The rise of stablecoins: what’s next?
It’s well known that volatility is the main obstacle preventing millions of people and companies from using crypto. The benefits of fast, cheap, secure, and unmediated transactions around the globe are watered down by the breakneck price rallies of top cryptocurrencies, making them attractive yet risky investments. This also makes them absolutely unsuitable for daily operations. But that’s exactly where stablecoins can shine.
The concept of a stable cryptocurrency backed by another asset has been around for almost as long as Bitcoin has, but it was just last year when stablecoins started gaining traction and attention. The world’s leading financial institutions and corporations such as JPMorgan and Facebook have been designing their own stablecoins for a variety of goals: instantaneous transfer of payments between institutional clients, peer-to-peer transactions and banking the unbanked. The total value of stablecoins in July 2019 exceeded €4.3 billion – a threefold increase compared to €1.5 billion in January 2018.
After such an eventful 2019, it’s clear why financial and crypto media are unanimous in proclaiming 2020 the year of stablecoins. This article aims at providing a brief overview of everything you should know about this industry: how stablecoins evolved, what are the hottest projects right now, and what is coming up next.
The origins of stablecoins
What is a stablecoin? European Central Bank paper “In search for stability in crypto-assets: are stablecoins the solution?” offers a comprehensive definition:
“Stablecoins are digital units of value that are not a form of any specific currency (or basket thereof) but rather, by relying on a set of stabilisation tools, try to minimise fluctuations in their price in such currencies.”
In other words, stablecoins are a new class of digital assets designed to merge the best of crypto and fiat worlds: the speed and security offered by blockchain and the stability of the world’s dominant currencies.
The concept of a stablecoin was first introduced in 2012 in the official documentation of Mastercoin (later renamed to OMNI) fundraising campaign, described as a protocol which allows the binding of crypto to a stable real-world asset.
In 2014, BitUSD and NuBits released the first stablecoins collateralized by crypto, but neither of them received wide adoption.
The first full-fledged stablecoin and the current leader of the market – USDT (Tether) – went live in 2015. Pegged 1:1 to the U.S. dollar, USDT became the first stablecoin backed by traditional currency and real world asset.
Since then, the industry has come a long way: according to Blockdata, in 2019 there were over 200 stablecoin projects on the market, with about 70 active stablecoins, different in structure and underlying mechanism:
Types of stablecoins
Existing stablecoins are rather diverse and can be classified by a variety of parameters.
First of all, it’s important to note and understand the difference between stablecoin collateralized by an asset, and a stablecoin pegged to an asset. For example, MakerDao’s DAI is collateralized by Ethereum cryptocurrency, but is pegged to a dollar.
Let’s take a look at the difference.
- By the underlying asset
In order to be stable, a stablecoin has to be collateralized, or backed by an equivalent amount of a particular asset or a basket of assets (fiat or crypto), securely stored in an account designated for that purpose. Just like the US dollar used to be collateralized by the gold reserve.
- Fiat-collateralized stablecoins backed by currencies, most commonly U.S. dollar (Tether, TrueUSD)
- Commodity-collateralized stablecoins backed by precious metals, oil or other (DGX)
- Crypto-collateralized stablecoins, typically “over-collateralized” by a large number of other crypto (MakerDao’s DAI)
- Algorithmic stablecoins that use a consensus mechanism to increase or decrease the supply of tokens, similar to central bank printing banknotes (basecoin)
- By the pegged currency
When a stablecoin is pegged to an asset, it means that its value is equivalent to the price of a particular asset, usually a national currency with 1:1 ratio.
There already are multiple projects that already work on stablecoins pegged to the majority of the world’s top currencies.
As of now, the majority of stablecoin projects are built on Ethereum blockchain, including those mentioned above (except for BitShares-based bitCNY).
However, 2019 has seen a massive shift to other blockchains, as the industry started to realize that Ethereum might not be the best option due to some of its features. EOS has been the most popular alternative so far, for a number of reasons.
EOS for stablecoins
Similarly to Ethereum, EOS is a blockchain platform that enables the development of decentralized applications, powered by EOS – the 8th-largest cryptocurrency in the world by overall market cap.
Using the different mechanism of consensus than Ethereum – verification of events in the network – EOS is capable of handling much higher throughput of transactions, potentially up to millions of transactions per second.
This, together with close to zero transaction fees, makes EOS a highly efficient platform for stablecoins, which has been acknowledged by both the industry leaders (such as Tether, who announced the plans to launch on EOS blockchain) and brand new stablecoin projects like Vigor, Pizza, CUSD and EOSDT.
EOSDT: the new generation of stablecoins
EOSDT is a decentralized dollar-pegged stablecoin built on the Equilibrium network that leverages underlying EOS collateral with an aim to create the new highly-transactable and extra secure form of money.
In the industry-significant move, Equilibrium has introduced the Stability Fund, backed by 6.5 million EOS tokens worth over $23 million (as of January 20, 2020). The three smart contracts that maintain Equilibrium automatically pay out the insurance to consumers in case the coin’s price falls below its collateralized value. At the same time, Equilibrium enables its users to make extra profits on their EOS holdings from staking them into EOSDT smart contracts.
Making sure that the users get their funds back in case of extraordinary events, EOSDT sets an important standard for the industry and makes the stablecoins more reliable for wider usage.
What’s next for stablecoins in 2020?
As the demand for stablecoins soars, so does the need for more scalable and secure solutions. EOS comes into the spotlight as the blockchain platform most fit for this purpose: in 2020 more established players and new projects are choosing EOS to build the new generation of stablecoins on top of.
Built-in smart insurance mechanisms like Stability Fund become a standard for stablecoins, building greater confidence and accelerating the adoption of crypto by traditional financial institutions, retail and e-commerce.