Although crypto currencies are all the rage these days, one of the issues they all share is the stability. Where fiat currencies vary by a few percentage, the price variations in crypto currencies can be quite large, this makes them very unstable from monetary perspective. Just like the issue of privacy & fungibility is being addressed by privacy coins, stable coins are trying to address the issue of stability.
Fiat currencies usually vary 2% or so, but crypto currencies are totally unpredictable. Hence one cannot rely on existing crypto currencies to use them for every day purchases and transfers like they do with fiat.
This article will answer the question What is a stable coin?
The first concept of stable coins was introduced in Second Life in 2003, it was called Linden Dollars. It is currently a $600 to $700 million economy. The current conversion rate is 265 Linden Dollars to USD
Then in 2014 Bitshares introduced the concept of cryptocurrency and what we see now is its evolution, where multiple parties are proposing their solutions in terms of implementation.
A stable coin should be:
- Fungible: Untraceable, and value remains the same no matter who has used it.
- Decentralized: Not controlled by a central body
- Stable value: Value does not fluctuate more than 1-2%
- Scalable: Transfer between parties is instant
Collateral can be of following types:
- Fiat: Tether, USDT which is pegged to USD
- Cryptocurrency: Dai which is pegged to Ether
- Other assets: Petro which is pegged to oil
- Collateralized Centralized, for example Tether from Tether Limited. Collateral is stored with one single entity, which is risky.
- Collateralized De-centralized – Dai from MakerDAO. Collateral is stored in a smart contract with master nodes having ability to vote on outcome of decisions.
- Non collateralized de-centralized – Basecoin
Some stable coins