Cryptocurrency with a stable rate: a dream or reality?
Excessive volatility characterizes cryptocurrencies, and that is a hazardous undertaking to invest in them. Cryptocurrencies have a reputation of a potentially high-yield, promising, convenient, but extremely high-risk financial tool. It does not reveal the full range of opportunities for the blockchain industry.
Volatility is also not a small thing for dollars, euros, sterling pounds, yuan or yen (currencies, issued and maintained by financial institutions of states). During crises or significant events, their rate is changing — anyway, to support national monetary units, monetary policy is maintained. It is backed by the economic strength of states, in contrast to cryptocurrencies as their rate is almost free and independent.
The lack of real security is the second important issue, which causes investors’ doubts. Fiat currencies, as well as precious metals, have got the reputation of an investment backed by the real value. Ordinary men believe that each unit of the fiat currency is provided with something real and depends on the tangible assets.
Cryptocurrencies are provided with impressive computing power, spent for the creation and support of their infrastructure. Therefore the rate is formed by the balance of supply and demand. They act as payment means precisely as long as users recognize their value. In the eyes of the majority of consumers of traditional financial services, all these complex interconnections are utterly worthless.
Types of stablecoins
Specific cryptocurrencies — stablecoins can solve both problems. Their creators promise to keep the regular price, or at least a more stable rate compared to other digital coins. These goals can be achieved in several ways:
- providing tokens with assets of traditional markets — for example, currency or gold;
- covering the stablecoins with other cryptocurrencies — market volatility also affects them. Anyway, the developers achieve the result by choosing the most liquid and popular coins and increasing their number;
- creating mechanisms that support the rate using sophisticated algorithms of additional emission, tokens buyback, the sale of bonds or other special contracts — similarity of the monetary policy of central banks.
All the ways have got advantages and disadvantages, and so far none of the cryptocurrencies stablecoins has achieved the enormous popularity and trust of all market participants as a genuinely stable digital coin.
Tether (USDT)
This crypto-stablecoin is very popular. Its daily trading volume is so significant that it sometimes exceeds the capitalization and makes up a quarter of the daily trading volume of the entire cryptocurrency market. The project team declares that it is provided with real dollars. Indeed, if you look at the trading schedule, it becomes evident that the rate of USDT is stable.
Picture 1. The dynamics of Tether rate (USDT)
Source: coinmarketcap
Technologically, cryptocurrency Tether looks like several layers working on the Bitcoin network: OMNI supports the release, burning, circulation of USDT tokens and their interaction with wallets and exchanges while Tether Limited, the mechanism of Proof of reserves, provides management of dollar assets and their connection with system tokens.
But Tether's assets are not confirmed: the last financial audit was not completed. The disappearance of an impressive amount of dollars from the accounts of the company as a result of the hacker attack by the community was viewed not unambiguously. The actions of the company's management were identified as suspicious regarding market manipulation: Tether and the Bitfinex, a related crypto exchange project , had a purposeful influence on Bitcoin rate by issuing the USDT tokens.
Some experts believe that with the help of USDT tokens, many big players make up for the liquidity of the market after the attack caused by financial regulators. It also created the disconnection from bank accounts.
Experts watch Tether with great caution and believe that in case of problems with the project (for example, with the active actions of regulators), the entire cryptocurrency market will lose a significant share of liquidity and inevitably collapse.
TrueUSD (TUSD)
The company of developers created this crypto-stablecoin to prevent any possible threats from the regulatory authorities and to throw off consumers’ suspicions:
- The legal justification of the project was carried out by professionals of the financial market;
- Assets in the fiat currency are outside the access of the project team. The assets are insured;
- Third parties — professional auditors perform inspections of assets;
- Asset holders are specially selected legal licensed and authoritative organizations;
- Any operations with finances are carried out in strict accordance with the principles of KYC/AML.
Each TUSDT token is provided with one dollar, which is in the asset of the company which serves the assets of the project. A user who buys or sells cryptocurrency from True USD, interacts with a dollar holder, while the project infrastructure is used to circulate digital money only.
TrueUSD uses the Ethereum smart contract system, and TUSDT uses ERC-20 tokens. The number of coins is equal to the number of dollars in assets, and the return of a token to obtain its security leads to the burning of a coin. Thus, the system regulates strict compliance: 1 token = 1 dollar.
The plans of the company's founders include the release of new stablecoins, backed by other fiat currencies and assets: euro, yen, gold, silver, oil. At the moment, the system works in the alpha version. Then the beta version is planned to be launched, where the limit for the return of security tokens will be reduced (now — $ 10,000). The commission for the purchase and return of tokens is ten basis points or $ 75.
Trustworthy — this word can be found in the texts on the website and documents of the company dozens of times. The project team is working hard to achieve this reputation. For users, and they, according to the developers' statement are traders, exchanges, financial services and commercial structures, this aspiration is commendable. But working with TUSDT, you will have to accept all the requirements and restrictions imposed by state regulators to traditional financial markets.
MakerDAO (DAI)
DAI stablecoins are backed with cryptocurrency — they are Ethereum coins at the moment. Also, other popular digital currencies are planned to be used. Still, a dollar serves as a guideline. The volatility of cryptocurrencies (even of advanced Ethereum), is too high to become reliable and stable support, so developers use a flexible system that regulates the ratio of the security resource and tokens.
The system compensates for the changing price of the currency with the help of the feedback mechanism, and the target price — means of the Ethereum smart contract realize this.
The MakerDAO platform that produces DAI is the DAO (Decentralized Autonomous Organization). The DAI token management system uses many features of this type of project: unique additional tokens MKR are issued — they are used to pay for platform commission and voting for decisions affecting the fate of the project.
The DAI cryptocurrency looks attractive from different points: first, it is decentralized (unlike Tether and TrueUSD). It is backed by other cryptocurrencies, rather than traditional assets, and thus it withdraws some of the issues connected with the regulators. The mechanism that stabilizes the rate works with the help of smart contracts and can be checked — this increases the trust of the community.
Still, it is quite expensive to make DAI cryptocurrency-backed — to smooth the fluctuations of the exchange, a vast reserve will be required. Besides, many experts doubt the effectiveness of this type of stablecoins with the price reduction.
Carbon and Basecoin
These are two projects offering the market a new stablecoin model. Flexible and complex algorithms will support the stable rate of these digital coins. Basecoin issues bonds with a decrease in the price of currencies and burns extra tokens with an increase in the market price. Carbon issues additional credit tokens — their price will grow with the price decrease of the principal coins.
These companies attract investments and are definitely of high interest. The market needs solutions to problems, and investors are willing to risk and invest in future stablecoins, although the effectiveness of these cryptocurrencies can only be proved with the help of calculations.
Are stablecoins effective?
Stablecoins offer a tempting and long-awaited solution to the long-standing problem of the cryptocurrency market. The need for such digital coins is obvious, and the success of Tether tokens proves this.
Stablecoins, backed with currency or precious metals, is a tool that connects two worlds: cryptocurrency and traditional finance. But the solution can become a problem too as state regulators keep standard assets under control, which leads to the fact that digital currency projects lose decentralization and become vulnerable to legislative restrictions, and can quickly lose their reserves, facing obstacles from banks and government agencies.
On the other hand, stablecoins backed by cryptocurrencies are not supported from external markets, and asset management is not difficult. It is evident that the advantage becomes a drawback too — the volatility is typical for the whole market, while threats and instability affect both the stablecoins and the supporting currency.
Algorithmically stable cryptocurrencies can use the considerable potential of smart contracts and programmable mechanisms with elaborate sets of actions for controlling the price, emission, and provision of tokens. Still, the overall volatility of the market poses a threat to the stability of stablecoins rates. And moreover, the effectiveness of this method has not been proven yet.
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