About 10 years ago, Satoshi Nakamoto was on the verge of releasing a paper that gave birth to what is known today as the blockchain. Since this breakthrough, a lot of water has passed under the bridge. Digital currencies and blockchain technology have developed from a countercultural element, dismissed as only used for nefarious means, into being widely accepted by enterprises and governments as the potential backbone of a new economy.

In 2017, we saw an explosion of interest around decentralized technologies. When I was publishing the State of Decentralized Exchanges, valuations had never been so extreme. The global cryptocurrency market capitalization was more than double what it is today. We were probably at the highest peak of inflated expectations, but it reflected a global appetite that was here to stay.

Even if it is now clear to many that blockchain technologies will reach mass markets, and that every sector is likely to be disrupted by blockchain-assets and cryptocurrencies, some aspects still hinder mainstream adoption:

Volatility: highly speculative markets and extreme price variations. Regulation: uncertain landscape with grey areas and unstated governmental positions makes it hard for businesses to build legitimate and trusted solutions. Scalability: uncertainty regarding the ability of blockchain technologies to reach a global efficiency to compete with centralized solutions (Visa ≈2000 tps VS. Bitcoin ≈3tps). User Experience: owning and using cryptocurrencies (safely) is a struggle for most; using blockchain services is challenging.

All four aspects are extremely limiting factors for the development of the digital asset ecosystem. Of them all, the focus here will be placed on volatility, which may be the most challenging among those listed.

In traditional markets, hedging is a financial strategy designed to reduce risk by balancing positions in the market, protecting against volatility. For example: an investor that owns a stock could hedge the risk of the stock going down by buying put options on that security or other related businesses in the industry.

In the first part of this series of articles on decentralized hedging solutions, we will shed the light on stablecoins, which are considered to be the ultimate crypto-hedging solution, and will briefly explain what needs to be known about stablecoins before exploring financial alternatives in a second step.

As a reminder, money exists for 3 main reasons: to serve as a mean of exchange, a unit of account and a store of value. Volatility hinders all three of them. This exempts crypto-assets and (in this case) cryptocurrencies from being used as money.

While becoming a currency is not the sole objective of blockchain technologies, ensuring stability is key to the development of the ecosystem and volatility challenges crypto-economics mechanisms. Costs, and thus incentives, are highly unpredictable.

After a brief explanation of the definitive traits of stablecoins, we will map existing projects in a comprehensive manner, and study limitations of such models. In the following part(s), we will also explore other solutions that ensure price stability in both centralized and decentralized fashion with financial instruments such as derivatives or insurances.

I. Stablecoin 101

Volatility prevents the widespread adoption of cryptocurrencies as a store of value. Because they are subject to huge fluctuations, they do not represent a proper mean of exchange nor unit of account. Indeed, no business would ever be likely to accept digital currency when their value can drastically drop the day after. It also makes it harder for anyone to accept a currency as a “unit,” since there is no common acceptance on how much it may be worth, or will be worth. A measuring unit, by definition, should remain stable. So volatility transforms what were meant to be cryptocurrencies into speculative crypto-assets. With less volatility, crypto-assets may have reached a much broader audience already.

A plethora of highly qualitative articles already describe the ins and outs of stable tokens/coins (like these global overviews on hackernoon, multicoin and bitmex), so we will focus on essential aspects.

Volatility has a number of causes, including:

constantly shifting public perception

emerging markets

static monetary policies

unregulated markets

The Definition of Stablecoin:

Stablecoins are crypto-assets that maintain a stable value against a target price (e.g. USD).

Stablecoins are designed for any (decentralized) application which requires a low threshold of volatility to be viable on a blockchain.

Use Cases:

Examples of applications in which volatility must to be reduced:

Remittance, to cover price deltas while payments are being processed Commerce & Payments, for any business to accept day-to-day payments, fiat or cryptos avoiding volatility Salaries & Rents or any other recurring payment Lending & Prediction markets (long-term issuances) Trading & Wealth management. In this case, stablecoins are needed because they:

• Enable denomination of trading pairs in US dollars instead of bitcoin or ether

• Enable exposure to fiat-rates (other than ETH or BTC)

• Enable an easier visibility and adoption by simply showing fluctuations in fiats

• Enable arbitrage opportunities Store of value, for long-term hedging: e.g. miners to cover recurring cost ensuring a stable income

In other words, anyone that wants to benefit from advantages of blockchain technology (transparency, security, immutability…) without losing guarantees (e.g. trust and stability) provided by fiat currencies needs a stable cryptocurrency.

Three main categories of stablecoins exist — all very well detailed in overviews previously mentioned, which we will use to categorize in the mapping to follow:

by Haseeb Qureshi, “Stablecoins: designing a price-stable cryptocurrency”

Fiat-collateralized: IOU “Centralized” stablecoins / backed by fiat currencies, collateral-backed

Crypto-collateralized: IOU “Decentralized” stablecoins / backed by crypto and/or multiple assets, collateral-backed

Non-collateralized: Seigniorage Shares / Decentralized Bank / Algorithmic stabilization mechanisms

II. Stablecoin Mapping

Disclaimer:

I am part of VariabL (building derivatives on Ethereum) and ConsenSys (one of the largest global blockchain specialists). Opinions expressed are my own.

This “State of Stablecoins” may not be fully exhaustive, and did not assess all of those projects’ viability, nor teams’ legitimacy. An effort has been made towards making an exhaustive mapping but it will not be kept up-to-date.

Please refer to sources such as this website or this repository for further updates. Abandoned or somewhat questionable projects might be included. It should be taken with a grain of salt and readers should conduct due diligence before using or investing in any of the tokens listed. Hybrid projects may belong to several categories.

1) IOU Centralized, Collateral-Backed Stablecoins

Backed by fiat (or traditional assets) reserves

LIVE PROJECTS

Cryptocurrency (AAA) backed by cash, gilts and AAA-rated credit investments and stable against fiat currencies. Focus on large fiat amounts(>$25k).

[Live since January 2018]

Gold-Stable tokens (DGX). 1DGX = 1 gram of gold in a Singapore vault.

[Live since Q1 2018–1st crowdsale on the Ethereum blockchain in 2016, raised +465K Ether]

Fiat-collateralized EIP-20 stable token backed by EUR, with verification streams, supported by STASIS.

[Live since July 2018]

USD-backed stable tokens (USDT) built on Omni, market-leader.

[Live since February 2015]

USD-backed stable cryptocurrency (TUSD) focusing on transparency, built on Ethereum.

[Live since March 2018]

PROJECTS IN DEVELOPMENT

Stablecoins (GLX) pegged to a basket of fiat currencies held in custody.

[Launch by the end of 2018]

Stablecoins (jUSD, jEUR…) backed by a wide range of assets, built on the Ethereum blockchain

[Alpha — Launch TBD]

IOU stablecoins (PHI) backed by loan collaterals maintained algorithmically.

[Launch TBD]

Asset-backed cryptocurrency (SGA) maintained with a reserve held in a regulated banking institution, stable against SDR (basket of currencies).

[Launch TBD]

Reserve-backed stablecoins (StableUSD) with a supply adjusted via open market operations. [Beta — Launch TBD]

Stronghold USD (by Stronghold & IBM)

USD token backed by multiple fiat currencies based on the Stellar network, guaranteed by the Federal Deposit Insurance Corporation. [Launch TBD]

USD Coin (by Circle & CENTRE)

Fiat tokens (USDC) for crypto payments and trading (using CENTRE, a framework for stablecoins project involving real-world asset reserves, issued by CENTRE network members and audited by CENTRE).

[Launch TBD]

Stable cryptocurrency (X8X) backed by a basket of fiat currencies and physical gold reserve. [Launch TBD]

2) IOU “Semi-Decentralized,” Collateral-Backed Stablecoins

Backed by crypto-assets.

LIVE PROJECTS

Stable cryptocurrency (Smarctoins: BitUSD, BitCNY) with value backed by multiple assets (including cryptos) using derivative instruments.

[Live since 2014 — 1st historic stablecoins projects]

Stablecoins (nUSD) backed by fees, a distributed collateral pool and issuance mechanisms (similar to seigniorage shares model — see 3).

[Live since June 2018]

Decentralized system issuing stablecoins (DAI), stable against ETH and backed by multiple assets (only ETH for now but aim to open a multi-collateral version). Maintained by MKR holders. Assimilable to derivatives instruments.

[Live since December 2017]

Stablecoins backed by ETH with a system matching speculators to buy tokens against hedgers who buy “stablecoins” (Staticoin) to create stability.

[Live since October 2017 ]

PROJECTS IN DEVELOPMENT

Stablecoins (SDUSD) built on top of NEO, backed by a pool of assets (fiats and cryptocurrencies). [Launch planned Q3 2018]

Digital tokens (A-EUR, their € stable token) targeted to fiat currencies copycatting their mechanisms using stability reserves and smart contracts.

[Launch planned on Q3 2018 — Q2 2019]

Stable crypto-assets (Boreals) backed by a combination of ether reserves, debt from loans, and dapp endorsement.

[Launch planned Q3 2018]

Stable tokens pegged to fiat currencies, backed by a diversified, overcollateralized, and auditable crypto-asset reserve.

[Launch TBD]

Tokens stabilized by crypto-assets locked in a smart contract, “fully” decentralized.

[Launch TBD]

On-chain collateral-backed stablecoins (Bridgecoins).

[Launch TBD]

Stablecoins backed by multiple cryptocurrencies and simple reserve mechanisms.

[Beta — Launch TBD]

3) Seigniorage Shares

Acting as a (partially) decentralized bank and incorporating elastic supply mechanisms. Often involve some collateral positions, algorithmic regulations and complex stability mechanisms [Further readings here]:

LIVE PROJECTS

Cryptocurrency (BAY) aimed to be stabilized via a dynamic peg using “liquid” and “frozen” tokens and decentralized governance mechanisms.

[Live since 2015]

Cryptocurrency (USNBT) stabilized by issuance mechanisms and custodial grants.

[Live since 2014]

Tokens (SBD) to be stabilized on the Steem blockchain with a 1:1 USD conversion rate — based on a convertible notes system.

[Live since 2016]

PROJECTS IN DEVELOPMENT

(ex Basecoin): To issue stablecoins via smart contracts acting as a central bank to inflate and deflate prices by issuing bonds.

[Launch TBD]

Cryptocurrency monitored (Carbon) by an elastic supply through market participants, powered by Hedera Hashgraph.

[Launch TBD]

Cryptocurrency whose price is maintained by an automated inflation/deflation control.

[Beta — launch TBD]

Stable (low-volatility) tokens (USD Fragment) with an auditable reserve and monetary supply policy.

[Launch TBD]

Cryptocurrency (kCoin) to be stable against fiats, cryptos and other types of assets maintained with algorithms and market-based oracles.

[Beta — launch TBD]

Stable cryptocurrency (Polys) backed by a basket of assets stabilized by the Topl foundation that issues and redeems tokens.

[Launch TBD]

Tokens (STB) to be stabilized through a flexible supply and demand with inflation containment mechanisms.

[Launch TBD]

Tokens whose price is maintained via multiple stabilization mechanisms involving a DAO, cryptocurrencies reserves applying various monetary systems.

[Launch planned on Q1 2019]

Cryptocurrency pegged to a basket of currencies (e.g. SDR) and assets with its value algorithmically stabilized; involves decentralized elastic supply mechanisms.

[Launch TBD]

III. Stablecoin limitations

Stablecoins surely come with many limitations inherent to their mechanisms. Knowing these limitations will help to better approach them and develop stronger solutions by either solving those problems, mixing solutions or creating brand new ones.

A number of articles already highlight deficiencies and limits of stablecoins. Preston Byrne for instance, is an excellent stablecoins devil’s advocate of the topic, and I advise you to read him if you want to dig into the topic (starting here).

Let’s study those limits case by case:

USD-Pegged stablecoins (e.g. Tether) limitations

Centralized: single point of failure, which is an increased source of risks. Not to quote me on flaws caused by centralized solutions in the blockchain field “They represent honeypots for hackers as they are responsible for billions of trades per day and store most of them on their servers.”

No transparency: hard, even impossible, to trust. Also, actual costs and processes are opaque and can involve higher fees and delays due to peaks of demand badly managed.

No guarantee to hold funds nor to redeem tokens, quoting Tether:

Collateral Costs: storage, transport, audits, legal, etc.

2. Crypto-pegged stablecoins (e.g. DAI) limitations:

Collateral volatility: crypto-assets used as collateral (e.g. ETH) are also volatile, which makes harder for the peg to be maintained.

Little to no resistance to black swan events. If the cryptocurrencies backing the stablecoins face huge drops, so does the collateral.

A decentralized price-feed oracle is needed , but does not exist yet. Until one appears, those “decentralized” solutions will present security breaches and a strong potential for manipulation (cf. criticisms faced by centralized solutions).

, but does not exist yet. Until one appears, those “decentralized” solutions will present security breaches and a strong potential for manipulation (cf. criticisms faced by centralized solutions). Excess collateral needed (e.g. $1 stablecoin needs to be backed by >$1 worth of ETH; often $2/$3).

3. Seigniorage shares stablecoins (ie Basis) limitations

Decentralized (price) oracles have to be trustless, like with any other dApp. (Except price is here absolutely central — bad pun intended).

Monetary policies remain complex, unclear and unproven. Incentives described may not be enough.

Stabilization is often partially maintained via centralized mechanisms (e.g. Basis’ centralized reserve)

Only a few projects are live and most suffered from high volatility and drops in value — hard to tell from whitepapers if others will work (applicable to other categories).

Conclusion

Stablecoins are known for being the “holy grail” of cryptocurrencies, and may significantly lower barriers to entry to the market, thus leading to a massive adoption of blockchain technologies. As this piece showcases, many different projects with various approaches are live or in production, but there is no clear best-practice as of now.

Of them all, Tether is leading the pack in market capitalization, and MakerDAO is probably the most remarkable decentralized challenger, with results and traction so far. But the capacity of the latter to remain trustworthy and efficient at large scale remains to be proven, as it still faces major limitations that even the founding team acknowledges (e.g. robustness in case of Black Swan events).

Volatility remains a huge hurdle to adoption of blockchain technologies and cryptocurrencies. The number of projects working on solving that issue confirms this fact. Reaching stability is key; achieving it is the new crypto gold rush. Indeed, with stablecoins fulfilling the initial role of money, we can think of a decentralized world with efficient cryptoeconomic mechanisms, feeding unstoppable applications. To some extent, it would bridge the gap between the web 2.0, monetized by fiat currencies, and the web 3.0, fueled by crypto-assets.

That said, in looking at the limitations that currently exist, stablecoins may not be the ultimate solution to price volatility in digital currency. Is creating cryptocurrencies the right solution to improve cryptocurrencies themselves? Do we actually need a token? This is far from being set in stone, and these are questions we should be asking ourselves.

Other solutions coming from the traditional world like insurances or financial products could be the way. More specifically, derivatives products represent what could be the biggest competitor to stablecoins on the list of hedging solutions for cryptocurrencies. The most famous among centralized options are the ones provided by CME and CBOE. Others projects use blockchain technologies to provide such services. For instance: SchellingCoins and VariabL, which could provide derivatives for hedging purposes, issuing stable positions escrow via CFDs (Contracts For Difference). This approach presents an exciting path forward. Of course, no model is perfect and only time will tell which method will make it through.

We will study that in another article, soon TM.