The high volatility of Bitcoin and other cryptocurrencies diminishes their usefulness. From remittances to merchant payments, people need a stable means of exchange. Stablecoins provide a stable store of value, a unit of account and means of exchange.

A stablecoin is a digital token that maintains a stable value, because their values are tied to other assets like the US dollar or gold. The price of stablecoins is much more fixed than non-stable cryptocurrencies.

There are a few types of stablecoins: fiat-backed (U.S. dollar, euro, Swiss franc), commodity-backed (such as by precious metals), crypto-backed (backed by cryptocurrencies or a basket of cryptocurrencies) and seignorage style (which use algorithms to control the stablecoin’s money supply). We’ll focus today on fiat and crypto-backed stablecoins.

Fiat-backed

Fiat-backed stablecoins are the most common and were the initial type of stablecoins on the market. They are backed by reserves of fiat currency held at a regulated financial entity. The company that issues the stablecoin is often the custodian of the backing fiat currency. These stablecoins are redeemable by the issuer.

Their value can be pegged in a fixed ratio to more than one fiat currency. The most common fiat currencies backing stablecoins are the US dollar, the Euro, and Swiss franc. The peg of a stablecoin to its fiat counterpart happens off-chain at regulated financial institution. This is where the currency backing the stablecoin — which must reflect the circulating supply of the stablecoin — is deposited.

Since the fiat is deposited in a bank account, there is a risk that the account owner could defraud holders. Alternatively, the bank or a government could deem this account suspicious and close it down.

Cryptocurrency-backed

A Bitcoin-backed stablecoin is issued with bitcoin as collateral. While fiat collateralization is handled off-blockchain, a bitcoin-backed stablecoin can manage this on the blockchain through smart contracts. A Bitcoin collateralized stablecoin can help users manage Bitcoin’s price volatility. In a Bitcoin-backed stablecoin, the peg and regulation of supply are executed on-chain via smart contracts.

While a cryptocurrency-backed stablecoin is more complex and varied than fiat-collateralized stablecoins, they are not subject to third party regulation, thus creating a more decentralized solution. Large amounts of collateral, however, are needed to ensure stability.

By using Bitcoin as collateral, a stablecoin can more seamlessly incorporate the properties of decentralization and censorship resistance that has allowed bitcoin to win over hearts and minds.

What Makes a Bitcoin-backed Stablecoin Possible?

RSK, as the first open-source smart contract platform secured by Bitcoin’s robust network, provides smart contracts and greater scalability. This secondary layer built on top of the Bitcoin network is what makes a bitcoin-backed stablecoin possible.

Connected to the Bitcoin network through a 2-way peg, RSK users lock up in their bitcoins in a side chain and receive an equivalent amount of rBTC, RSK’s native token that is linked 1:1 to Bitcoin (1 rBTC= 1BTC). rBTC can interact with smart contracts and dApps.

RSK employs “merge mining” for security purposes, such as preventing double-spending and settlement finality. By adopting merge mining, rBTC and BTC can be mined simultaneously, allowing RSK to increase the hashing power behind its network by bootstrapping onto Bitcoin. RSK could also scale Bitcoin up to 300 transactions per second from Bitcoin’s current 7–15 transactions per second.

Bitcoin as a Stablecoin Reserve

Bitcoin is the most liquid cryptocurrency and has the largest capitalization and the biggest user base. These attributes are good for price stability.

Because it is the oldest and pre-eminent blockchain, Bitcoin has a sophisticated mining architecture that has developed over time. This network of miners ensure Bitcoin’s security. Bitcoin, furthermore, has won over many more hearts and minds than any other cryptocurrency, having been featured regularly in music and film.

Money on Chain

Our Bitcoin-Collateralized Stablecoin harnesses the power of smart contracts on the Bitcoin network. With smart contracts on Bitcoin, agreements can be enforced on the bitcoin network, and the inaugural blockchain could create its own contracts that are automatically enforced in a decentralized fashion.

With Bitcoin as collateral, Money on Chain will provide a multicurrency stablecoin. (American Dollar On Chain and Argentine Peso On Chain at first, before we add Euro on Chain, Yen on Chain, etc.). Users can leverage collateral in the price of Bitcoin 2X, 5X, 10X or 20X. If you’re leveraged 2X, your token goes up twice as much as bitcoin or vice versa.

Our decentralized stablecoin will be managed by a decentralized autonomous organization (DAO). A DAO is an organization whose rules are managed in a transparent manner by conditions set forth in a software program. In the context of cryptocurrency, the software’s rules are controlled by token holders.

MoneyOnChain is made by Bitcoiners for Bitcoiners. Bitcoin holders can simply use Dollar on Chain as a safe haven from bitcoin’s violent price swings. Why trust a third party with a bank account for your stablecoin needs, when you can depend on trustless smart contracts secured by the Bitcoin network?

Details about our Stable Coin can be found on www.moneyonchain.com

Written by: Justin O’Connell