A digital token backed by a currency, such as the dollar or the euro.
On November 1, 2008, Satoshi Nakamoto published the Bitcoin white paper. In the introduction of the paper, it is explained that bitcoin is «a purely peer-to-peer electronic cash system,» which does not need to «go through a financial institution.».
A purely peer-to-peer electronic cash system must therefore operate without banks and without governments, and must allow individuals to transfer value in the same way they exchange hard currency.
Thus, the very first successful crypto-asset aims to become a store of value recognized and accepted by all. However, in reality, it still proves to be far too volatile to be kept in a portfolio without regard for its fluctuations, unlike the fiat currencies used in the real economy.
In the highly volatile universe of cryptocurrencies, the stablecoins are therefore a necessary refuge. In most cases, these are digital tokens backed by a currency, such as the dollar.
Besides their usefulness in protecting against volatility, stablecoins provide a solution to a tax-related need. Indeed, even though regulators are far from finished with their work regarding the taxation of capital gains on crypto-assets, these gains are already subject to rigorous calculation as soon as one converts their cryptos back into FIAT currencies. Thus, stablecoins allow investors to realize their profits while keeping their portfolio in crypto-assets.
Among these tokens, USDC from Circle, USDT from Bitfinex, and BUSD from Binance are the most widely used. All of them operate on the same mechanism, with 1 $ in the bank equaling 1 token issued. Unfortunately, their stability involves risks due to the opacity of the issuing organizations' accounts.
Stablecoins ranked by market cap according to CoinGecko
However, there are other approaches, such as Maker's with its multi-collateral DAI protocol, a token whose value is pegged to the dollar, but which is not backed by that same currency. It is a stablecoin decentralized. Its price is maintained at a 1-to-1 ratio with the dollar. Its value, meanwhile, is guaranteed by the pledging of ETH tokens by multiple issuers.
However, it is difficult to consider the DAI “secure enough” today when 60% of the collateral used to back it is not secure (USDC, wBTC, TUSD, etc.), even though one of the goals of decentralization remains resistance to censorship.
Necessity driving progress, a new kind of stablecoin emerged in 2020: stablecoins algorithms. These are completely decentralized stablecoins, and for good reason: their «central bank» is a smart contract, and no one controls it.
In most cases (Amplforth, DSD, Basis cash, etc.), they operate on an elastic supply system that alternates between expansion phases and reduction phases. Concretely, it is the quantity of tokens you own that varies at regular intervals during the event of rebase to adjust and stabilize the value of your portfolio.
Algorithmic stablecoins ranking by Coingecko
In theory this is achievable, but in practice the greed of market participants often reveals flaws in the mechanisms of these protocols, which are not yet fully matured.
To end on a positive note, however, there is an algorithmic stablecoin that has successfully maintained its stability at 1$ to within plus or minus 0.01$ for almost a year now. This is the Frax protocol, although it must be admitted that its stability is still guaranteed at 60% by USDC, but the remaining 40% are indeed autonomous, trustless, and censorship-resistant.
