created a pressing need for a stablecoin. However, as a cryptocurrency, this stablecoin would need to not only remain price-stable but function in a transparent and decentralized ecosystem. Otherwise, it is unlikely to be accepted by a community who emphatically supports both transparency and decentralization.
Analyzing stablecoins in the context of sustainability can primarily be broken down into two components:
- Short-Term Effectiveness
- Long-Term Effectiveness
In the short-term, a stablecoin needs to function as both an effective medium of exchange and fungible unit of account. Fungibility can be achieved relatively easily through pegging the stablecoin to a fiat currency (i.e., Tether) or gold (i.e., Digix Global) but that typically comes with a large dose of centralization. Price-stability helps with functioning as a medium of exchange, but other factors such as speed, fees, and security play significant roles.
In the long-term, a stablecoin needs to maintain its price-stability to function as a legitimate store of value. Current market volatility in cryptocurrencies obscures the ability to determine which coins are adequate stores of value.
Moreover, a stablecoin purely pegged to a traditional fiat currency like the USD is also susceptible to typically obscure inflation, removing its effectiveness as a store of value. Fungibility also needs to be maintained in the long-term, but the primary goal is a store of value.
Current Issues of Stablecoins
The current limitations of stablecoins stem from their balancing act between fiat-pegged cryptocurrencies or crypto-collateralized stablecoins.
Fiat-pegged cryptocurrencies – like Tether – are inherently more stable and hold the collateral off-chain, but are clearly more centralized and less transparent.
Conversely, crypto-collateralized stablecoins are stablecoins that are pegged to another cryptocurrency. While more decentralized and transparent, they are more susceptible to market volatility and are much more complicated to implement.
Furthering the idea of crypto-collateralized stablecoins is the concept of non-collateralized stablecoins based on the premise of Seigniorage Shares.
These stablecoins are based on the concept of elastic non-discretionary monetary policy. Despite being the most decentralized, they require continual growth and are the most susceptible to downward market pressure because they cannot be liquidated during a crash.
As the cryptocurrency space continues to develop, it is inevitable that numerous types of stablecoins will be tested, implemented, and improved. Currently, there are several interesting solutions out there worth evaluating.
The most popular stablecoin available today, Tether is available on many of the world’s largest cryptocurrency exchanges. It is a fiat-collateralized stablecoin that has been consistently criticized for its lack of transparency and centralization.
However, despite its criticisms, it remains capable of providing a liquid and price-stable cryptocurrency.
TrueUSD is similar to Tether in that it is a fiat-collateralized cryptocurrency, but it is designed to improve upon Tether’s transparency. It offers holders regular attestations of escrowed balances and legal protection from the underlying USD asset.
TrueUSD is an ERC-20 token pegged to the USD, but the company behind it – TrustToken – does not actually hold any USD in reserve. Instead, the escrow attestations come from legally registered banks that hold the fiat.
MakerDao is a crypto-collateralized stablecoin in that it is pegged to the USD but entirely backed by Ethereum. It leverages smart contracts where the stablecoin Dai is pegged to the USD 1:1 and functions as a decentralized autonomous organization.
MakerDao heavily relies on complex and novel technology. The current downward pressure on Ethereum as part of an extended bear market also places stress on the crypto-collateralized model as it is backed entirely by ETH.
Further, the scalability issues facing Ethereum have led to periods of extreme network congestion, leading to prohibitively high gas costs and limiting Maker’s capabilities for immediate transaction finality.
Basis is an example of a non-collateralized stablecoin and uses an algorithmic central bank that functions within the paradigm of supply and demand.
Contracting the supply is designed to restore the Basis price while expanding the supply is designed to decrease the price so that it maintains an equilibrium price. Basis is much more complex than other stablecoins and is highly susceptible to a cryptocurrency market crash.
Despite raising a $133 million, Basis is still in its whitepaper Beta phase. The project will require a long runway for building and developing its product due to its aspirations of functioning as a non-collateralized stablecoin. By that time, the market landscape could potentially change drastically.
Mile is an innovative stablecoin in that it achieves decentralization without sacrificing price-stability or transparency while avoiding the complexities and risks of becoming a crypto-collateralized or non-collateralized stablecoin.
Essentially, Mile functions as an open-source, decentralized IMF with a two-token ecosystem:
- XDR – Functions as the stable price token (1 SDR) with a growing supply.
- Mile – Functions as the stable supply token with an increasing price (index of demand on XDR).
Interestingly, Mile is secured using a stake distributed Byzantine Fault Tolerant consensus model (sdBFT) and has a predefined, transparent process for governing its emission rate. It also is fast, comes with no transactions fees, and XDR is used in the real economy rather than solely crypto exchanges.
It’s interesting that XDR stability is backed by the real economy usage, unlike other crypto coins, focusing only at the crypto market or a math. XDR is backed with long-term loans and supply contracts, made by the global ecosystem of the enterprise participants.
When somebody’s got to return the 10-year loan issued using XDR, that creates permanent monthly demand on XDR. The same is happening when somebody’s got to pay for the oil or rice supply contract signed in XDR.
Thanks for the sanctions and permanent financial crisis, there’s a whole lot of room for the alternative mediums of payment, and the demand in real economy is high.
Stablecoins will continue to be an evolving frontier in the cryptocurrency realm. With some fascinating innovations, their effectiveness will ultimately attract a new generation of users and provide the stability necessary for cryptocurrencies to enter the mainstream.