Despite the potential of cryptocurrencies, they are unable to gain mainstream adoption due to their volatile nature. The fluctuations in cryptocurrencies’ price mean that their value can change dramatically in very little time. The losses can be in direct or indirect form.
a. Direct loss- the value of cryptocurrency can depreciate following the heavy speculations.
b. Indirect loss- in case the value of cryptocurrency appreciates, then it will become like a non-competitive or a monopolistic economy. Thus again the stability of the currency will be affected.
This, in turn, would make it difficult for the traders to transact cryptocurrencies as their niche digital asset. A reliable solution to this problem is stablecoins. Stablecoins are pegged by a real-world asset, which means that their value is stable. Most of the stablecoins are tokenized against the USD, however, various other assets can back up a stablecoin, including the following:
There are also other types of token development services such as for building dual tokens wherein one part of the token is listed on the exchange and another part of the token is pegged to the underlying asset. The stable nature of stablecoin has also been understood differently by various researchers which can be concluded as below:
Launch and Marketing
The major source of liquidity in the economy is through bootstrapping. Bootstrapping is a method of estimating properties by accuracy through sampling techniques. The main aspect of stablecoins is to attract users and maintain long-term viability. It follows the seigniorage model where services of bonds are in parallel to the platform growth, the same goes with the stablecoins.
The following models can be used to increase the viability:
a.The concept of dual tokens could be used. One aspect is linked to capital appreciation and another pegged against the asset
b. Another model of basket can be used which would diversify the currency risk.This means that it is not valued against only one asset but a number of assets.
Further, confidentiality in stablecoins will emerge through financial transparency, firm banking relations, the ability of technology to work publicly. Lastly, it can also be enhanced through maintaining reserves, accurately managing the asset pricing models.
Economics
The most important criteria to judge the performance of a stablecoin is during the worst-case market scenarios. The event of “black swan” is constructed to manage the stability by pegging during the times of stress. Maintaining structured reserves can mitigate future risks but discovering the unforeseeable circumstances can be unpredictable.
To well maintain the reserves, you may contact various market makers, banks, financial institutions, currency auctioneers etc. Still as mentioned above predicting the “black swan” event is very critical.
Therefore this is the reason various proprietary stabilization mechanisms make use of 1:1 backing. It signifies that even if a stablecoin’s price went down to .01, it would still be redeemable. Deployment of risk diversification tool and emergency shut-down procedures should be well built up. So considering the event of uncertainties and economies, a robust reserve system should be implemented.
Technology
Stablecoins are built on ethereum and use solidity. Thus, formal verification is not required. But if the protocols of the projects are changed in the future, then there would be a need for formal verification provided it is validated by smart contracts. The very use of fully automated and semi-automated smart contracts is being used in various projects of stablecoins. The aspect of formal verifications is still in the exploring stage due to the hindrances in the solidity code. Eliminating these limitations would enable an environment of stability.
The considerable uncertainty occurs in trading off stability and the benefits of decentralization. As stablecoins are pegged to fiat currencies thus reserves need to be maintained in a commercial bank. The trust of the users is maintained in stablecoins there are adequate funds backed in the banks. Thus the value of stablecoins has relied on its issuing central identity.
Regulation
Many regulations that regulate stablecoins. For instance, KYC/ AML verification is being implemented by many companies, which acts as a barrier to illegitimate entries.
The regulations in stablecoins are still assumed to be in the early stages of development and many agencies and governments are taking steps to regulate the rulings. There is a need to harmonize the jurisdictions and make them “auditable”.
Testing
The testing of the model is based on algorithmic calculations that maintain the basket of stability.
Endnotes
Finally, it is time to get connected with a reliable token development services provider to develop your stablecoin. At Antier, we can be your trusted stable coin development company. We follow a coherent roadmap to navigate your stablecoin development journey – from conceptualization to coin development and marketing.
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