We covered the basics of stablecoins in Chapter 4, Stablecoin. We learned what stablecoins are, why we need then, their basic types, and their challenges. In this chapter, we will explore more about these primary stablecoins, including how blockchain technologies help cryptocurrency tokens to minimize price volatility. This chapter is split into two major topics, as follows:
Stablecoins play an important role in the digital asset world. One of the major designs of stablecoins is to minimize digital currency price volatility. In the past couple of years, the most popular cryptocurrency prices have been very volatile, for example, bitcoin and Ethereum. Huge price fluctuations prevent the wide adoption of cryptocurrency as money for daily transactions. That is where stablecoins are designed to address this issue.
As we learned in Chapter 4, Stablecoin, stablecoins connect cryptocurrency and fiat currencies with the total amount of backed assets (mostly, this is in USD, or in a digit currency such as bitcoin, ether, or gold). It stabilizes the price with the one-to-one equivalent in USD, euros, or cryptocurrency.
As we learned in Chapter 4, Stablecoin, there are several types of stablecoins. At a high level, there are three major types:
The following diagram shows the major three types of stablecoin:
Let's look at them in detail.
Fiat collateralized stablecoins are backed by gold or fiat currencies such as the US dollar, euro, and so on. The token aims to keep a 1:1 ratio with the underlying asset. The token holder can redeem assets at any time with a stable 1:1 price peg. The centralized entity has to maintain a relative level of stability. This solution is a more off-the-chain centralized solution.
Tether and...
In this section, we will review the technical design of some major stablecoins, especially smart contracts.
Tether stablecoins run on the bitcoin blockchain. These are designed in three layers, as shown in the following diagram:
Let's take a look at these layers:
JP Morgan announces a stablecoin, JPM Coin, in the quorum blockchain platform on February 2019. JPM Coin is still not an official release; it is in its prototype stages. The aim of JPM Coin is to be able to run on all standard blockchain networks. The JPM Coin is designed to support USD and other currencies. It has a value ratio of 1:1 to USD.
Its payment flow is considered traditional and has at least four transactions across interbank networks through a central bank. This centralized design for a payment clearing system is inefficient and slow. JPM Coin provides real-time gross settlement (RTGS) to clear and settle payments.
There are three steps in the process flow:
In this chapter, we reviewed the basic features of popular stablecoin and understood the three types of stablecoin, including fiat collateralized stablecoins, crypto collateralized stablecoins, and non-collateralized stablecoins.
Then, we looked into USDT, DAI, TUSD, USDC, GUSD, and PAX stablecoin smart contract design and explored the functions that are defined in these contracts. We learned how each stablecoin system maintains stable tokens with a 1:1 price peg through mint, burn, and other controllable functions.
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