With the current traction of the DeFi world and the unprecedented growth of cryptocurrencies, the world is witnessing a shift in the financial paradigm. From our traditional brick and mortar system, we are moving towards an ecosystem which is governed by code or what we usually refer to as smart contracts.
However, change is never easy and especially when it is on such a large scale, it is never defined. While cryptocurrencies may have poised to be the new financial system, the volatility associated with them leading to tremendous uncertainty has been a major bump in the road. Most of the financial institutes have exploited this drawback of cryptocurrencies which has greatly affected their mainstream adoption.
However, what the world has failed to realise is that cryptocurrencies were in a nascent stage and they had yet to evolve. Taking a leap towards mainstream adoption, cryptocurrencies have evolved into stable coins.
Stable coins are bridging the gap between the traditional financial system and the future. What we need to understand is that the traditional financial system has a strong position in the global financial market and it can’t be replaced. On the other hand, cryptocurrencies have given us a taste of how cutting the middleman can give us better returns, more transparency, and create a trust-based environment. Stable coins are a synergy of both.
What is Stablecoin?
There are 180 currencies in the world which are used for the payment services across the globe. What these currencies facilitate is the assurance that you can pay for goods or services at a standard rate without the risk of the rates getting extremely high or extremely low. However, these currencies have been subject to various drawbacks such as inflation or dependency on banks which has repeatedly led us to economic downturns.
While cryptocurrencies eradicated this dependency on the middle man and the possibility of inflation, they failed to provide the security regarding price fluctuations. This is where stable coins entered the scene.
At the very core, a stable coin is digital money. While it has a few sub types which are discussed in the later section of this blog, let’s assume for now that a stable coin represents your money on the Internet. If you have some money in your pocket, let’s say 100 dollars, then you can represent that money digitally, in the form of a cryptocurrency which will be pegged to the actual US dollar and have a stable value.
In other words, it is a cryptocurrency that is collateralized to the value of an underlying asset. This underlying asset can either be a fiat, gold, silver, or even other cryptocurrencies. The most prominent functionality of stable coins is to provide all the crypto and DeFi related services without the volatility. These services include immutability, transparency, security, fast transactions, more trust, digital wallets, better yields, privacy and low fees. The different types of stable coins are mentioned below:
Types of Stablecoins
While there may be different categorizations of stable coins over the internet, the following are the basic and most recognized types of stable coins.
Collateralized Stablecoins
Stable coins that are backed by collateral are called collateralized stable coins. Depending on the underlying asset, they can be further divided into categories such as:
Fiat-backed stablecoins
Stable coins that are pegged to a fiat currency are fiat-backed stable coins. These are the most common type of stable coins that are being used in the market and they have already moved towards mainstream adoption. Even some large central banks such as the central bank of England have started issuing the stable coins baked by the assets they hold. The first and most popular stable coin is Tether represented as USDT. Tether is pegged to the US dollar and is supported by reserves representing the total market capitalization of Tether. Other stable coins such as USDC and PAXOS are also very prominent in the market. Later in this blog, we will see how you can create your own stable coin like USDT.
Asset-backed stablecoins
If a stable coin is pegged to any asset other than a cryptocurrency or a fiat, it falls under this category. The most common examples of such assets are precious metals like gold and silver, diamonds, oil, and real estate among many others. These stable coins provide better returns as compared to fiat-backed stable coins but this is accompanied by a relatively higher risk too.
Crypto-backed stablecoins
As the name suggests, the crypto-backed stable coins
Crypto-backed stablecoins are underpinned by cryptocurrency; however, they use protocols to ensure that the value does not vary with the backing token price. DAI token is a crypto-backed stablecoin supported by Ether and pegged to the US dollar value. It maintains its price via Maker Smart Contract that destroys and creates MKR tokens according to the fluctuations in ETH price.
Non-collateralized stablecoins
The simplest form of stable coins built on top of nothing but decentralisation is called non-collateralized stable coins also known as Seigniorage shares or algorithmic stablecoins. To remove the dependency of a third party such as a custodian issuing stable coins, and shifting this dependency back to code or more specifically, algorithms, non-collateralized stable coins does not rely on a central authority but on the formula derived from demand and supply.
Hybrid stablecoins
Hybrid stable coins are a synergy of collateralized and non-collateralized stable coins. Basically, these stable coins are pegged to an asset but they are modelled through an algorithm. They are complex by nature as they involve a mix of two different and already complex concepts.
Now that you are aware of the different types of stable coins, you can easily identify your needs and the stable coin that will be most suitable for those needs. After the type of stable coin that you need becomes cloudless, you can move towards the actual development of these stable coins. The process of creating a stable coin like USDT is mentioned below:
How to create a Stablecoin like USDT?
- Identification
This point can not be stressed enough. The right identification is imperative for your use-case to be successful. Generally, hybrid coins are not that suitable for most use-cases so you would have to choose between collateralized and non-collateralized stable coins. While there are only two options, it is still very difficult to select one. The usefulness of each of these stable coins depends on the use-case and there is no concept of one being better than the other. Non-collateralised stable coins are more suitable for a use-case that requires long-term stability while collateralized stable coins provide short-term stability depending upon the reliability of the underlying asset.
To further assess the appropriateness of the type of stable coins, refer to the following questions:
- What the liquidity needs of your use-case?
- What are your compliance and audit-related requirements?
- Is your use-case more dependent on decentralization?
2. Architectural needs
The Blockchain ecosystem has grown tremendously over the past couple of years and the pandemic has acted as a catalyst to its growth. While only Ethereum was available earlier, a plethora of platforms is now available where you can develop your stable coin. Each of these platforms has its own pros and cons which is why the decision of selecting the right platform and the right technologies should be left to an expert. The seasoned consultants at QuillHash can assist you in making an informed decision regarding the architectural needs of your stable coin. The pros and cons that we focus on are not the basic concepts like the consensus type but advanced functionalities like potential bandwidth and interoperability. As of today, there are more than 70 stablecoins and 140 are in development.
3. Liquidity maintenance
Poor liquidity maintenance is probably the biggest vulnerability of the traditional financial system and one of the major reasons why this paradigm shift is happening. If we can learn one thing from our past it is to maintain liquidity in an efficient manner. The following steps can help you maintain liquidity for your stable coin:
- Evaluating inflation
- Monitoring value
- Transfer fee sharing
- Keeping demand and supply in sync
After these, the next steps may seem familiar to you if you have been around the IT world.
- Designing a suitable interface by researching current user preferences is the first major task.
- The better user experience should be your focus area
- Defining and designing smart contracts
- Getting a professional audit of the smart contracts
- Deploying the smart contracts on the blockchain platform you have selected
For a better understanding, mentioned below is the code snippet from the official USDT contract present on etherescan which can be viewed here.
function redeem(uint amount) public onlyOwner {
require(_totalSupply >= amount);
require(balances[owner] >= amount);
_totalSupply -= amount;
balances[owner] -= amount;
Redeem(amount);
}
This function inside the USDT contract allows the contract to redeem tokens. These tokens are withdrawn from the owner’s address. This is just one small but significant function of USDT.
Conclusion
The aforementioned steps provide just an overview of how you can create your own stable coin like USDT. However, each step requires in-depth knowledge and expertise to ensure a successful outcome. The team at QuillHash can assist in the whole process of creating a stable coin right from the very beginning where you need to identify which type of stable coin is more suitable. Our cryptocurrency developers have worked extensively in this domain and are adept in delivering a high-quality contract. In addition to this, we have an inhouse auditing team to ensure the complete safety of your smart contract. Reach out to us and book a free consultation today.
