“Now, in the middle of 2018, it seems that every second project is a stablecoin,” says Havven founder Kain Warwick. At the end of September, Blockchain published a study on this rapidly developing cryptocurrency market niche. The authors note that the number of stablecoins has increased significantly over the past 12–18 months and more than a dozen different companies have announced plans to launch stablecoins by the end of this year.
In total, researchers examined 57 stablecoins, including Tether, TrueUSD, Dai, and Digix Gold. Approximately 45 percent (26 stablecoins) exist at the moment, while the rest are at the pre-launch stage (Basis, Carbon, Saga, Center, Standard.One, and others). According to the document, the market capitalization of stablecoins is $3 billion, which is about 1.5 percent of the total capitalization of the crypto market.
Researchers have divided the stablecoins into two categories: backed by other assets (cryptocurrency or fiat) and algorithmic (those that use a central banking platform for stable prices). Approximately 77 percent of the examined coins belonged to the first category, and 66 percent of the projects used a dollar peg.
Despite the abundance of criticism against him, Tether remains the most popular stablecoin of this kind. It now ranks second in terms of trading volume (after Bitcoin) and is in the top 10 cryptocurrencies by market capitalization. Tether is listed in the cryptobirth listing at 46, and in terms of turnover among stablecoins, it accounts for about 98 percent.
Examples of the second category of stablecoins with the "algorithmic central bank" are Basis and Carbon.
Basis held a SAFT token sale in the spring of this year and raised $125 million. The cryptocurrency will maintain a stable price due to the availability of other digital assets: oracles will track the prices of these assets, and the protocol will regulate the number of tokens so that the price of the Basis will remain at the same level. In addition to the “base coins,” the startup is developing “base bonds and “base stocks,” or cryptocurrencies that will support the Basis, thus helping the protocol manage the money supply. Basic bonds can be converted into tokens as needed, and when new tokens are issued, basic shares will ensure their distribution among holders. The project is supported by many large funds, including Andreessen Horowitz, Pantera Capital, Polychain Capital, and Digital Currency Group. And in December, during the Token Summit II in San Francisco, Coinbase co-founder Fred Ehrsam singled out Basis as one of the most relevant and significant projects for the ecosystem, noting that "developers of the crypto industry are interested in a stablecoin."
The second project, Carbon, announced the successful holding of a seed investment round in April of this year. The project raised $2 million, and among investors were funds such as General Catalyst, Digital Currency Group, FirstMark Capital, Plug and Play Ventures, and The Fund. Stablecoin will be pegged to the dollar and developed on the Hedera Hashgraph platform. “If we create a mechanism that is currently used by the Federal Reserve Bank, but make it decentralized, we will not need to trust the central government. We can simply trust the code,” as co-founder of Carbon Connor Lin explained the choice of algorithmic monetary policy. The Carbon system includes two tokens: the stablecoin itself, the price of which must be equal to $1, and the “credit token,” which fluctuates in value, leveling changes in demand. When the price of a stablecoin falls, an auction is held, during which anyone can give away their tokens, thereby reducing the money supply and raising the price, and receive a “credit token” instead. In the future, when the price rises above $1 and the supply increases, the holders of “credit tokens” will receive new stablecoins and the whole process is completely carried out by the algorithm.
In Real Life
The study describes various scenarios for the use of stablecoins (medium of exchange, value storage, remittances, assessment of project growth, and so on), in each of which it is possible to use “regular,” unstable cryptocurrencies. The advantage of stablecoins in all the described applications is precisely in fixing the price that they provide, unlike all other traditionally highly volatile cryptocurrencies.
More specific scenarios for the use of stablecoins include the derivatives market, lending, and insurance. Researchers note that approximately 600,000 passengers each year do not receive adequate compensation for canceled or delayed flights, as the application process looks very confusing. If you put stablecoins and blockchains into this system, however, then all data will be recorded, saved, and made publicly available, and any information can be checked with the help of smart insurance software. If the aircraft does not take off for any reason, the smart contract will immediately pay compensation and simplify the application process, eliminating the risks associated with mediation.
Stablecoin regulation remains blurred, and, as with all crypto regulation, the most pressing issue is whether stablecoins fit into the national laws on securities and financial services.
According to the study, the United States and Switzerland have become the friendliest jurisdictions for stablecoin projects. Ten of the projects reviewed in the study officially function in the United States (including TrueUSD, Basis, Carbon, and the new Gemini Dollar from the Winklevoss brothers), and in Switzerland, seven (including DAI and Saga). Also, several projects have been registered in Australia (Havven, OnRamp), the Cayman Islands (Center, Kowala) and Jersey (AAA Reserve, FiatPeg). Tether is registered in the Virgin Islands. And in Russia, there is officially only one of the projects reviewed, the GoldMint.
Leaders in terms of trading volumes China and Japan did not shelter a single stablecoin project because of their tough crypto policy.
The authors of the paper believe that stablecoins may receive even more unfavorable reception from regulators than other cryptocurrencies, because they pose a greater threat to the traditional financial sector and fiat currencies. Earlier, the same position was announced by Kain Warwick, saying that as soon as a really strong and viable stablecoin appears, “the same arguments will be brought against it that are being brought against Bitcoin today, but in a much more aggressive manner . . . [because] a stable decentralized currency will be a real threat to fiat." Following this logic, the attention of the government is an indicator of the success of the project.
In particular, Barry Eichengreen, professor of economics at the University of California (Berkeley), takes an unfriendly stance on dollar backed stablecoins. He believes that such cryptocurrencies require additional expenses, since for each issued “dollar token” there is one real dollar from the national reserve. Thus, people will use the dollar, but in the form of a legally unspecified stablecoin with “dubious” backing. According to Eichengreen, this form of payment will be popular only for the purposes of money laundering and tax evasion.
Many stablecoins are included in the listing of approximately 50 different crypto exchanges.
Most projects about 54 percent use on-chain support.
More than 50 percent of stablecoins offer "dividends" or have other economic incentives (including DAI, Havven, Digix, Basis, Fragments, Saga, and Terra).
Ethereum is the most popular platform for creating stablecoins (approximately 60% of projects used it). Next in popularity are Bitcoin, NEO, and Stellar.
Approximately 69 percent of projects use open source code (including DAI, TrueUSD, AAA Reserve, Havven, Digix, USD Coin, and Standard.One).
Approximately $350 million of venture capital investments were directed to the development of stablecoins.
The largest investors in this sector are Pantera Capital, Coinbase, Circle, and Digital Currency Group.
Most of the teams of such projects prefer to be based in the U.S.A. (19 of the projects reviewed). There are a total of 13 projects in Europe throughout the study, of which five are based in Switzerland and three in the U.K.
The Most Popular Stablecoins at the Live Stage
Launch year: 2014
Type: asset backed
Tied to: dollar
Security pool: off-chain (dollar and euro)
Platform: Omni Protocol, Ethereum
Capitalization: $2.7 billion
Launch year: 2017
Tied to: dollar
Security pool: onchain (live)
Capitalization: $53 million
Launch year: 2018
Tied to: dollar
Security pool: offchain (Dollar)
Capitalization: $78 million
Launch year: 2017
Security pool: Offline
Tied to: Fiat currencies and bonds
Capitalization: $2.9 million
Launch year: 2018
Tied to: dollar and other fiat currency
Security pool: On-chain (cryptocurrency)
Platform: Ethereum, EOS
Capitalization: $1.1 million
Launch year: 2018
Tied to: one gram of gold standard 99.99 percent of the London Association of Participants in the Precious Metals Market (LBMA)
Security pool: Off-chain (Gold)
Capitalization: $2 million