A stable coin is a token that is tied to the value of a relatively stable asset such as the U.S. dollar or gold. The token is traded globally and can be easily exchanged over its platform. The market supply and demand doesn’t fluctuate in value significantly.
Necessity for Stable coins
Stable coins are absolutely necessary for the adoption of crypto tokens to be a viable exchange medium. A token that fluctuates significantly on a daily basis is not a good candidate for monetary transactions. Imagine paying $20 for your pizza one day, then $50 the next day and $2 on the third day.
Fluctuating prices remove utility from crypto currencies. They might serve the purpose for speculative gambling, but completely fail when it comes to daily transactions.
Coins like Bitcoin and Ethereum are highly volatile. Bitcoin was stable for a period of time however in the past three months the value has cratered. Meanwhile, on a technical level, it is common to see a 5-10% fluctuation in the value of Ethereum on any given day.
An optimal crypto token should offer the following four traits:
- The value should be stable
- Transactions should be scalable
- Token should provide privacy
- It should be decentralized and free from control
Hurdles in Creating a Stable Coin
Unfortunately, two of the four defining traits of an optimal token do not work in tandem. A token that is free from control can fluctuate in value depending on market supply and demand. That said, a token that is kept stable regardless of excessive supply and demand must be controlled somehow.
Developers are seeking methods to keep token prices stable. The price of a commodity is maintained at a stable level in one of two ways.
- First, when there is a higher demand, a central authority will increase the supply in circulation to stabilize value. In the event of selling pressure, the same authority can take action to remove tokens from the blockchain thus circulation.
- A second way to control prices is through suspension of trading. In certain markets, trading can freeze if the value of the commodity rises or falls by more than 1% within a period of time.
Currently, there are numerous active projects that are trying to develop stable coins in the market to ensure crypto has a place as a popular medium of exchange into the future.
Tether is completely backed by the U.S. dollar. The conversion rate is exactly 1 USDT to 1 USD. That rate is maintained despite the supply and demand swings in Tether.
Clearly, the price is controlled by a central authority. Curiously, Tether has also refused to allow audits of its ledger creating certain levels of suspicion.
The Havven platform works by creating two separate independent coins Nomins and Havven. Nomins is a stable coin that can be utilized for making daily transactions.
Havven absorbs the impact of the market’s supply and demand fluctuation. Havvens are automatically created to satisfy the level of demand. At the same time, they are destroyed when supply exceeds demand. The model is still being tested as a new project that appears to offer practical solutions.
Basecoin is another attempt at developing a stable coin. The value of Basecoin is fixed at $1 USD. The platform uses a consensus based system where the supply of new coins increases or decreases based on the value of the coin.
When Basecoin is trading at less than $1, traders are offered bonds in exchange for their coins. The coins that are invested in bonds are destroyed and taken out of the supply or circulation.
When Basecoin is trading at more than $1, investors that own bonds can redeem them for coins, making a profit. New tokens are then generated adding to the supply of tokens driving down the value.
When the token is trading at a price below 1 EUR with an increased supply, the platform destroys tokens out of the system by offering collateral to investors. The platform also offers traders the option to freeze the price of their own tokens as a mechanism to control the value.
Speculation Is Over
Crypto experts believe that the era of speculative gambling in crypto markets is coming to an end. Wild increases in prices played a major role in bringing attention to digital coins via the global media.
The recent crash in crypto prices has now opened the door for more serious and stable projects.
We are now seeing an increase in platforms that offer concrete solutions for digital transactions rather than an “asset” based entirely on speculation.