Stablecoins are cryptocurrencies that tackle price volatility effectively. It maintains a stable value as it is pegged to a currency like USD or EUR or any precious metal like gold or silver. Stablecoins have several advantages such as diversifying portfolios during times of market instability, used for daily transactions, improving return on investment by minimizing market volatility, and for payment of loans. It can also be utilized as a store of value.
A majority of stablecoins run on Ethereum, an open software platform based on blockchain technology.
To become popular and be widely adopted, a stablecoin has to be made easy to use. It must support a high volume of transactions and maintain different on-chain and cross-chain mechanisms.
Stablecoin, a digital currency with a stable value, is being increasingly created on Ethereum, a decentralized software platform due to flexible token standards that allow easy issuing and interoperability.
Types of Stablecoins
- Centralized IOU stablecoins – They are stablecoins backed by fiat money or metals. It requires the trust of an issuing party and intense regulation. They are also called as a Trustcoin. Centralized stable coins strengthen the legacy financial system as it is backed by authorities. The popular examples would be TrueUSD, where multiple trust companies hold US dollars in bank accounts, Gemini Dollar, Paxos Standard Token, and Digix Gold.
- Crypto-collateralized stablecoins – These stablecoins will be backed by digital assets on-chain. Examples would be Dai and Havven. They are decentralized and not vulnerable to a central agency’s financial wellbeing.
- Non-collateralized stablecoins – It works based on an algorithm known as Seigniorage shares. Stability is ensured as the network issues new coins when the demand is high and burns coins if the demand is too low. Therefore, supply is adjusted by a smart contract system based on price. It is generally like an income-generating bond. Examples would be Basis and CarbonUSD.
Reasons why Ethereum is the go-to platform for Stablecoins
- In-built on-chain logic and regulation – With robust on-chain logic, Ethereum has set the standard and delivered a proven business model as an accessible blockchain ecosystem. Most of the current assets trade on Ethereum. Through reliable smart contracts, it passes multiple audits in a glitch-free manner. Apart from the popular Tether, other stablecoins such as Paxos Standard and USD Coin and the Gemini dollar have also been built on the Ethereum blockchain platform.
- Unshakeable consensus mechanism – The consensus mechanism is a method by which the network agrees on a single source of truth. Ethereum is all set to move to the Proof of Stake (PoS) mechanism from the existing Proof of Work (PoW) concept. Plenty of benefits such as energy efficiency, low entry barriers, better scalability, and greater revenue-generating capabilities can be realized through PoS.
- Presence of ERC 20 – ERC (Ethereum Request for Comment) 20 is the technical standard for all smart contracts used for token implementation. It enables better trading of the token with its high liquidity and simplifies the work of developers. With the help of ERC 20, valuable information such as the total number of tokens, the balance of tokens in each owner’s account, transactions to be executed, transfer of tokens, finding out if the user has the minimum number of tokens to execute a transaction can be found out. Around 93% of stable coins transactions occur on the ERC20 based Tether.
- Interoperability – Ethereum scores well in interoperability. Other blockchain networks lack interoperability making the creation of stablecoins difficult. Since stablecoins can be used only on the primary chains where it has been mined, Ethereum’s cross-chain facility is useful.
Steps involved in creating Stablecoin on Ethereum
- Make sure that your exchange has a license and follows all rules and regulations
- Peg the stable coin to USD or Euro or a couple of crypto assets and hold the tokens in a smart contract
- Value of tokens will be determined by exchange rate peg
- The user’s portfolio will be overcapitalized due to the volatility of assets. Overcapitalization can be reduced as the value of assets become stable
- User must have collateral as a backup
- All users will have to go through the KYC process though some might prefer privacy for their cryptos
Future of Stablecoins
Due to the volatility in Bitcoins and other cryptocurrencies, Stablecoins definitely has a promising future. However, issuers of stablecoins must ensure that the users have adequate funds to back it on a 1:1 basis. Therefore, many companies are going for independent third-party audit services for knowing their user’s financial health. Transparency around their banking relationships, appropriate custody solutions, and insurance arrangements will improve the acceptance of stablecoins.
There are instances where stablecoins have been used for trafficking, money laundering, and other illegal activities. This requires more compliance to be imposed on smart contracts.
Though stablecoins are compatible with blockchain, which works on decentralized technology, excess control of central issuing authorities is a matter of concern. Their success also depends upon the extent of efficiency and robustness of distributed ledger technology.
Stablecoins help in fuelling the remittances market assisting migrant workers and companies that operate in different countries. It helps in financial services becoming affordable to the marginalized. The cost of payments is reduced as dividends and coupons are generated to users. It can be a replacement for cash in times of hyperinflation and monetary stability.
Investors can also seamlessly move between their different investments and create leveraged positions without added volatility.
Many countries, too, are skeptical about stablecoins and they can resort to banning it to protect their traditional currencies. So, if stablecoins are to be part of our daily usage, it has to integrate into our current financial infrastructure.
How much does it cost to develop a Stablecoin on Ethereum
Many factors play a role in determining the cost of creating an Ethereum Stablecoin. It depends on the size of the project, usage of blockchain technology, and the country where it is going to be launched.
For creating a well-performing stablecoin, reach out to the Blockchain App Factory. Its team of skilled developers will create customized solutions tailor-made for your business needs.
Stablecoins through effective control of value helps in diversification of investments during instability. It is very easy to use on Ethereum, a decentralized platform that allows flexible use of tokens.