Stablecoins On Bitcoin: Mitigating Volatility
Volatility is one word that is almost synonymous with the cryptocurrency industry. Since Bitcoin’s inception, the premier cryptocurrency has continually been touted as a volatile investment vehicle despite its many benefits against legacy options. Stablecoins have been for a long time the go-to option when mitigating volatility in crypto markets and RSK has enabled several projects to deploy stablecoins on top of Bitcoin’s network.
Stablecoins are digital currencies that can be pegged to the price of fiat currencies, precious metals, commodities and a basket of assets (including other cryptocurrencies). Stablecoins’ introduction within the crypto industry was an absolute game-changer as it gave the traders a new financial instrument that commands a stable price, devoid of any unanticipated volatile fluctuation.
Stablecoins unlocked a whole trove of new use-cases and utilities within the crypto industry as we see today. Users can now deposit stablecoins on crypto platforms to earn attractive yields without fearing any unanticipated price crash, swap them on decentralized protocols (DeFi) for yield farming, use them as collateral for loans, use them to provide liquidity, etc.
In this guide, we will dive deep into the world of stablecoins. Although stablecoins are a fairly novel concept in the world of digital finance, their impact on the crypto and the wider blockchain industry cannot be understated. While we have already discussed the basic characteristics of these asset-pegged digital currencies, we will learn about their need and significance in the digital asset industry, the different types of stablecoins and RSK contributions to the landscape.
The Need for Stablecoins in the Crypto Industry
Stablecoins play a central role in driving the crypto economy. They are in general pegged to fiat currencies that imbibe a degree of trust in people who might otherwise be on the fence about dripping their feet in the crypto space. The following are some of the use-cases that make stablecoins a cornerstone for the crypto industry.
At their core, stablecoins provide an option to not only traders but also for all individuals to be used as an asset or a medium of exchange for quick settlement of transactions. Stablecoins are not too different from cash or fiat currencies in that they exhibit the same price as that of the asset they are pegged to. However, unlike physical cash, stablecoins are digital which means they enjoy certain technological benefits over their paper-based counterparts.
Stablecoins operate on distributed ledgers or blockchain networks which means their authenticity can be proved by basically anyone in the world. A user needs to only click on the transaction number or hash and check the blockchain explorer to confirm if they have sent or received a particular stablecoin correctly. Furthermore, stablecoins facilitate quick settlements as they can be used all across the planet with minimal transaction costs.
Today, stablecoins settle billions of dollars of value daily not only within the crypto industry but also across other avenues such as peer-to-peer payments, commercial payments, and others. By leveraging the immutability, high speed and security of the underlying blockchain network, stablecoins have emerged as a force to reckon in the payments industry.
As alluded to earlier, stablecoins benefit from the lack of volatility that is otherwise a very frequent trait in typical cryptocurrencies such as BTC, ETH, and others. The lack of volatility makes stablecoins a lot better medium of exchange and a pseudo-currency. Today, there is no dearth of stablecoins in the market. Some of the leading stablecoins, such as Tether (USDT), USD Coin (USDC), Paxos (PAX) and Gemini Dollar (GUSD), have already been embraced by companies all over the world over for payments purposes.
Another major advantage that stablecoins hold over the traditional mechanisms of payments is their degree of mobility. Unlike physical cash, stablecoins are completely digital which means that to use them all that an individual would need is a mobile phone and an internet connection. Stablecoins can be used to make payments anywhere across the world with just a few taps of the finger. This way, stablecoins trump physical cash in that they can be used internationally across borders without restrictions.
Similarly, stablecoins also eclipse bank digital payments since they are instant. Unlike a bank transfer that might sometimes take days on account of bank holidays or non-operating hours, stablecoins can be used 24/7 without any hindrance. Clearly, by taking into account the aforementioned characteristics of stablecoins, one can start forming an idea of why these asset-pegged cryptocurrencies play such a crucial role in the crypto industry today.
Make no mistake though. Naysayers today still hold the opinion that there is no inherent need for stablecoins in the crypto industry as they are essentially just a digital form of money that’s already circulating in the world. However, once you combine the authenticity of physical money with the characteristics of blockchain technology, the possibilities become endless as we can see in the case of stablecoins.
Different Types of Stablecoins
Stablecoins can be of different types depending on the asset they derive their value from. We have already discussed in detail the fiat-pegged stablecoins but there are a few more different kinds of stablecoins out there that track the price of particular asset classes to cater to the demands of the market and consumers.
The following are the 4 most commonly used types of stablecoins:
As discussed earlier, fiat-backed stablecoins derive their market price from the price of the fiat currency they are pegged to. At present, numerous stablecoins track the price of different fiat currencies ranging from the US dollar, GBP, Euro, Japanese Yen, Canadian dollar, Australian dollar, and others.
While fiat-backed stablecoins are the most widely used stablecoins in the crypto industry today, they also carry the same risk as to the underlying fiat currencies they track. For instance, if a stablecoin is pegged to a fiat currency that witnesses an immediate crash in price such as the Turkish lira, then the corresponding stablecoin’s price would fall too. Therefore, it is advisable to hold stablecoins that track strong and globally recognized fiat currencies.
Unlike fiat-backed stablecoins, crypto-backed stablecoins are stablecoins that are pegged to the price of cryptocurrencies or a basket of cryptocurrencies. Here, as you can imagine, the price of the stablecoin could fluctuate a lot as they are pegged to other crypto assets that can be volatile. Therefore, to ensure that these stablecoins do not lose their stability, crypto-backed stablecoins tend to be overcollateralized in value.
For instance, a crypto-backed stablecoin worth $1 can be pegged to an underlying crypto asset worth $3. This is done to ensure that even if the underlying asset loses its value by 50% overnight, the stablecoin pegged to it would still have an extra cushion which would help it remain stable and not deviate from its original value. However, these stablecoins tend to be a little more volatile than fiat-backed stablecoins due to the fact their value is tied to other digital assets.
An example of a crypto-pegged stablecoin is DAI, an Ethereum-based stablecoin that is decentralized in nature and tracks the price of the USD. It is important to mention here that even though DAI tracks the greenback’s price, it is not backed by it. Rather, it is overcollateralized by other cryptocurrencies to ensure the coin holds value in the market.
Algorithmic stablecoins are a relatively recent phenomenon in the world of stablecoins. As the name might suggest, these stablecoins derive their value from the smart contracts that power them based on certain conditions concerning demand and supply.
Notably, algorithmic stablecoins tend to have an elastic supply that changes based on the demand for the particular coin. The change in supply continues to occur until the peg is firmly established. While interesting, algorithmic stablecoins are still a very novel idea and usually not the most popular option for crypto beginners.
These are stablecoins that derive their value from a particular commodity or a basket of commodities. These commodities can be precious metals such as gold, silver, copper or even other less liquid assets such as real estate.
Some of the most commonly used commodities-backed stablecoins include Tether Gold (XAUT) and Paxos Gold (PAXG), two leading stablecoins pegged to the price of gold. These coins provide various benefits over owning physical in terms of increased liquidity, mobility and security. As you might have figured out by now, both XAUT and PAXG are collateralized with the equivalent amount of gold to ensure their price remains stable.
Similarly, some stablecoins are collateralized with other forms of assets such as real estate. Stablecoins pegged to an asset class such as real estate allow the smaller investors to access an asset class that is usually out of their reach due to the limited purchasing power or income. In this way, stablecoins enable fractional ownership of an otherwise illiquid asset class.
Stablecoins are not inherently risk-free. The degree of risk associated with a stablecoin largely depends on the asset it is collateralized with. Taking from the above-mentioned examples, the most risk-free stablecoins are arguably the fiat-backed stablecoins. Hence, before investing into a particular stablecoin, investors must do their due diligence as per their risk appetite.
RSK Contributions to the Stablecoin Space
Money on Chain
Addressing the market demand for BTC collateralized stablecoins, RSK blockchain-based Money on Chain platform offers a wide suite of tools and services. In a way, Money on Chain aims to solve perhaps the biggest hurdle prohibiting bitcoin’s mainstream adoption: price volatility. Money on Chain offers Dollar on Chain (DOC), a stablecoin that is collateralized with bitcoin itself and carries all the egalitarian ethos of the leading cryptocurrency such as decentralization & user-custody.
Notably, there are 4 major tokens within the Money on Chain ecosystem:
The DOC is an RRC-20 token and is collateralized with the RSK network’s native coin, RBTC. For the uninitiated, RBTC is pegged to BTC at a 1:1 ratio and allows users to seamlessly convert to and from BTC as and when they desire through a token transfer bridge. As DOC is collateralized with a bitcoin-pegged synthetic asset, the risk of counterparty default via smart contracts is minimized.
Notably, DOC is designed to maintain a peg of 1DOC = 1USD. While DOC was not designed to consider the current stablecoins mechanisms, it is however geared towards identifying and aligning the interests of users of three other types of cryptocurrencies, namely BitPro, BTCX and RBTC.
Unlike DOC which is pegged to the value of the USD, BitPro is an RRC-20 token that tracks the price of bitcoin. This might prompt you to ask the question, what is the difference between BitPro and RBTC as both the crypto assets track the price of the same cryptocurrency? To answer this, we must understand the difference in utilities of both RBTC and BitPro.
Unlike RBTC which is the standard BTC-pegged token in the RSK ecosystem, BitPro’s functionality is a bit more specific. BitPro is nothing but the MOC version of RBTC, i.e., whenever any RBTC is sent to MOC, it is automatically converted into BitPro. The transaction occurs instantly, i.e., as soon as RBTC is moved to MOC, the blockchain instantly issues the equivalent amount of BitPro token for the user.
The next token in the MOC ecosystem is BTCX, which is essentially the native token of MOC’s decentralized derivatives exchange (DEX). The non-transferable BTCX token signifies leveraged positions on RBTC’s price. These BTCX positions are automatically created whenever an address sends RBTC to the DEX’s smart contracts.
In a nutshell, traders who are keen to use leverage anticipating the rise in the price of RBTC can tap BTCX that works as a futures contract.
4) Money on Chain Token (MOC)
Last but not least in terms of its significance, the MOC token is quintessential to the growth of the rapidly expanding MOC ecosystem. The MOC token allows its holders to participate in the governance of the platform. In addition, any MOC token holder can also provide a service to the platform and in return be eligible to receive subsidies and a certain proportion of the fees collected by the platform.
The varied utilities of the aforementioned tokens give us a slight idea about the nuances existing within the MOC ecosystem and how it aims to further catapult bitcoin into mainstream adoption while at the same time also ensuring it can be used for purposes other than as a safe haven for investment. It is worthy of note that in December 2020, MOC unveiled its liquidity mining program for BTC holders where 14,000 MOC tokens were distributed daily among all BPRO holders.
By leveraging a carefully token economy, with tokens such as DOC (the first USD-pegged stablecoin collateralized with BTC), BPro (a token with several HODLing benefits) and BTCX (a token representing leveraged positions on RBTC), MOC looks primed to help onboard more audiences into the bitcoin ecosystem in a completely decentralized and self-custodial manner.
The RIF Dollar on Chain (RDOC) is one of the several tokens in the RSK Infrastructure Framework (RIF) ecosystem. Just like DOC, the RDOC is a stablecoin that is pegged to the USD at a ratio of 1RDOC = 1USD. However, RDOC’s utility is a lot different than that of DOC.
To understand the use-case of RDOC, we must first understand what RIF (RSK Infrastructure Framework) is. RIF is an open and decentralized suite of infrastructure protocols that use smart contracts powered by the Bitcoin network to facilitate easier, faster and scalable development of decentralized applications (dApps).
RIF uses the underlying RSK network to power its suite of robust and innovative services that span across emerging landscapes such as DeFi, file storage, name service and payment solutions. These include RIF on Chain, RSK Swap, RWallet, RIF Marketplace and many other services/protocols.
To power these services, there are basically two tokens in RIF’s ecosystem. RIF token allows any user to consume the services and dApps built on top of the RSK blockchain and RIF Dollar (RDOC) is a USD-pegged stablecoin that is minted after the RIF token is staked as collateral for accessing services in the RIF DeFi ecosystem. Notably, $RIF is also used to pay network fees for dApps built on the RSK network.
As RIF tokens are required to mint RDOC, we can say that RDOC is a crypto-collateralized stablecoin. However, the minting process of RDOC differs from the vast majority of other stablecoins in that new RDOC tokens are minted after a certain amount of RIF tokens are staked in the platform.
A fairly recent entrant in the RSK ecosystem, Babelfish is a cross-chain stablecoin protocol that aims to bridge the distance between different smart contracts platforms via its meta-stablecoin XUSD. Babelfish recently launched on the RSK network.
With the rising adoption of the stablecoin economy in the RSK ecosystem, Babelfish is primed to lead the pack with its innovative cross-chain niche that will not only ensure enhanced liquidity from other protocols into RSK but also open RSK to other protocol users so they get a chance to experiment with the flourishing Bitcoin-based DeFi landscape.
According to its official website, Babelfish’s primary objective is to become the leading stablecoins aggregator to propel multi-chain inflow of liquidity and foster hyper bitcoinization. Specifically, with the rising DeFi markets across multiple blockchains, the liquidity for USD has become increasingly fractionalized which means that there is a lot of idle capital that can further be deployed into the industry. This is exactly where Babelfish comes into the picture as it aims to become a liquidity aggregator to increase stablecoin capital efficiency across the crypto industry.
In addition to XUSD, Babelfish also has its governance token FISH that allows the protocol users to chart the future course of the platform by voting on governance proposals via a DAO. The main objective behind proposals, however, is to increase the number of assets under management at Babelfish.
At present, the Babelfish protocol accepts major stablecoins from some of the leading smart contract platforms such as Ethereum, Binance Smart Chain and RSK. Babelfish’s first interaction with RSK occurred via Bitcoin-based DeFi app Sovryn, which integrated Babelfish’s XUSD stablecoin into its bridge and frontend to offer users a simplified UX along with deep stablecoin liquidity.
What Role Could Stablecoins Play in the Future?
While cryptocurrencies such as Bitcoin, Ether and others are continually touted as the future of money, in recent years, stablecoins have established themselves as a significant force competing with the top cryptocurrencies as far as the function as a medium of payment is concerned.
As mentioned earlier, stablecoins offer several advantages over other cryptocurrencies, however, the most important of them is purely from the perspective of the potential to be used as a future medium of exchange in the absence of volatility. Stablecoins are an excellent instrument for making payments as they are completely digital.
The rise of stablecoins in the future can also be predicted with the help of recent studies which mention that the use of physical cash in a lot of countries around the world is at an all-time low and continues to diminish with every passing year. However, regulatory hurdles remain and it might take some time before stablecoins become the norm. Conversely, if financial regulators and central banks embrace a stablecoin-driven economy, it is very likely that some stablecoins would be permissioned in nature and could drastically compromise user privacy.
Therefore, the role of permissionless smart contract platforms such as RSK becomes all the more crucial to ensure that users’ financial privacy is kept private via decentralized stablecoins built on top of the largest decentralized network in the world.
RSK is pioneering the stablecoin revolution through its exhaustive suite of products such as Money on Chain, RSK Infrastructure Framework and integrations with cross-chain stablecoin projects such as Babelfish. RSK’s products offer all sorts of options ranging from fiat-pegged to crypto-collateralized stablecoins paving the way for exponential DeFi on Bitcoin growth.