The Stablecoins, concept, types and typical examples

The context that justifies the appearance of the stablecoins.

The high volatility of cryptocurrencies means that there are still many investors who do not dare to invest in them, especially those with a more conservative profile. Although for those that are already in the crypto world it is hard to believe that there are too many people without knowing even the mere existence of Bitcoin, there is still a long way to go for the massive adoption of cryptoassets by the global financial market and much less by individuals. Their widespread and regular use in the general economy may be still far off. Although official currencies have lost their gold standard they still have what cryptocurrencies do not have, i.e. they serve as a generalised unit of account and payment. The volatility of cryptocurrencies is one of their positive aspects in order to generate important returns, but this makes them not suitable to be used as a means of daily payment. A 20% drop in the price of cryptos in one night would make everything much more expensive the next morning, which would be very inconvenient.

What are stablecoins?

For all these reasons, the "stablecoins" have been created as a haven cryptoassets to protect the investments from the volatility of classic cryptocurrencies such as bitcoin and etherium. The stability of these cryptos is based on the fact that they are backed by fiduciary currencies or even commodities or real estate, i.e. they have an official currency as their underlying value or the market value of products or commodities. These are crypto-currencies that have the best of both monetary systems, on one hand they have the stability of fiduciary currencies and on the other hand they have the advantages of cryptos such as their decentralization, their easy transmission and their cryptographic protection to avoid the problem of "double spending", as it used to happen with the old digital currencies that could be spent several times. Thus, stablecoins can fulfil the function of being an unit of account and stable payment in addition to being cryptocurrencies.

Usefullness of these types of criptos

Thus, these types of cryptos may be the answer to many country economies with unstable fiat currencies characterized with hyper-inflationary, such as Venezuela or Argentina, since their price stability alongside with their decentralization feature may turn them into haven values to preserve the purchasing power of their populations.
One of the aspects which makes stablecoins very beneficial is that they can transfer funds quicker and cheaper in a very inefficient system where sending money is very expensive and slow for the users who are watching how these costs are eroding their benefits and how the waiting time is too much to send/receive the funds from one country to another.

New interesting projects of Stablecoins

There are many well known projects of stablecoins such as “Libra” from facebook, and also whatsapp and messenger intend to launch this type of project, even telegram made an attempt but it had to cancel it for not being prepared for it. In fact, the Facebook Libra which intends to be a stablecoin of USD does not have yet the approval of the U.S. government for it, but all indicates that it is going to get it.

Two main categories or types of Stablecoins

  • Official Currency Backed Stablecoins ( USD or Euros).

  • Commodity Backed Stablecoins. (Gold or Raw Materials)

Official Currency Backed Stablecoins (USD or Euros)

Nowadays there are already some stablecoins in crypto market which intend to have the best of both monetary systems: crypto and fiat. The best known category of stablecoins are those which have an official currency as reference value, having a reserve of this currency of equal amount as the tokens issued, serving as a guarantee for such issuing. Holders of such tokens can then exchange them for the relevant fiat currency with a conversion ratio of 1:1.
However, there is a contradiction here, since in this case it is necessary to have an authority to audit and safeguard the fiat currency reserve that works as a backup, which clashes with the concept of decentralization, contradiction added to the fact that it is necessary to accumulate large amounts of fiat currency in order to be able to issue sufficient numbers of tokens to achieve a general adoption.
As typical stablecoins we can mention Tether (3rd in capitalization according to the CoinMarketCap), Paxos Standard and USD Coin. Let's talk a little bit about each of them:

  • Tether (USDT)
    • Stablecoin founded in November 2014, which also has its euro counterpart, EURT, it is issued and deposited using the etherium-based protocol, ERC 20. This stable cryptoasset had its moment of controversy when more than 1.8 billion was generated between 2017 and 2018 without knowing too much about the auditing authority in charge of the reserves verification.
  • Paxos Standard
    • Stablecoin launched by the company of the same name, with the same parity as the dollar, 1:1, which would be fully backed by the USD, the auditing company is in this case qualified and approved by the American SEC to safeguard client funds. This is another etherium-based ERC 20 token.
  • USD Coin
    • Stablecoin designed by a Fintech subsidiary of Goldman Sachs, called Circle, and it has the same characteristics as the two previous ones, i.e. it is another etherium ERC 20 token and has parity with the USD, as it could not be otherwise.

Commodity Backed Stablecoins. (Gold or Raw Materials)

Obviously, these types of stablecoins are designed to provide even greater price stability thanks to the guarantee offered by precious metals such as gold or raw materials such as copper or nickel. Although there have been previous attempts to create these types of currencies, they have not been successful until now and in recent times, countries such as Germany, Russia and China, are stockpiling large reserves of gold surely to create their own stable cryptocurrencies backed by such reserves. Lately we have been already talking about a cryptoyuan, a cryptorublo or cryptoeuro based on this precious metal.

The system is analogous to the previous types of stablecoin, each token is issued at the rate of one gram or one ounce of several grams of gold and it is stored and guarded by an entity. The price of each token will be equal to the corresponding gold and can be bought or exchanged for gold and viceversa, and it may happen that the token market price is higher than reserves of gold and not whatsoever lower. The problem lies in the veracity of the accumulated reserves since if they are not real or are lower than the token issued, the price of the token can drop, so that if they are not supported by the blockchain to give them transparency and veracity the system can collapse as it has happened in previous experiences.

  • DigixGold
    • As the most typical example to avoid the problem of lack of transparency and traceability of gold-based stablecoins, every token represents therefore one gram of 99.99% gold guarded in security vaults. This commodity stablecoin is a etherium-based intelligent contract platform with PoA (Proof of Asset) that uses the blockchain to prove the existence and ownership of gold placed in custody.
  • Tiberius Coin
    • Another example of stablecoin based on raw materials would be this case in which cryptoassets are merged with ETFs (specialised investment funds) of key technological industry raw materials such as copper, aluminium, cobalt, nickel, tungsten etc, essential for the telecommunications, automotive and aeronautical industries. This type of stablecoins can also be called "Commodity tokens".

Recent news about stablecoins

One data that shows how stablecoins are gaining ground among cryptocurrencies is that there is having a signficant grow of 94% in stablecoins capitalization since February 2020, rising from 5.68 to 11 billion as shown in the following graph. The stablecoin that has a greater growth is Tether with an increase of more than 86%.

Source: The Block Research.

As Larry Cermak from The Block Research noted, "the increase in supply occurred in the midst of a global liquidity crisis resulting from the economic impact of the coronavirus.

It is very likely that this growth has to do with an increased demand for stablecoins seeking the financial shelter that these stable cryptocurrencies can provide from such convulsive changes that were occurring before and during the crisis of this pandemic.

As a conclusion, we can say that stablecoins are therefore part of the altcoins that offer the best of both monetary systems, crypto and fiat and can be backed using the support of raw materials and precious metals, which makes it much more interesting and sustainable.