Stablecoin - what is it and how does it work?

By
Tokeneo
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2 min reading

Stablecoin is a type of cryptocurrency or token designed to maintain a stable rate (as the name suggests - stable) against a given asset - usually a fiduciary currency. They are usually used on crypto exchanges (centralised and decentralised), markets or payment processors in order to maintain relatively the same value during the exchange and not to lose when crypto rates fluctuate.

stablecoins

The technical nature of stablecoins is that on the one hand they use blockchain technology for transparency and security of transactions, on the other hand they rely on hedging in fiduciary currencies (such as the dollar or euro) or other types of assets (such as silver or gold). The coverage should reflect the amount of a given stablecoin in circulation. For example, : When issuing 1,000,000 US dollar-based stablecoins, our coverage should also be US$1,000,000.

The purpose of the stablecoins is to build a bridge between traditional banking and the cryptocurrency world. Many exchanges use stablecoins as a substitute because of the difficulty of introducing fiduciary currencies, due to the regulations imposed by some countries. With large fluctuations in exchange rates, stablecoins are very popular when users want to keep the earned value for a certain period.

Examples of stablecoins

The first stablecoin was  bitUSD created in 2014 by BitShares, reflecting a dollar 1:1 exchange rate, and has its coverage in BitShares (BTS). Initially, it was underdeveloped and the rate changed quickly even a few days after it was issued. For a long time the volume has been fluctuating at a maximum of several hundred dollars of daily trading, which means that this crypto is virtually unused.

Another stablecoin is DAI - a project created in 2015 by MakerDAO, written in the form of smart contracts on the Ethereum platform, linked to the US dollar in the reflection of 1:1. On smart contracts, MakerDAO is blocked over 2% of the total supply of ethereum.

The largest stablecoin is Tether ( USDT) - with which there is a lot of controversy, as many people believe that this cryptocurrency is emitted without hedge and artificially created. The company creating the Tether admitted that their security is not only in dollars, but also in cryptocurrencies and loans granted by it. The Tether is built on a bitcoin blockchain (BTC) via the Omni Layer platform. A small part of USDT tokens also exists in the form of ERC20 contracts, based on blockchain Ethereum.

Stablecoins such as these are also worth noting:

  • True USD (TUSD) from TrustToken - in the form of ERC20 contracts on blockchain Ethereum, fully secured by the US dollar,
  • Paxos (PAX) from itBit - also in the form of ERC20 (Ethereum), created by the company under New York State Banking Law and regulated by the Financial Services Department,
  • Gemini Dollar (GUSD) from Gemini - the first regulated stablecoin by the New York State Department of Services, created by the Winklevoss Brothers (the first Facebook originators).

The vast majority of stablecoins are based on the dollar, but there are also projects based on the euro rate, such as bitEUR or xEURO. They use also blockchain on which they operate. Most of them are built on the Ethereum blockchain in ERC20 standard.

With the growing popularity of cryptocurrencies, stablecoins may also become desirable, as they bypass the obstacles posed by banks. Noteworthy is the project created by Facebook - "Libra", which has a chance to become a global digital money with the features of stablecoins. So far, however, it has been effectively blocked by governments from various countries, which are afraid of competition with traditional currencies, fully controlled by them.

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