2019 Complete StableCoin Guide 1/7

Chapter 1

Enjoy shorts from my book while Kyle Rea of cREAtiveCastleStudios finishes the graphics!

What is a StableCoin?

Definition

Simply stated, a StableCoin is a cryptocurrency pegged to another asset. Or, a global digital currency solely unrelated to a central entity. StableCoin’s make for practical usage of cryptocurrencies by allowing for secure, convenient transactions without the high volatility traditional cryptocurrencies hold.

History of StableCoins

While Satoshi Nakamoto’s vision for Bitcoin to be used as electronic cash, the world’s first cryptocurrency is rarely used as a medium of exchange on a day-to-day basis. Rather, volatility and high fees make many cryptocurrencies impractical for daily transactions, therefore is used more as a long term investment.

StableCoins offer all the benefits of cryptocurrency, including;

cryptographic security
ability to transfer assets digitally
fast transactions

The concept of the StableCoin officially appeared in the 2012 documentation attached to the first version of MasterCoin. The founders claimed Master Coin Inc protocol “will allow the binding of cryptocurrency to a stable traditional asset.” (A Brief History of Mastercoin)

It wasn’t until 2015, Tether Limited released the first full-fledged StableCoin. Tether or USDT is backed and pegged 1 : 1 with USD. The following year a European analog created EURT.

January 2016, an ethereum platform contributor aimed to create the StableCoin, DigixDAO. DigixDAO had DGD tokens paying for different operations with DGX. Criticism states this is not a StableCoin related to the asset not being gold, but with DigixDAO’s reputation and their digital version of gold.

2018 brought nearly thirty StableCoin projects preparing for ICO and pre-ICO and many expect that number to exponentially increase in 2019.

Purpose & Need

The goals StableCoins attempt to accomplish.

Create stability among cryptocurrency trading pairs in forex-style trades.
Aim to diversify portfolios in times of market instability.
Desire to be used for daily transactions, as effortlessly as fiat.
Aide in adoption of digital currencies.
Form a new, better financial ecosystem.
Assist in investment predictions by minimizing current cryptocurrency market volatility.
Provide global access to a stable currency, protecting those plagued by hyperinflation.

In Photo; Tyler Winklevoss. Cameron Winklevoss.

StableCoin Advantages

Benefits of Cryptoconomy. Low fees. Secure transactions. Somewhat or completely anonymous.
Stable. Asset-backed.
Blockchain Technology Utilized. This ledger system brings security, transparency and accountability.
Simple. System is easy to understand for fiat and digital currency users.
Aids in Adoption. Acceptable bridge from fiat to cryptocurrency use.
Smart Contracts. Placed to protect all parties with interest in investments.
Regulations. Fiat-involving processes involved.

StableCoin Disadvantages

Centralized. Defeats purpose of cryptocurrency.
Requires Third Party. Requires trust from an entity.
External Audits Needed. To ensure assets are accounted for.
Less Return on Investment. Traders and investors look to other means for financial gain.
Lack of Education. New technology and processes take time for mass adoption.
Regulations. Fiat-involving processes involved.
Example: StableCoins tied to real world assets such as; fiat, gold, corn, oil, sugar, diamonds, wheat, sugar. Stable asset-backed cryptocurrency makes a great digital currency for everyday use by any consumer.

Particularly useful Examples;

Fixed Income Investments. Asset management made easy.
Loan Payments. Financial loans with benefits of ‘smart contracts’.
Ordinary Payments. Everyday transactions.
Recurring Payments. Mortgages, rent, subscriptions.

Roger Ver

Key Factors for Evaluating StableCoins

When investing in a StableCoin, it’s wise to consider a few key factors;

Auditability. If not completely decentralized, do users have access to audit the systems financial fundamentals to confirm collateral?
Collateralization; Collateral defined; ‘To offer an asset as a surety that a debt will be repaid.” When ‘collateral’ or ‘collateralization’ is used in StableCoin’s terminology, it’s the asset the borrower leverages in order to secure a loan from issuer. What is the collateral behind StableCoin?
Fallback methods. What are the procedures in the event of system failure? What happens to assets? What regulations protect the users?
Growth. Does this ecosystem have stable stability?
Maintenance. What is the overall costs? The ecosystem loses efficiency when high overhead costs and excessive fees exist, thus risking market fluctuation.
Pegging; StableCoins are often ‘pegged’ by an entity. Investopedia states, “Pegging is a central bank’s open market operations meant to stabilize its country’s currency to that of another country by fixing its exchange rate.”
Redeemability; Users are not always able to redeem their token exchange for underlying asset, one should know this before investing.
Stability methods. What is the underlying reason this is a stable investment? What guarantees and risks exist?
Transparency. If on a centralized system, are ledgers open and viewable by users?

Where to Find Stability; “Quantity Theory of Money”

Many StableCoin White Papers state their cryptocurrency is designed based off ‘The Quantity Theory of Money’ to control currency supply with a goal of maintaining price stability.

The infographic shown is termed ‘The Fisher Equation”. Irving Fisher and. Milton Friedman developed this equation in the 20th-century based off the popular orthodox theory by 17th-century classical economists, “Quantity Theory of Money”

Simply;

Money Supply multiplied by Velocity of Circulation is equal to; Price level multiplied by Transaction volume. (M x V = P x T )

If M doubles while V and T remain constant, then P theoretically will double; therefore the value of each individual unit of currency will be cut in half.

Majority of notable economists accept ‘The Fisher Equation” as valid over long-term use. Therefore, with this pre 17th-century theory in mind, economists state StableCoins will maintain price stability by increasing or decreasing money supply.

StableCoin’s can remain stable based on this concept because, if the cryptocurrency’s value drops below a certain price point, its users drive the crypto to be scrapped, decreasing the total supply of tokens, which stabilizes its value. If the token’s value rises beyond a certain price point, users incorporate more supply to keep cryptocurrency at fair market value.

Being an aged theory, there’s some problems with “The Quantity Theory of Money.” An example being; V and T are assumed to be constant for the long term. Consequently, M and P are perfectly proportional. An intelligent design was in mind, as this theory was developed based on an advanced economic structure which assumes money velocity and transaction would be consistent. However, blockchain projects are rapidly changing and the technology is in its infancy, therefore it’s difficult to calculate token velocity and transaction volume, and assume they’d be constant. Considering V and T as variables, it may be time to add more variables to ‘The Fisher Equation”.

Criticisms & Quotes

Vitalik Buterin, in a 2014 Ethereum article states, “Are stable-value assets necessary? Given the high level of interest in “blockchain technology” coupled with disinterest in “Bitcoin the currency” that we see among so many in the mainstream world, perhaps the time is ripe for stable-currency or multi-currency systems to take over. There would then be multiple separate classes of cryptoassets: stable assets for trading, speculative assets for investment, and Bitcoin itself may well serve as a unique Schelling point for a universal fallback asset, similar to the current and historical functioning of gold.“

Miko Matsumura EvercoinNews Miko Matsumura

UC Berkeley’s Computer Security Researcher, Nicholas Weaver wrote StableCoin Tether is “the primary vehicle for hiding money flows by allowing customers to switch between different cryptocurrencies. In short, they represent a significant problem.”

Preston Byrne, founder of Monax, wrote, “fiat-world examples of pegged assets form an object lesson in why you don’t try to peg currencies: because you are unable to hold the peg any longer than you can afford to subsidize your differences of opinion with the market.” Later stating, StableCoins are “the techno-magical idea that a cryptocurrency can tell the market what its price should be, rather than the market determining what a cryptocurrency’s price should be.”

“Distributed StableCoins aim to achieve both the characteristics of crypto-coins like Bitcoin (censorship resistant digital transactions) and the price stability of traditional financial assets, such as the US Dollar or gold. These systems are distinct from tokens such as Tether, where one entity controls a pool of US Dollar collateral, ultimately making the system centralised and thus susceptible to being shut down by the authorities.”

Matthew Leising Everipedia

Nick Szabo stated central banks could soon turn to cryptocurrencies to shore up reserves, Finance Magnates reports Jan. 9, 2019. “There’s going to be some situations where a central bank can’t trust a foreign central bank or government with their bonds for example. One solution that’s been developed is to have the Swiss government hold it for you — that’s not a trust minimised solution. The Swiss government itself is subject to political pressures and so a more trust minimised solution is cryptocurrency.”

“ Tyler Winklevoss and Tyler Winklevoss Bitcoin (BTC) bulls and founders of the cryptocurrency trading platform Gemini , have said stablecoins and tokenized securities will usher in a bright future for the digital currency space. The twins made their remarks during an interview on Fortune’s crypto-focused news segment The Ledger on Jan 14, 2019… Cameron further noted that with at least 60 percent of $100 bills now held overseas, dollars on the blockchain are poised to significantly reshape the global currency market.”released on cointelegraph January 14, 2019.

Types of Stablecoins: Asset-Collateralized vs. Non-Collateralized

Define Asset-Collateralized StableCoins.

The socially agreed upon currency most countries use is termed ‘fiat’, which literally means ‘something that was created without effort.” Until 1971 world currencies were backed by gold. Before printed money; diamonds, silver, gold, land, estate and other goods were used as means for barter. Shifting from an asset backed currency to the current fiat system left centralized banks, governments, financial technologists, private entities, and economic experts with the concept of Asset-Collateralized StableCoins. These specific StableCoins’ purpose is to tokenize stable assets on a blockchain serving as a digital currency for means of speedy, secure and stable daily transactions. Stablecoins in this category should be guaranteed to exchange 1 : 1 StableCoin for its underlying asset.

Define Non-Collateralized StableCoins.

One argument states, fiat is not backed by any tangible asset, therefore; why should cryptocurrency only have value as an asset-backed currency? An opposing argument suggests currency merely must have an agreed upon “value” to be successful. Non-Collateralized Stablecoins were created as a medium. This category of digital currency is not backed by any “real-world” or cryptocurrency asset; but instead, maintains value by its users expectations of maintaining a certain value. The only current noted Non-Collateralized approach is the Seigniorage Supply (Algorithmic) StableCoin Model.

Each Category Broken Down

I’m releasing shorts of my ebook on each section. I’ve separated StableCoins into three different categories. three are Asset-Collateralized, one is Non-Collateralized and the remaining group is a Hybrid category. This is in hopes of a more simplistic understanding for us all.

First Asset-Collateralized StableCoins, Fiat-Collateralized. My Medium publication is here.

Second, Crypto-Collateralized StableCoins. That article can be viewed here.

We then switched things up a bit and visited the only Non-Collateralized StableCoin Category, Seigniorage Supply (Algorithmic) StableCoin Model. Enjoy the description of the futuristic currency model here.

Next was a simple to understand category among a Asset-Collateralized group; Metal-Collateralized Stablecoins with a long list of promising projects found here.

Stay tuned for more updates! If you’ve found this article helpful and would like to donate to our work towards decentralized education, ETH accepted here: 0xF32Cc9FBA17F389f734e7aACACDFb39ba7029c18

End.

Part 1/10 of Alyze Sam’s 2019 Complete StableCoin Guide

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