This trend is here to stay - Stable Coins, the new kids on the block

By Roy Gil
On 1 Jan., 2019

In this article, we will dive into what these Stable Coins are, why they are emerging and review where they stand today. In short term, these new Stable coins can create liquidity to exchanges, a gateway for traders to exit their crypto positions too. However, from a more holistic point of view, they can end up being a viable solution to issues preventing more retail & institutional investors from entering the crypto market as a whole.

This trend is here to stay - Stable Coins, the new kids on the block

We already got accustomed to the ICO industry and its ever-changing trends. As 2017 was all about DAPPS, 2018 so far has been mostly about Protocols and Exchanges, until the recent trend took off. Perhaps the most promising concept we’ve seen this year is the emergence of “Stable Coins”, these currencies attempt to resolve dire issues for the crypto market and more so for individuals who are in need of a stable currency. As their name suggests, Stable coins come to us with promises of stability and liquidity, however, will this concept of digital currencies backed by fiat currencies, digital assets and algorithms really end up being the "holy grail" of crypto?

In this article, we will dive into what these Stable Coins are, why they are emerging and review where they stand today. In short term, these new Stable coins can create liquidity to exchanges, a gateway for traders to exit their crypto positions too. However, from a more holistic point of view, they can end up being a viable solution to issues preventing more retail & institutional investors from entering the crypto market as a whole.

 

Throughout this year over 30 new stable coin projects emerged with some of them raising substantial financing rounds from respectable investors: Terra raising $32 million, SAGA with $30 million raised and Basis were able to raise a staggering $133 million!. Some of these tokens were created by liquidity providers & exchanges such as GUSD by Gemini, Tether, USDC by Circle, TrueUSD etc.

BITSME is an investment banking firm helping cryptocurrency-based projects conduct successful TGE campaigns. BITSME encourages anyone to conduct in-depth checks and due-diligence before participating in any kind of trading of digital currencies. The following represents BITSME’s sole opinion and does not constitute a recommendation or investment advice of any kind.

Stable coins at the most basic level are just digital tokens backed by a certain currency, asset or system of algorithmic commends that ensure price stability. There are several types of Stable Coin concepts that are being developed to note and examples of projects already underway:

Fiat collateral - This is probably the most common concept in use today, having a digital currency backed by the US dollar 1 for 1 to peg the price, the idea is 1 token = $1 in 99% of these projects so far (Tether, TUSD etc.). The main issue in this method is the need for a 3rd party to act as custodian for the fiat money the token is backed by ( a bank or financial corporation with a legal framework in place that allows them to hold the fiat in a compliant fashion). This hurts the aim of a permissionless, censorship-resistant, borderless nature and most importantly a decentralized currency. Here we can see centralized powers with the ability to manipulate price and issuance and a centralized server that is just waiting to be hacked.

Saga (SGN): Saga is a fiat collateralize project where the tokens are pegged to Special Drawing Rights (XDR), an International Monetary Fund-issued token tied to an underlying basket of currencies which includes the EUR, USD, RMB, JPY, and GBP. We can see that this Stable Coin is fiat backed with a twist so to speak, as the majority of stable coins are pegged to the USD alone. In theory, this will ensure price stability even in tough market conditions of extreme volatility. The Saga Genesis team is not planning on doing a public ICO event, instead, they will offer accredited investors and institutions to purchase the tokens under the standard KYC & AML the SEC requires.

Physical asset collateral - With the above projects being backed by FIAT, other projects are aiming to harness the power of real-world assets such as Gold, Diamonds, Oil, Real-estate and pretty much any physical asset that can be stored relatively safely and tethered to a digital currency. ( DGX, Carats etc.)

Digix (DGX): for example, every DGX token is equal to 1 gram of 99.99% LBMA approved gold, however, the production of gold is a linear curve, while in today's modern economy that needs to be an exponential one for the asset to be able to keep up with the growth of the economy, that is a part of why the gold standard is long gone. This approach can have enormous potential for a variety of industries, will the current projects withstand the test of time? That remains to be seen...

Crypto collateral - This is the least favorable approach at the moment due to the volatility of crypto assets in our young market, a daily 20% shifts are normal, which pretty much defies the point of a Stable Coin since it is everything but stable! At a future time when the cryptocurrency market is more mature and less volatile by nature, these coins can be a viable option, however, will we really need them at that point?

Algorithm backed stable coins - The “Holy Grail” of Stable coins and consequently the crypto market. The reason being, these platforms are designed to function as a central bank, meaning the algorithms built in the platform act as the rulers executing predetermined commands that are tailor-made to manage price fluctuations in real time. The way this usually works is by manipulating the supply through minting more tokens as the price rises, the tricky part is maintaining price stability in a downtrend or a market crash. The issuing powers that be have to then sell Bonds that represent a claim to the Stable Coin at a later time ( if price dips to $0.90 instead of $1, in theory, you will be able to sell the tokens for the bonds and then buy the tokens back for their original $1 price in the future), this approach is called “seigniorage shares” and it was thought up by Robert Sams.

The BIG question for a project that uses this approach is, will the projects see sufficient adoption in order to maintain it’s pegged price. If the algorithms saw a price decline and you as a user bought bond tokens to avoid a loss, you have to have faith that the Stable Coin will regain its pegged price, which will not happen unless the network is robust enough to be able to correct itself through the price control mechanisms the developers implemented to it. If there aren't enough people using the network, it will fail miserably.

Basis: This project raised over $133M in a private placement from Stanley Druckenmiller, Kevin Warsh, Foundation Capital, Wing VC, and many more investors & VCs that seem to believe Basis has what it takes to make the dream a reality! Basis coin is uncollateralized, fully decentralized and can be pegged to most assets/currencies, this gives it a huge advantage over other projects making trade-offs on the decentralized nature of their platforms. As we go into their algorithm backed currency concept the important fact to understand right away is that the Basis protocol is designed to expand and contract supply similarly to the way central banks buy and sell fiscal debt to stabilize purchasing power, the kicker is the way to maintain price stability when downward pressure is being applied on the market. Stability is maintained through incentives, the system has a built-in incentive structure that promotes stability, so users acting based on their profit motives is a key factor. The US monetary systems function under a very similar concept.

One of the reasons Basis hasn’t yet seen the hype we’ve grown accustomed to seeing in the space is the complexity of the project as it uses 3 separate tokens to overcome issues of demonetization of the “StableCoin” and vice versa ( Base coin, Base shares, Base bonds). Basis has an approach that’s much like the US monetary system, only without the rulers to mass it up like we’re seeing in many nations around the world, having their currency devalued massively every year, they aim to enter these markets and offer the people a stable solution to the currency chaos they’ve been forced to live with. We will cover Basis more extensively in the future as it functions under some fascinating yet somewhat complex algorithms and processes.

Terra: The Terra protocol team is building a decentralized platform that goes hand in hand with the Terra token, the platform can be used for other decentralized applications to be built and be supported by Terra's stability mechanisms as well as contribute to the stability of the network, forming a covenant of decentralized applications with Diversified asset classes to achieve stability. The Korean giant, Terra makes a guarantee of solvency, meaning they guarantee to maintain a reserve greater than the value of their economy, the idea is to have a reserve bigger than the circulating Supply it cannot be shorted because they can contract the supply all the way down to zero. The reserve derives its value by receiving dividends from network transaction fees, making it a decentralized alternative to Visa that backs its currency by its own dividend-bearing shares. Partnering with the Terra project is TMON a leading e-commerce platform in Korea that was founded and by the co-founder of Terra Daniel Shin. TMON has over 100,000 merchants and over nine million active customers and 3.5 billion annual transaction volume.

TMON is serving as a strong partner for Terra and is guaranteeing strong adoption right from the get-go. We believe this project can become a major player due to the meticulously planned out model and capabilities to deliver in terms of adoption to the network from the millions of users already transacting on the TMON e-commerce platform.

Conclusion

The growth rate of stabilizing technologies is astonishing and while volatility is an encumbrance on traders it is a nightmare for people living under a totalitarian government that is demonetizing and devaluing the worth of their money. The ideal goal so to speak is not building a stable coin that allows traders to switch positions, it is to create a decentralized network that is open, border-less, neutral, censorship-resistant, fraud resistant and of course price stabled. Making sure this happens, will drive massive adoption from billions of people who are currently outside of the crypto market due to its volatile risks. Without committing to any advice it is safe to say the odds of an algorithm based Stable coins as Terra and Basis to win the jackpot are more favorable.

 

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