Are stablecoins actually solving crypto’s volatility problem? 5 stablecoins compared.
Bitcoin has been a notoriously volatile asset, which has made using it as a store of value or a means of payment much more difficult than early adopters had hoped. Other market-leading cryptocurrencies have faced the same challenges. But over the past year especially, we’ve seen the emergence of a new class of cryptocurrencies, “stablecoins,” using combinations of collateral-backing, smart contract code, and decentralized governance to provide cryptocurrencies with a stable, reliable value. That’s been the promise at least. How well are some of these stablecoins holding up?
We’ve put together profiles of five most notable stablecoins available today, and attempted to analyze just how stable each of them are.
Tether (USDT), originally called “Realcoin,” launched on October 6th, 2014 and renamed to Tether shortly after, announcing 3 Tether stablecoins pegged to the U.S. dollar, the Euro, and Japanese Yen. Tether tokens exist on the Bitcoin blockchain using the Omni Layer Protocol. Tether Limited, a Hong Kong-based start-up, operates it. Tether Limited is a fully-owned subsidiary of British Virgin Islands-based Tether Holdings Limited, which runs cryptocurrency exchange Bitfinex.
USDT is pegged to and collateralized by the U.S. dollar at 1:1 rate, meaning users deposit 1 U.S. dollar for every 1 USDT they buy. When a user redeems USDT for dollars again, Tether Limited destroys the old USDT tokens to maintain the price equilibrium. Tether has announced on their website that as of November 2018, they have a banking relationship with Deltec Bank & Trust Limited (“Deltec”), headquartered in the Bahamas.
There have been questions over Tether’s transparency. The company responded with a 3rd party audit, which verified the company’s dollar reserves, but prompted controversy that a law firm (Freeh, Sporkin & Sullivan LLP) conducted this audit and not an accounting firm.
- Protocol: Originally issued on the Bitcoin network using the Omni Layer Protocol, in September 2017, Tether Limited also launched ERC20-standard USDT tokens on the Ethereum blockchain. Tether treats USDT on Bitcoin and Ethereum as the same, simply allowing for users to use their preferred protocol (allowing USDT to be used in Ethereum-based smart contracts, for instance). Tether states Phil Daian and Zeppelin have audited their code.
- Adoption: At the time of writing, USDT has a market cap of over $ 2 billion, according to CoinMarketCap.com. Binance, Bitfinex, Shapeshift, GoCoin, CoinBene, BitMax, Kraken, Poloniex are some of the 20+ exchanges that list USDT.
- Stability: Using data from CoinMarketCap.com, we looked at 90 days of closing price data for USDT from mid-November 2018 to mid-February 2019. For 96.7% of this time period, USDT closed at a price within 2% of $1 USD, at it’s lowest closing at $0.968.
Circle and Coinbase partnered to create the open-source project CENTRE, which launched USD Coin (USDC). Circle owns Poloniex, offers investment products, and counts Goldman Sachs and IDG Capital among their investors. USDC started trading on September 26th, 2018. Circle emphasizes as a differentiator that they are a regulated money transmitter.
USDC is pegged to and collateralized by the U.S. dollar at 1:1 rate. Circle has accredited banking partners for the U.S. dollar reserves, with Grant Thornton LLP auditing and publicly reporting on these reserves monthly. Along with CENTRE’s open source code for USDC, they also plan to launch a membership framework through which other financial institutions can become issuers of USDC.
- Protocol: USDC is an ERC20-standard token on the Ethereum blockchain network.
- Adoption: At the time of this analysis, CoinMarketCap.com reports $ 301 million market cap for USDC. 14 exchanges list this stablecoin, including Poloniex, Coinbase, Binance, and Bitfinex. Wallets such as Coinbase and Ledger support it.
- Stability: Using data from CoinMarketCap.com, we looked at 90 days of closing price data for USDC from mid-November 2018 to mid-February 2019. For 95.6% of this time period, USDC closed at a price within 2% of $1 USD, always higher, reaching a peak of $1.04.
The Gemini Dollar (GUSD) is a new stablecoin launched in September 2018, issued by Gemini Trust Company (Gemini), a New York-based digital asset exchange company created by the Winklevoss twins (of Olympic / Facebook lawsuit fame) and in operation since 2015. Gemini places a heavy emphasis on the additional credibility and stability that operating under U.S. + New York state regulatory supervision provides their stablecoin.
GUSD is pegged to and collateralized by U.S. dollars at a 1:1 rate. A user with a Gemini account can deposit U.S. dollars into their account and receive a corresponding amount of GUSD, sent to any specified Ethereum address. The deposited dollars are held at State Street Bank and Trust Company, with a monthly (and publicly published) audit by BPM, LLP verifying the total collateral.
- Protocol: GUSD is issued as an ERC20 token on the Ethereum blockchain. Gemini points to a public report by information security firm Trail of Bits that they engaged to audit their code.
- Adoption: At the time of writing, CoinMarketCap.com reports a market cap of $93.57 million for GUSD. Over 30 exchanges so far list the Gemini Dollar for trading, including OKEx, DigiFinex, and Everbloom. The Gemini Dollar site lists several other platforms of note integrating GUSD, including crypto payment processors Bitpay and Dizpay.
- Stability: Using data from CoinMarketCap.com, we looked at 90 days of closing price data for GUSD from the end of October 2018 to late January 2019. For 95% of this time period, GUSD closed at a price within 2% of $1 USD. It briefly spiked in value in mid-December, closing at a high of $1.13 on December 18th, and returning to a closing price of $1.02 the following day.
Maker DAO, i.e., the “Decentralized Autonomous Organization” of the Maker platform is the organization that launched Dai (DAI), and the coin went live on December 18th, 2017. Maker smart contract platform runs on the Ethereum blockchain, and Dai is a crypto-backed stablecoin, collateralized with other cryptocurrencies and pegged in value 1:1 to the U.S. Dollar. Each Dai token is currently backed by an over-collateralization of Ethereum alone, however, work is in progress for a multi-collateral-backed Dai.
When a user purchases Dai, smart contracts on the Maker platform lock the Ethereum they’ve provided as collateral, and issue Dai in the form of a loan, called “Collateralized Debt Positions” (CDPs). There is also an interest rate, which works as the stability fee.
At the time of writing, Maker DAO is working on a multi-collateral-backed Dai, with OmiseGo (OMG) and Digix Gold (DGX) having been announced as supported collateral. They expect to release the multi-collateral-backed Dai in 2019.
- Protocol: Dai is an ERC20 token, and the underlying blockchain platform is Ethereum. Users can store their Dai in any ERC20 wallet. Maker DAO has engaged the information security firm Trail of Bits for an audit of this protocol.
- Adoption: At the time of writing this analysis, CoinMarketCap.com shows that Dai has a market capitalization of $ 75 million. Over 10 exchanges list Dai, and the list includes Bitfinex, Ethfinex, CoinHub, Kucoin, and Exmo.
- Stability: Using data from CoinMarketCap.com, we looked at 90 days of closing price data for DAI from the end of October 2018 to late January 2019. For 92.4% of this time period, DAI closed at a price within 2% of $1 USD. It briefly spiked in value in mid-December, closing at a high of $1.13 on December 18th, and returning to a closing price of $1.02 the following day.
Digix Gold Token
Singapore-based Digix Global launched Digix Gold Token (DGX) on April 8th, 2018. DGX is a stablecoin collateralized with the purchase of physical gold bars. 1 DGX is equivalent to 1 gram of gold. Investors that buy DGX get a “Proof of Asset” (PoA) card that contains the relevant information about the transaction, which is also stored on the Ethereum blockchain. There are transfer and demurrage fees for DGX.
Digix Global was incorporated in Singapore in December 2014, with a separate token (DGD) that grants holders voting rights to determine any future changes. Digix buys gold from ValueMax Singapore, a public company that sells certified gold bullion bars. The custodian vault is operated by The Safe House, Singapore. Bureau Veritas Inspectorate independently audits the quantity and quality of gold. If a token holder chooses to “recast” their DGX tokens for an equivalent amount of gold bars (available in denominations of 100g or 1000g), Digix does require investors to be physically present at the vault within 30 days of choosing to recast their tokens, in order to physically receive their gold bar value.
- Protocol: DGX is an ERC20 token, and the underlying platform is Ethereum.
- Adoption: CoinMarketCap.com shows that DGX has a market cap of $4.25 million at the time of writing. Ethfinex, Kryptono, and Kyber Network are the exchanges that currently list it. Recently, MakerDAO announced a partnership with Digix in which their upcoming multi-collateral-backed token would include DGX.
Stability: As DGX’s value is pegged to the value of gold, a physical asset with significant fluctuations of value in relation to USD of its own, a comprehensive measure of its stability is beyond the scope of this article, but we can present some findings from our initial analysis. In addition to using data from CoinMarketCap.com as we have for other tokens in this article, we also looked at 90 days (67 open trading days) of price data for gold (U.S. COMEX GCJ9) over the same period.
We found that over this 90 day period, DGX was on average valued at $2.29 over the daily price of gold itself; and on 26 out of 67 days DGX closed at a price 5% or greater in value from that day’s gold trading price. However, while speculation and possible arbitrage opportunities seem to create more volatility in DGX than other stablecoins, it does seem to do at least as good a job of maintaining a minimum value relative to its peg as the other stablecoins we’ve profiled here: on only 2 of the 67 days did DGX close at a price greater than 2% less than the price of gold (2.01% less on December 3rd, and 2.3% less on December 25th).
Are stablecoins stable?
From our analysis, many of these new cryptocurrencies are certainly holding their value much better than Bitcoin, Ethereum, or XRP. While many of these stablecoins are more recent, Dai and Tether at this point have over a year of stable performance compared to the crypto market leaders.
While stablecoins show promise as a store of value, most have yet to receive the adoption needed to truly “solve” crypto’s volatility problem as a payment medium. As the market continues to evaluate the strengths of each token’s stability mechanisms and potential points of failure within the companies operating them, we’ll be watching to see how this new class of cryptocurrencies evolves.
All facts and analysis above are offered for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.