The $4 Billion Stablecoin World: The Fall and the Climb

In 2017, USDT (Tether USD) was an undisputed absolute market monopoly. Just one year later, in 2018, the number of stablecoin projects emerging reached dozens. As of 2019, there are now more than 200 stablecoin projects. Some of the earliest projects have been closed, and some new projects are still entering the market at an early stage, but it can be said with certainty that at least hundreds of stablecoin projects have now been recognized by different interest groups and are in different stages of commercialization.

Whether it is a stable currency that has not yet been launched and is only a concept, or a stable currency that has been launched and can be traded on an exchange, too many are difficult to track. With the help of CoinMarketCap, we found 23 stablecoins with nearly 2 years of operating data. To simplify the research, these stablecoins are grouped by backing collateral assets and attachment type. The categories are as follows:

By collateral type:

1. Traditional assets: asset mortgages are anchored to certain assets with relatively stable value to give value, such as gold, legal currency, or other assets. The most direct way is asset mortgage.

2. Encrypted assets: mortgaged by encrypted assets, represented by DAI

Whether traditional or alternative stablecoins, the U.S. dollar remains the most popular pegged currency.

Despite successive successes of competitors, Tether continues to dominate.

For supporters of non-fiat currency experimental projects, the situation is not very optimistic: traditional electronic currencies, even if they land on the blockchain, can hardly be called the pioneers of monetary thinking.

While many stablecoin projects dream of becoming a truly global currency and even helping the people of Venezuela, the floor trading scene remains the primary use of stablecoins so far.

Another bad news for gold standard supporters: there are Austrian stablecoins on the market, but the market doesn't want them to be used as money. In contrast to stablecoins pegged to fiat currencies, they are not used as quote currencies in cryptocurrency exchanges. The use of gold as a unit of account or other monetary functions is not popular in e-commerce. Gold-pegged cryptocurrencies also showed no gains.

DAI is the only successful crypto-collateralized stablecoin, that is, a stablecoin backed by a smart contract-based cryptocurrency. The ecosystem maker platform around this stablecoin is developing rapidly. DAI is traded against fiat currencies on centralized and decentralized exchanges, Bitcoin, mainstream cryptocurrencies and other stablecoins.

DAI provides loans and deposits, and is implemented in e-commerce. The project has attracted up to $15 million in investment from A16Z. Maker is by far the most successful DAO on Ethereum with a capitalization of $700 million, while about 2% of ETH’s offer is based on DAI.

DAI is the only successful crypto-collateralized stablecoin (so far). "

The main reason is the choice of collateral. DAI’s native ether is the second largest cryptocurrency after bitcoin, while BitShares, Steem and Golos blockchain’s native tokens are relatively unattractive new altcoins. As for projects like Synthetix (formerly known as Havven), they don’t use the blockchain’s native token, but their system’s internal token. Therefore, it is more illiquid than ETH, which seriously affects the security of its stablecoins.

When it comes to unsecured stablecoins, or algorithmic stablecoins, there hasn’t been much headway in the market for this type of stablecoin, although there has been some headlines.

Most recently, the most important news for this segment has been the closure of the Basis project, the first ambitious algorithmic stablecoin project, also backed by top-tier VCs with $133 million. Developing the concept of managing the supply and demand of money by issuing and redeeming stocks and bonds and attracting investment under them is easier to implement than issuing private money under current law.

Basis is bound to push other projects that plan to use issuing securities to manage stablecoin supply to abandon this model. Carbon originally planned to create a system with algorithmic stablecoins and the security of Carbon Credit, limited to creating traditional digital currencies on the blockchain. Fragment changed the model to a one-sided system involving an algorithmic stablecoin and dubbed Ampleforth. To control the token supply, a section offers stablecoins for cryptocurrencies, it also plans to use bonds and stocks. While the project’s team did not report changes to the token composition, there is also no word on plans to launch the stablecoin.

Another loss in the segment was NuBit - the first algorithmic stablecoin. The stablecoin was unable to recover after a sharp increase in supply led to a rapid drop in interest rates. At present, its project team and community activities are almost zero.

USNBT and MNX are unable to maintain target rates.

Still, algorithmic stablecoins are at the vanguard of monetary thinking. If Basis and NuBits were just trying to create a private analog of modern fiat money, BitBay and Ampleforth are trying a model unprecedented in monetary history.

With Ampleforth, the supply reduction of stablecoins will take place through non-traditional market routes (currency intervention, sale of bonds or shares). By reducing the assets of all Ampleforth holders proportionally, the supply can be reduced to increase its market price. Ampleforth holders will receive nothing in return for seized stablecoins. On the other hand, when it becomes necessary to increase the Ampleforth offer, newly created tokens will be distributed in the same "non-market" way: they will be distributed for free among all Ampleforth holders in proportion to their balance.

First, a global currency is a global measure of value. Global markets need a standard of measurement. Cryptocurrencies claim the status of global currencies, and stablecoins are no exception. In pursuit of such a global measure, stablecoins are linked to special drawing rights and new national currencies and baskets of metals. Facebook is considering offering a stablecoin pegged to a basket of currencies. Tiberius Technology Ventures offers a token pegged to a basket of metals used to produce modern electronics.These baskets may be attractive as a store of value, but using them as a global measure of value seems unlikely at this stage.

Huobi exchange conducted an experiment by creating a HUSD token that could be exchanged proportionally for one of four stablecoins (PAX, TUSD, USDC and GUSD). However, this project failed very quickly. HUSD 2.0 can only be exchanged for the above-mentioned stablecoins at the weighted average market price. In this cooperation, PAX was lost nearly 10 million US dollars by traders through the exchange of cross-stablecoins. CementDAO is developing a stable coin aggregator, Reserve plans to switch to a stable coin linked to a basket of tokenized assets, and Neutral and dForse have also announced that they will develop a basket of stable coins.

At the end of this article, I would like to draw your attention to two issues related to the business day-to-day work of stablecoin projects.

First one: redesign of the second token after the initial distribution.

The second option: impose additional fees for the use of stablecoins.

Let's start with the first one.

A token is a security if ownership of the token generates income in the form of transaction commissions, commissions on seigniorage, interest on loans, or dividends. Projects that attract capital through the sale of tokens (i.e. securities) do not always receive all the necessary official approvals. Perhaps this is why Maker and Chronobank changed the design of their secondary tokens (MKR and TIME respectively) after their initial offerings. Right now, these tokens do not entitle holders to share in the commission fees of users of the corresponding stablecoins. Given the tightening regulation of cryptocurrencies, the legal aspects of these changes will inevitably be the subject of debate.

The conflict between stablecoin projects and the realities of regulating the issuance and circulation of securities has led to mixed results. Some have shut down projects, some have completely changed their token designs, you might even find those who have changed secondary token designs, and some are preparing to issue securities as required by current regulations.

The problem with charging additional fees for the use of stablecoins is that users have to pay not only commissions for miners in the blockchain’s native token, but also project fees.

Carbon uses meta transactions to allow its users to pay commissions to Ethereum miners in CUSD instead of ETH. This solution improves the user experience, but does not solve the problem of additional transaction fees. Users will incur additional fees regardless of the token that charges this commission. Offline transactions allow avoiding these additional costs, but this solution is unlikely to attract stablecoin projects, which build their business models precisely on additional commissions.