When crypto enthusiasts first had an idea to gradually move the economy to digital currencies, their first task was to manage the incredible crypto volatility and make the rate stable. This is how stablecoins emerged: cryptocurrencies that are backed by more reliable assets. The stablecoins have the main advantages of crypto – decentralisation, anonymity and low commissions, – as well as a stable rate, so it must solve all the problems, right? Let’s find it out together!
The Reserveum group wants to study all the advantages and disadvantages of different types of money to figure out the qualities of a perfect currency. We are planning to find a use for all that by making a protocol of an effective currency that could possibly replace the current outdated money system.
Stablecoins can differ in their reserve type. Most often, developers use fiat currencies to back up their stablecoin – USD, EUR; sometimes, they use commodities or even other cryptocurrencies. It means that stablecoins are created with collateral of these assets which are stored in separate accounts and make the coin more stable.
You can find out more about stablecoins backed by real estate and land in our article called Investment in Land.
Let’s start with stablecoins that are backed by fiat. To buy these coins, people usually use USD. This collateral can be returned by simply sending the purchased stablecoins back to their issuer.
The stablecoins with fiat collaterals are usually tied to USD with a 1:1 ratio and show minimal price fluctuations. The disadvantage of such projects is that they are not transparent. Issuers often have to go into different manipulations to maintain the stablecoin rate; for instance, they can issue some tokens with no backup to influence the market rate. Usually it comes out when a project rejects an audit. The risk is that users may question the project’s safety and ask for their funds back, and then it is impossible to stop the price fall.
Also, we should bear in mind that the idea to step away from fiat currencies and make a healthier money system cannot come true when this new currency depends on inflated fiat money, especially on currencies like the US dollar.
We dwelled more on the inflation in the USA and other sicknesses of the dollar in many of our articles, for instance, in Structural Inflation or Why Does US Petrol Grow in Price.
Stablecoins can be tied to a precious metal, for instance, to gold. It makes a token centralised and protects it from excessive volatility that is characteristic of cryptocurrencies. Such stablecoins are viewed not as cryptocurrencies but more like investment tools in precious metals without physical delivery and other inconveniences.
Excess Crypto Backup
Another option for backing up stablecoins is a crypto backup. As you can imagine, such an asset can rarely be stable. This is why the developers came up with excess backup, so a 1 USD worth token is backed by 2 USD worth of crypto. It is made in order to save the stablecoin price from the base currency fluctuations – the price for the stablecoin will still remain above 1 USD.
This stablecoin model is more viable, especially if we use crypto with medium volatility. But the market is truly unpredictable, and maintaining the stable rate of a token is only possible as long as the base currency does not lose more than half of its price, which, unfortunately, does occur quite often. However, if you keep a close eye on the base currency momentum you can still use the stablecoin tied to it.
Cryptocurrencies can remain stable even without being tied to base assets – for instance, algorithmic stablecoins. Their price is maintained by a special algorithm that manages the supply volume. When the price grows, the algorithm makes more coins, the total amount of tokens grows and their price naturally falls to its normal level. If the token loses in price, the algorithm burns a part of the tokens to reduce their total amount. The market reacts with increased demand which makes the price grow too.
We find this scheme the best out of all the stablecoins options that exist today. Algorithmic stablecoins are fully decentralised, transparent and independent, which are all very important features of a fair currency.
We decided to choose algorithmic management for our Reserveum stablecoin. We prefer to trust the fate of our token to a well-designed algorithm instead of something less trustworthy or, vice versa, too conservative. The only thing that money should synchronise with is the real total volume of all the production and consumption in the economy, but this topic is a little too big to cover now before our token wins its place in the market.
So far, we want to focus on this: we want to make our token effective, stable and non-susceptible to inflation. If you have any ideas on how to make it come true, join our team!
According to the analysis group findings: reserveum.org