Hello, I am Alyssa from Delio. It is now October with days getting colder and the mood of autumn is covering the nature. For the short rest of 2018, Delio cheers for you whom are passionate and interested in Stablecoins!
Let’s take a closer look at kinds of Stablecoins today. We’ve discussed about what Stablecoin is on the last time.
- The price variability of current cryptocurrencies makes them unsuitable as a payment option.
- It has to be a Stablecoin in order to be used as payments
- Current Stablecoins are mainly used for financial transactions
- Simple Algorithmic (controlling supply and demand) Stablecoin is hard to implement, and the price stability drops
This shows that there is no Stablecoin suitable to be used for commercial payments.
1. The Kinds of Stablecoins
As mentioned earlier, most of current Stablecoins are for financial transactional purposes. Stablecoins can be divided into mainly 3 groups.
① Fiat-Collateralized Stablecoin
② Crypto-Collateralized Stablecoin
③ Non-Collateralized Stablecoin
I will do my best to explain the 3 types of listed stablecoins.
1.1 Fiat-Collateralized Stablecoin
As the name suggests, Fiat-Collateralized Stablecoin refers to the issuing tokens and collateralizing them by currencies the nation or institutions issues like legal tenders (Dollars, wons, etc). For example, we collateralize 1 token by 1 dollar. The purpose of fiat-collateralized stablecoins is on using them as key currencies for trading cryptocurrencies at cryptocurrency exchanges.
Like how you can use or exchange USD anywhere around the world, using stable coin like this when trading cryptocurrencies on exchanges in the world of cryptocurrencies, it would be convenient and it will minimize the loss by exchange rates. But its disadvantage is on that it is centralized and it is not transparent.
Remember that the core of the blockchain is decentralization (Sharing and distribution)? If a particular management organization autonomously, unilaterally issues, exchanges, manages and operates account balances, and does not reveal the internal information, it can’t be said that it is using blockchain correctly. There would be no difference between them and general legal tenders.
As for fiat-collateralized stablecoin, a representative example would be Tether. Tether issues tokens by pegging USD 1 to 1 Tether(USDT). People usually use Tether to send money overseas or to purchase other cryptocurrencies. They would have to pay commission fee as the transaction is not made through a bank, and they can conveniently buy and sell other cryptocurrencies. But in January, the ‘Tether Incident’ occurred. As the suspicions have risen about Tether holding the same amount of USD as the amount of tokens they issued, the ‘centralization’ issue was pointed out. There were times where the value of Tether dropped to 99 cent, or even to 98 cents.
It broke the formula that stated stablecoin = price stability.
Then the stablecoin TrueUSD that corrected the fault of Tether appeared, and it issued stablecoin TUSD by using smart contract to increase the transparency and to pursue the decentralization. We’ll talk about smart contract in more detail later on.
1.2 Crypto-Collateralized Stablecoin
Crypto-collateralized stablecoin refers to issuing tokens and collateralizing them with cryptocurrencies. For example, you receive 1 stablecoin and collateralize it with 1 Ethereum. The purpose of crypto-collateralized stablecoin is on loaning cryptocurrencies. Loaning cryptocurrencies? Why would someone go through such difficulties to borrow cryptocurrencies?
To put it simply, when someone needs urgent money but doesn’t want to sell their cryptocurrency that the value would raise, they may collateralize stablecoins with their cryptocurrencies and use them to cover the money they need, and then retrieve their cryptocurrency back later.
The advantage of crypto-collateralized stablecoin is on decentralization. Because it uses smart contract, every transaction history is stored and it cannot be altered or edited.
*Smart Contract is an automated transaction protocol that operates without the intervention of the third parties on Ethereum platform, and it has its value on perfect reliability that supports all possible sorts of contracts while guaranteeing the completeness of them. (With Blockchain Laboratory).
Crypto-collateralized stablecoin resolves the centralization issue by securing the transparency by depositing cryptocurrencies on smart contract accounts, and is not issued or managed by an organization. But the disadvantage of it is on value variability of the deposited cryptocurrency.
For example, if the value of the cryptocurrency you collateralized with declines (1 Ethereum > 0.8) and becomes lower than the value of stable coin (1 coin) you loaned?
This would drop the stability of the network and the value of the token, it has to be resolved with forced Liquidation. Forced liquidation refers to the smart contract liquidation process that if the collateral to loan ratio drops below a certain point, the protocol automatically sells the deposited collateral and purchase stable coins. Thus crypto-collateralized stablecoin requires the value of collateral to be bigger than the value of the stablecoin. This is also known as excessive collateral.
As for crypto-collateralized stablecoin, a representative example is BitShares.
BitShares is composed with two types of tokesn : BitShares(BTS) that functions as collateral, and MPA(Market Pegged Asset) Token as stablecoin(Varies by legal tenders, bitUSD, bitEUR, etc.). (EX. Receive 1bitUSD and collateralize it with 1BTS) In short, the loaner deposits BTS collateral on smart contract, and loans the corresponding amount of stable coin. These stablecoins can be used or sold on exchanges.
The biggest problem of BitShare is 30-day Inclusion Rule. This means smart contract needs to be liquidated within 30 days. In other words, you have to pay back the cryptocurrencies within a month. The loaner would have to sell stable coins, buy back them, then pay the loan to take the collateral back, but if the market standard price of the stable coin increases, the loaner would have to go through the loss, so many either didn’t sell the loan on the market, or didn’t make a loan at all.
To resolve such issue, a new type of crypto-collateral stablecoin Maker appeared. To minimize the value fluctuation of stablecoin on the market, they chose three algorithm methods (Circulation Volume, Incineration, and issuance) to maintain the price stability. (I’ll cut it here since the text is getting too long.)
1.3 Non-Collateralized stablecoin
Non-centralized stablecoins refers to issuing coins without collaterals. It is maintaining the price stability of the coin by controlling the supply (number of issuance). Then the only factor that influences the price would be the demand, right?
The strength of non-collateralized stablecoin is that stablecoins can be utilized without collaterals.. it has its advantage on its decentralization, no need for making loans, and with an automated exchange rate, the system automatically controls the amount of tokens in circulation. It is designed to theoretically maintain the price by controlling the amount of coin issuance based on the estimated demand.
But this is where its disadvantage is revealed. There is uncertainty on expected demand. Without well-founded trust of the growth of the ecosystem and the distribution of the token, non-collateralized stablecoin is useless.
As for non-collateralized stablecoins, a representative example would be Basecoin by Basis. Basecoin aims to maintain the price of stable token with three token systems (basecoin, bondtoken, share token) For example, if the value stability is pursued at 1basecoin = 1$,
1) The price of basecoin > $1 = Exceeding demand, thus issue more basecoin to increase the supply.
*maintains the price stability*
2) The price of basecoin < $1 = Demand decreases, thus incinerate some portion of basecoin in circulation.
*maintains the price stability*
For this, they make extra distribution such as bond token to induce owners convert them as base coins, thus increasing the demand temporarily, and finally incinerate some portion of basecoin in the circulation. After the process, share token holders receive distribution of basecoins after conversion of bond tokens.
2. Closing Remarks
Today we’ve talked about 3 types of stablecoins. I hope for a more perfect stable coin that corrected weaknesses to appear in a near future.
Delio has developed Stable Stake Coin, an upgraded design of non-collateralized stablecoin by selecting Dual Token Paring between two tokens: DELO token with price stability secured and DELIO with growth potential of the value.
Not only the algorithmic method that controls the amount of tokens in circulation is implemented, we’ve also implemented a mechanical method that pursues both price stability and with token that its value continuously rises. Therefore, stablecoin DELO token can be used for payments, and the investors may purchase and own DELIO tokens. To resolve the expectation uncertainty, the weakness of non-collateralized stablecoin, we’ve designed a token economy where the amount of tokens in circulation and the number of token holders are bound to increase. We are confident with the growth of Delio Ecosystem.
On the next time, I’ll see you again with the last episode of the series, ‘#4 Stable Stake Coin’!
delio | Croschain Technology
Alyssa Yoon firstname.lastname@example.org
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