Setting Up Stablecoins on the XDC Network
The following is a complete guide to stable coin creation on the XDC Network. Topics include:
- What is a stablecoin?
- Types of stablecoins
- Why stablecoins?
What is a Stablecoin?
Backed by a reserved asset, which ensures price stability and eliminates the volatility usually expected of cryptocurrencies, a stablecoin is a cryptocurrency with a fixed price. Stablecoins on the XDC network, which can be pegged to any number of sovereign currencies, thus combine the benefits of cryptocurrencies with the stability of fiat currencies.
Cryptocurrencies like bitcoin and Ether are highly volatile. The price of bitcoin, for example, rose from USD 10,000 in October 2020 to USD 60,000 during March 2021. Needless to say, there are many users and investors who require greater stability. Imagine paying USD 30 for dinner today, only to wake up tomorrow to find you paid USD 60, because the value of bitcoin or Ether went up. Small investors are particularly susceptible to feeling the ill-effects of such price swings. In this situation, stablecoins emerged to drive adoption of cryptocurrencies.
The question arises: Why do we need to create fiat-backed crypto tokens when we can just use fiat currencies? The answer is that decentralized currencies eliminate third parties, which is to say, they eliminate the need for a centralized authority to establish trust. In doing so, they significantly reduce the cost (in time and money) of relying on third parties. In addition, cross-border payments can be expedited and made more efficient by cryptocurrencies.
What Are the Types of Stablecoins?
Fiat-backed Stablecoins
Fiat-backed stablecoins are crypto tokens equal in value to a specific fiat currency. These tokens hold their value fixed at a ratio of 1:1. For instance, Tether is a stablecoin whose value is pegged at a ratio of 1:1 to the USD. Fiat currencies are deposited as collateral to ensure the existence of a fiat-backed stablecoin. As a result, it requires a financial custodian and regular auditing to ascertain that the token always remains collateralized (e.g., Gemini stablecoin [GUSDT], USD Coin [USDC], etc.).
Non-Collateralized Stablecoins
Non-collateralized stablecoins depend on the idea of seigniorage shares. Seigniorage is the difference between the actual value of money and its printing cost. The coins, in this case, depend on an algorithm that changes the supply volume in order to control their price. By using smart contracts, non-collateralized stablecoins are sold if the price falls below the pegged currency. Conversely, more tokens are supplied to the market when their value rises above the pegged currency.
Cryptocurrency-backed Stablecoins
Cryptocurrency-backed stablecoins work in a way similar to fiat-backed stablecoins. The difference is that cryptocurrency-backed stablecoins lock up cryptocurrency as collateral instead of fiat currency. For instance, Ethereum can be kept as collateral to create a cryptocurrency-backed stablecoin. These tokens make use of a security pledge to compensate for the volatility of the cryptocurrency to be used as collateral, which directly states that the stablecoin will not be based on a 1:1 ratio to the crypto collateral.
Commodity-collateralized Stablecoins
This type of stablecoin is backed by other types of interchangeable assets, like precious metals or real estate. Gold, for example, is the most commonly collateralized commodity.
Commodity-backed stablecoins hold a tangible asset with some real value. These commodities can appreciate in value over time, which increases the incentive to use and keep these coins. With commodity-collateralized stablecoins, people can invest in precious metals or real estate properties worldwide. Generally, such assets are reserved only for wealthy investors; however, stablecoins open up investment opportunities for everyone globally.
Why Stablecoins?
By remaining stable in value in relation to the world’s major national currencies, stablecoins promise to bring the benefits of decentralized technology to traditional, centralized financial systems.
With a reliable stablecoin, people no longer need to worry about the fluctuating prices of cryptocurrency. Moreover, stability in cryptocurrencies make possible lightning-fast transactions and facilitates crucial financial functions like loans and credits.
A stable, decentralized currency can easily become a truly global currency by allowing trustless and rapid cross-border transactions. People living in countries with unstable monetary systems—like Argentina, for example—would reap enormous benefits.
Stablecoins have already emerged as an attractive option for investors looking to make transactions via a global currency, accessible to all. The adoption of stablecoins—like USDT or Tether, for example—will continue to support capital market formation and provide new opportunities for decentralized finance on blockchains, like derivatives markets and lending.
If you want to create a stablecoin backed by a stable asset or fiat currency, we can help. Simply visit https://st.mycontract.co to create your own stable coin on the XDC Main Network or the XDC Apothem Network, by doing the following:
Login with XDCPay or Private Key.
Enter the required details.
Review the token details.
Deploy the token.
