One of the most common complaints lodged against cryptocurrencies has been that they do not have price stability, and so cannot be used as currencies. After all, who wants a dollar that’s worth $0.50 tomorrow and $1.50 the day after that? This limits overall use cases of cryptocurrencies when prices of goods and services are measured through to fiat currencies.
In order to solve these problems with price stability, many in the blockchain community have sought out a “stablecoin” as the answer. A stablecoin utilizes one of several tactics or strategies to try to limit price volatility, ideally at one constant price.
The three major approaches so far have been to peg the token value to fiat currencies, to collateralize the token with a variety of cryptocurrencies, or simply control the token value with a pricing algorithm. From a regulatory perspective, the most difficult to create is a fiat-collateralized cryptocurrency.
There are different groups in support of these different approaches, but ultimately the main concern with stablecoins is maintaining the balance between consistent pricing and transparency and simplicity when explaining that to users.
An Emerging Solution
Currently, the only stablecoin that offers token-holders the opportunity to redeem for USD is TrueUSD. TrueUSD launched earlier this month on Bittrex. Each 1 TrueUSD is collateralized by 1 USD, and so maintains a constant price of $1.
How is this done? TrueUSD’s blog says they have set up a variety of banking partners that manage a series of accounts with USD collateral equal to the circulating volume. Thereby, if a token holder ever wants to cash out a dollar in exchange for their TrueUSD token, they have a series of legal rights that guarantees them that ability.
This way, new tokens are only minted when users wire USD to one of the banking partners, who signal TrueUSD to issue the corresponding tokens to the user and initiate a smart contract entitling them to $1 per token. When the user wants to redeem the token for their money, the token is destroyed and the dollars are sent to their bank account.
The Need For A Replacement To Tether
A stablecoin called Tether has grown rapidly over the last year, but has failed to maintain relationships with its auditors or provide proof of its underlying funds. Tether issues new waves of tokens in sporadic bursts. Furthermore, last year they stopped doing audits of their reserves, for a period of time were not allowing withdrawals, and have switched their banks a number of times.
So how what does TrueUSD do differently? First, TrueUSD offers token holders a legal claim to redeem their tokens for USD. TrueUSD understands that in order for a digital currency to have real value, investors needs enforceable rights.
Another issue that traders report is that Tether claims to have full collateralization with USD; justifying their $1 token value. However, since they have not done audits since their market cap was over $44 million, and most traders believe they are using fractional reserves at this point. Without the transparency to understand what money is backing the value of Tether, there could be a day where the Tether market crashes.
So far, TrueUSD has consistently published attestations on its blog, making it easier for investors to trust they will always be able to redeem their token for its value in USD. Typically, fiat-collateralized stablecoins have struggled to maintain this decentralized nature, since it involves someone with a bank account holding the collateral. TrueUSD overcame this with the establishment of a number of banking partners and independent auditing processes.
Overall, TrueUSD is an incredible stablecoin project that helps make it easy to trust that cryptocurrencies have tangible value. Their ability to reduce price volatility is a major step towards using cryptocurrencies for P2P transactions and payment processing for merchants. Keep an eye on TrueUSD as they continue to be added to different exchanges and see increasing market adoption. Opinions expressed here by Contributors are their own.