In 2018, the crypto-winter and thus the year of stablecoins started. What these are, how they work and what types are there, will be shown in this article.
By the end of 2017, blockchain projects sprang up like mushrooms. When the Bitcoin price collapsed in early 2018, the blockchain hype came to an end. However, this did not apply to all crypto assets: The beginning of the bear market was also the starting signal for so-called stablecoins. This means crypto-assets that couple their value to a stable value. Often they are national currencies such as dollars, euros or Swiss francs. While at the end of 2017 a manageable 30 of these projects existed, their number increased to more than 180 by the end of 2018. Currently, we count more than 220 stable coins. It is hardly surprising that this crypto asset category experienced enormous growth just when the bear market began.
The crypto community hopes to have found an antidote to stable volatility in stablecoins – especially if it is a downside. Many consider the volatility of crypto assets still a stumbling block on the path to a more decentralized financial world. Whether it’s decentralized insurance, forecasting markets, lending or derivatives platforms that are grouped under the name of decentralized finance or DeFi: without price stability, they will remain forever a marginal phenomenon, so the fear. But DeFi applications are one of the main goals of crypto development. While fintech applications tend to run on centralized proprietary software systems, the new decentralized financial software applications are meant to be trust-minimized solutions.
Not too much but too few speculators Currently, stablecoins are mainly used by traders to avoid friction costs. Especially frequent traders do not want to have to switch between their trading currency and crypto-assets every time. But these traders are in the eyes of many only speculators who want to exploit the fluctuating crypto markets in their favor, which would hardly correspond to the idea of stablecoins, so the vote of critical observers.
From their point of view, it would be a far more useful application if stablecoins – and not the also very volatile Bitcoin – can help in hyperinflationary countries like Venezuela or Argentina. People who are literally running their national currency between their fingers would actually benefit from a stable cryptocurrency that escapes the influence of state control. But just as Bitcoin is only accessible to a few people in these countries due to technical hurdles – paradoxically probably those who least need it – Stablecoins are hardly common. Still, they are too unknown, too user-friendly to use.
From an economic point of view there is not too much, but too few traders who use stablecoins for their financial speculation business. Therefore, they do not have the necessary market depth to make decentralized financial services seem lucrative to the masses. The market capitalization is about three billion US dollars – a vanishingly small value. Only greater liquidity should make stable coins more user-friendly and less volatile.
Three variants Commonly, three types of stablecoins are distinguished:
• Stablecoins secured by government currency (Fiat-col-lateralized)
• Stablecoins secured by crypto-assets (Crypto-collateralized)
• Unsecured stablecoins (non-collateralized)
The first variant is the easiest to understand: The Stablecoin is tied to a state currency and is issued as a digital Schuldscheintoken. In some cases, gold is used for the collateralization. The issuer also ensures that the connection remains in a stable relationship. The best-known examples of this kind of stablecoins are Tether, Gemini, Trust Token and Circle (USD Coin).
In the second model, the stablecoin is secured by crypto-asset. The connection is ensured via so-called on-chain smart contracts and an over-collateralization of the corresponding crypto asset. The most famous example of this Stablecoin style is MakerDao.
The third variant is called algorithmic stablecoins, which are not collateralized. Rather, algorithms to expand and reduce to ensure that price stability to the corresponding Fiat currency can be upheld.
The last two species are so interesting because they try to achieve price stability in unprecedented ways. How functional they actually are will have to be shown. However, at least one of the algorithmic approaches without collateralization, NuBits, has already failed. Critics complain that this type of collateral is dependent on continued growth to ensure price stability.
A more promising future is attested to stablecoins backed by crypto-assets. This despite the fact that over-collateralization is considered inefficient and, in the case of a black-and-swan event, would not be enough to maintain price stability. Nonetheless, one of those stablecoins, the MakerDao project, was hailed as an upstart in the 2018 crypto community. The decentralized Stablecoin seems to work well so far, except that the liquidity of Dai, the actual stablecoin of the MakerDao project, is too low for some large crypto-trades. If you want to secure yourself as a trader using Dai in a big way, you quickly reach an upper limit.
The most prominent stablecoin in Switzerland is likely to be the CryptoFranc (XCHF) – issued by Swiss Crypto Token AG, a subsidiary of Bitcoin Suisse AG. The crypto-franc is based on the Ethereum Blockchain, currently XCHF tokens equivalent to approximately 15 million francs spent.
The issuer seeks to defuse the general problem of trust in various ways: for example, the portfolio used for collateral does not comprise real estate or other assets but consists of physical banknotes deposited in a high-security block. In addition, this physical cash is insured at the current equivalent value. Every month, the relevant parameters are audited by the auditor Grant Thornton Bankrevision AG.
The CryptoFranc finds real use in real estate transactions by blockimmo. It is a transaction platform for the tokenization of real estate, in which the Swiss Stablecoin is integrated into the transaction as a value-stable token and thus makes this possible. Also used is the XCHF for the slot machine of the crypto startup Alethena, which tokenizes shares and offers against the CryptoFranc for sale. Although not nearly as prominent as the Swiss franc itself, the XCHF token is slowly but surely also used in first niches.
Also published on Medium.