Can we recover the dream of new forms of money moving without borders and being used as a tool to everybody’s advantage?
With a vision of monetary systems that would be resistant to hyperinflation, free from centralised control, and more stable; blockchain technology and its different applications are already transforming traditional finance models, creating constructive and much-needed simplicity and financial inclusion.
While early adopters, innovators and a small group of progressive institutions have already started shaping this transformation, the industry incumbents and sceptics are watching it happen.
Cryptocurrency is revolutionary in every aspect and changes the rules of the game. But real-world adoption is still the issue.
Cryptocurrencies serve as an excellent medium for financial communication that has no borders, but volatility poses problems. Because of volatility, companies and individuals have already disregarded Bitcoin and cryptocurrencies as a payment instrument.
To date, a fundamental building block of this new world vision requires the connection to traditional/real-world representation of value, whether that be ‘asset-backed’ or pegged.
Stable coins provide that onramp.
A stable coin is a cryptocurrency that intends to imitate traditional currencies or commodities. Generally, a stable coin is collateralised to the value of an underlying asset such as a fiat currency or a precious metal for example. They attempt to bridge this gap between fiat currencies and cryptocurrencies and can be traded just like other currencies.
Stable coins represent a major innovation across the financial services ecosystem by enabling a decentralised system that is secure and stable and making cross-border payment, borrowing, lending, derivatives trading and much more possible.
In contrast to mainstream cryptocurrencies, stable coins have the opportunity to become the basis for financial applications.
If we look at the current financial system, the key players are the banks and central banks.
Why is it hard to replace the banks with alternative monetary systems?
Well, it’s all about trust. The word ‘Trust’ says it all.
Banks are not usually the most transparent entities, they are not usually the ones on the edge of the technology nor remarkable innovators, but they represent trust for the users. On the other hand, the feeling of trust is being reinforced by the financial law and regulations in place as a result of governments watching banks.
Now, using the same reasoning, the trust would be the reason why people would start using or not cryptocurrencies and stable coins.
At the present moment, the main stable coin on the market is Tether, with 74% of aggregate stable coin market value but the competition is rapidly growing with other stable coins such as Paxos, TrueUSD, USDCoin and Gemini Dollars. One of the main reasons for this success comes from the fact that participants in the crypto world want to trade in and out of other crypto-assets through a stable anchor to limit the risk of volatility. (The success of and trust in a stable coin, should, however, not be measured in market cap, but transaction velocity.)
But why shall we use stable coins?
In short, stable coins, leverage the benefits of cryptocurrencies such as transparency, security, fast transactions, low fees, and privacy without losing the guarantees of trust and stability that come with using a fiat currency like the US dollar or Euro.
Stable coins are a safe, transparent and trustworthy layer for fiat to operate over a blockchain and within smart contracts. Blockchain applications are unable to interact with and execute contracts with traditional currencies. It’s like connecting analogue with digital. You need a connector or a converter.
Currently, there are 4 different types of stable coins:
-Fiat collateralised stable coins are the easiest to understand. They are backed 1 for 1 by fiat currency which is cash deposit in financial institutions. They are just basically digital fiat currency; because they are pegged to a national currency such as USD, the concerns over what defines the value of the coin is potentially answered.
One of the main disadvantages of this option is that it’s not fully decentralised and requires financial institutions to act as ‘anchors’ and the trusted custodian. On the other hand, one of the main advantages is the ability to cut down on the foreign exchange costs and move money faster, even across borders, through the stable coin and therefore not have to rely on the current banking system which is slow and expensive for participants.
In a world ruled by custody, what also makes stable coins interesting is their capacity to replace the need for traditional escrow services. Indeed, while traditional escrow is a neutral third party that collects, holds and releases the contents of an agreement once both parties to the agreement are satisfied, blockchain and smart contract applications offer the same features but also removes the third party.
An escrow account can be set up on the blockchain and protect the parties like a third party would be using a smart contract instead of an expensive escrow service. However, unlike traditional escrow, smart contracts do not act as third parties but they facilitate direct transactions between parties to the agreement. The contract will only be executed once specified conditions on both sides are met.
One example of this is TrueUSD. They created a stable coin that has a 1:1 parity with the USD. They enable you to exchange USD directly with an escrow account set up on the blockchain, without the need to trust a third party or a company’s bank account. Their smart contract runs the escrow account and ensures the parties are satisfied without touching the funds.
-Commodity-collateralised stable coins are backed by other kinds of assets, such as gold, oil or real estate. They hold a tangible asset that has real value for something most cryptocurrencies do not have.
We now see companies emerging in this field such as DigiX which offers 1 token backed by 1 gram gold and is fully exchangeable and transferable on the blockchain.
-Crypto-collateralised stable coins are a bit more complex. They are backed by people depositing other crypto-assets. For example, if someone deposits $150 of BTC, they will receive $100 of X stable coin. If BTC falls then a smart contract sells BTC for cash to maintain the stable coin price.
They have the benefit of being decentralised — the collateral is held in a smart contract, therefore, they can liquidate quickly as so users aren’t relying on any third party to redeem it. However, they are a bit less stable than fiat currencies.
-Non Collateralised stable coins, these are the most complex, they aim to play the role of a central bank on the blockchain. These stable coins are not actually “backed” by anything other than the expectation that they will retain a certain value.
A prominent project in this field is the Basis coin. Basis aims to be a stable currency managed by a set of algorithms that operate as a virtual central bank on the blockchain. They developed a concept where 1 Basis token would equal 1 US dollar. If the value of the token increases in value, the system would print more Basis tokens to increase supply and so reduce the price. If the price falls below $1, the code will issue bonds worth one Basis token each. They would then use the proceeds to buy existing Basis tokens to reduce supply and so bid the price back up, later on repaying bondholders.
Unfortunately, Basis couldn’t meet the US securities regulations and the project has been shut down.
To date, stable coins projects have raised over $335 million through Venture capitalists.
Regulations are also a major component in the advancement of stable coins.
As the governments regulate cryptocurrencies and stable coins, they could think of being the first to issue a stable coin.
But the past shows us that most governments typically don’t adapt quickly and innovate. We can assume that there will be dominant stable coins in the future, that they will not come from governments and banks but companies.
How long will it be before we see multinationals issue their own coins?
Multinational brands could issue their own stable coin and having the coin listed on an exchange. Companies like Google, Amazon, Apple, Total are the ones who are moving billions of dollars around the world every day to pay for staff, suppliers, shareholders, etc. If they offered to those they transact with an incentive such as a faster payment or a discount, for using their own coins, then I wouldn’t come as a surprise that a significant amount of participants would stop using the USD or other fiat currencies to move to the brand’s coin. Lots of global brands are sitting on massive assets. If we look at Apple it currently has over $66Billions of short term investments and cash, so why not create an Apple coin?
However, to be accepted by merchants and adopted widely all crypto-assets including stable coins need to be liquid and therefore enable people to buy and sell in a fast, cheap, and private way.
And to go even further, what if the Saudis, with their massive oil reserves, issued a “Saudi coin” — a bit like the Venezuelan with the PETRO coin? Imagine the impact on the USD if Saudi Arabia then priced and sold oil in Saudi coins.
To conclude, stable coins open up an enormous amount of possibilities for decentralised applications and facilitate a brand new set of rules. Although the trust remains a central ingredient that needs to be achieved, we should soon start seeing new paradigms with the development of global macroeconomics thanks to blockchain technology.
Each tokenised venture project we work on at Redsand Labs has one thing in common — the transition of a traditional business model to one that eliminates cost, friction and offers transparency to the ultimate customer of the product or service. This is the true value of tokenisation.
However bridging the gap from a traditional means of exchange, payment and financial instruments into the world of tokenised assets or crypto assets require a ‘bridge’ which offers surety, predictability and is liquid. As such, most of our projects rely on the use of a stable coin to facilitate the changes a tokenised business model requires and offers the market comfort and understanding of the new economic models they are able to participate in.
Mélissa Amouny, Ecosystems & Research at Redsand
At Redsand Labs we believe, the token economy will be the foundation of every successful future business.
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