Stablecoins are a new type of cryptocurrency that often have their value pegged to another asset.
These coins can be pegged to fiat currencies such as the United States dollar, other cryptocurrencies, precious metals or a combination of the three. Fiat seems to be the most popular option in the marketplace right now, meaning one unit of a stablecoin equals $1.
Stablecoins are designed to tackle the inherent volatility seen in cryptocurrency prices. They are normally collateralized, meaning that the total number of stablecoins in circulation is backed by assets held in reserve. Put simply, if there are 500,000 USD-pegged coins in circulation, there should be at least $500,000 sitting in a bank.
With bitcoin suffering abrupt crashes and sudden gains, advocates believe stablecoins help eliminate doubt about conversion rates — making cryptocurrencies more practical for buying goods and services.
Examples of the best-known stablecoins include tether (USDT), trueUSD (TUSD), gemini dollar (GUSD), and USD coin by Circle and Coinbase (USDC). Demand for such coins has been growing. In December, Cointelegraph reported claims that four major stablecoins had clocked up $5 billion in on-chain transactions within just three months — enjoying a 1,032% surge in November compared with two months earlier.
As the name suggests, stablecoins are designed to have a consistent price or value over time.
There are three different ways of achieving this — delivering a happy medium between offering the stability of fiat currencies and the decentralized benefits that virtual currencies provide. Without stablecoins, taking out a loan while using crypto as collateral can be risky, as the assets used to secure your borrowing can be rendered worthless in a short space of time. Likewise, imagine what getting your salary in crypto would be like if prices were to tumble unexpectedly. In the real world, it would be like suddenly finding out that milk has ballooned in price from $1 to $3, meaning your money goes a lot less further.
The first type of stablecoin is collateralized by fiat. For every single stablecoin issued, $1 is kept safely by a central custodian such as a bank. In other cases, commodities have been touted as a way of collateralizing crypto, with Venezuela’s government unveiling plans to launch the petro — a coin that’s value was to be tied to one barrel of oil.
Next, you have stablecoins collateralized by crypto. But wait, doesn’t this mean that price volatility is still possible? To an extent, yes — but some providers try to tackle this issue by “overcollateralization,” meaning $2 worth of crypto is deposited with a custodian for every $1 of a stablecoin. This can help to keep decentralization alive, with crypto reserves absorbing the impact of any fluctuations, but a downside is that huge amounts of capital can be required to get them off the ground.
Last, there are noncollateralized stablecoins like Ramifi, which do away with the idea of having reserves altogether. These kinds of assets use smart contracts take on a role not too dissimilar to a reserve bank. They monitor supply and demand — removing circulating coins when prices are too low and issuing new ones when prices are becoming too high. The ultimate goal is to keep prices in line with that of a pegged asset such as the U.S. dollar.
The Ramifi Protocol offers a novel solution to stablecoins by acting as a synthetic commodity. Like Ampleforth, is it a noncollateralized stable coin that monitors its supply and demand, providing adjustments based on price. The difference is, Ramifi enacts a system into its protocol that allows it to track and peg the buying power of the United States Dollar to the token.
By using a function coined the Denominated Mean, Ramifi's protocol is pegged not only to the dollar but to the value of a dollar. Why is this so important? Well, the US dollar experiences an average cumulative inflation rate of 3%. This inflation rate does not take into account other factors that may influence the rising prices of goods and services.
If stable coins and synthetics commodities like USDT and Ampleforth are pegged to an inflating and devaluing dollar, what sort of drawbacks can be seen within these tokens that RAM solves? For one, overtime, these tokens will fail to guard the dollar purchasing power of your investments.
Capturing the value of a dollar provides a real time nominal dollar value for the RAM protocol to follow that alternatives lack.