Pay with non-volatile digital currency? Zoom in on Stable coins.
How did we get here?
To explore the stable coins we must first go back to 2009 when Satoshi Nakamoto first released his White Paper “Bitcoin: A Peer-to-Peer Electronic Cash System”. In the beginning, there was only Bitcoin which offered an alternative method of payment to the traditional monetary system. The first of its kind, Bitcoin was an innovation because it operated on a decentralized digital infrastructure, and was able to facilitate the transfer of value without the need for a trusted third party. Mr. Nakamoto was able to solve the ‘double-spend’ problem by creating a Proof-of-Work (PoW)consensus algorithm; whereby each transaction must be validated by the community of network nodes before being embedded into the next ‘block’ of the (block)chain.
Today, in the blockchain industry, there are a large number of different digital and tokenized assets that exist. However, we will specifically be exploring cryptocurrencies which are digital assets like Bitcoin which are used as a means of payment.
What is Cryptocurrency?
Every cryptocurrency is different. Some are using different consensus algorithms like Proof-of-Stake (PoS) or Proof-or-Authority, or implementing new technological advancements to try and fix scalability issues, such as sharding. While others have simply forked the original Bitcoin protocol and are experimenting with new approaches to marketing in order to help adoption of said digital assets.
Nevertheless, each cryptocurrency is ultimately scrutinized by how well they fit the characteristics and definition of ‘currency’. In order to be considered a true ‘currency’, they must fulfill four basic purposes:
- Means of exchange — Units can be exchanged for goods and services.
- Unit of account — Currency is a measure of common value.
- Store of value — Value can be derived from Units when held as an investment.
- Means for deferred payment — Currency can be used to settle debt.
Currently, one of the main issues with cryptocurrency is that price volatility makes it problematic for fulfilling the important role as a means of exchange.
Due to the liquidity of these digital assets, we can trade them and use them as payment solution, as they got a market value.
Therefore comes to cryptocurrency as payment solutions;, the volatility causes a big problem of trust towards the potential users, who never know the exact value of their wallet tomorrow due to the price fluctuations.
Stable Coins
Fortunately, some projects succeed to create what we call stable coins. A stable coin is a coin that doesn’t have a relative or absolute price fluctuation. It is a coin pegged or backed by a collateral asset, and follow its price market. This price stability has been achieved thanks to different methods of intrinsic value management.
Tether, or USDT, as a first example is a digital asset where the price of one coin is always equal to $1 USD. This price stability is an artificial stability. The Company Tether has a bank account and the amount of Tether coins in circulation represents the total amount of USDT that the bank has in.
When the bank increase inputs the amount of tether increase, and when increase outputs the amount of tether decrease. That specific particularity makes Tether an interesting opportunity as a store of value, as we are sure that my counter value in Fiat (non-blockchain-based currency) of tether in my wallet will be the same when I will go out with friends tonight. This system possess advantages, but as well disadvantages.
Exchanges need to have specific technologic plugs with the Tether company in order to follow market needs, which create always a price a slightly fluctuating (max 10%). So tether is pegged to USD, but other coins pegged to a basket of multiple fiat currencies exist. This type of coin is more interesting for a long term trader, as there is less risk of market depreciation of a basket of underlying assets rather than only one Fiat backed coin.
At the same time, a stable coin can be crypto-collateralized, a corner supported by another crypto-currency. To compensate for the volatility, the stable corner is over-adjusted. For example, the equivalent of $1,000 worth of bitcoins may be required to issue the equivalent of $1 worth of stable corners. Even if the Bitcoin loses 30% of its value, the stable corner remains covered.
Stable coins can be also pegged by real physical assets, like commodities (gold, silver, copper…) These assets have a lower correlation with Fiat currencies, as a physical asset act as an intermediary.
Blockchain technology is limitless and enables various stable coins initiatives. An alternative to standard stable coins is Fieldcoin. Fieldcoin is developing a platform to trade physical lands easily by the use of cryptocurrencies. They hope to release their product very soon.
The project applies a mechanism to stabilize the market price of its token during downtrend market cycles. Indeed, Fieldcoin implements a Trade Back protocol intended to act as a cushion if the token market cap drops under a certain threshold ratio to the total value of the company assets. In consequence, Fieldcoin tokens can be used at a certain price on its platform, independently of the price displayed on the exchanges.
Another interesting aspect of a Trade Back Token is the capitalization on the upward trend. In other words, it is a minting process that is calculated when the token price goes up to provide liquid assets to grow the ecosystem and limit eventual devastating market pullbacks. Only a very small percentage of FLC will be minted to ensure steady token price inflation.
As Cartam is a project allowing safe & easy P2P transactions with cryptocurrencies, it is relevant to say that including more and more stable coins into the wallet and ecosystem is one of the future mission of Magna Numeris. After the launch of the V1 of the Cartam App, we will investigate more and more into the potential integration of these techs into the system, as they need use cases to really shine bright.
Written by: Rayane Hocine & Hugh Flood
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