Stablecoin: EU experience and tech insights on implementation

By Clark

Digitalization is a new black. This megatrend covered up all over the world, where one tries to go virtual.

Financials are not an exception. In this article, we are going to discover the history of stable coin’s formation and its challenges through the EU experience with tech insights on implementation. BTC wires gather this information.

Stablecoin: Introduction

What is the stablecoin? 

Even if you are only a freshman in this sphere, you should exactly know about Bitcoin. Do you remember that in 2017 its value raised nearly 1000%? 

The difference between Bitcoin and stablecoin is that fact, that the last has the exact stabilization of value. Stable coin has the same value as US dollar as a rule.  

You may say: we may make virtual payments with normal currency. So, what is an advantage of using stablecoin? 

Comparing with original currency, we used to consider stablecoin to be emerging one. But in spite of this fact, it has plenty of features. 

First of all access to payments. Using original e-payments, you should go into complicated scheme: create an account in the bank-branch system, get an access to e-payment, make a range of verifications. Besides, you may wait from 1 to 3 working days for your payments completing. You may get off all these only using stablecoin. All payments with it are available 24/7. 

EU experience of providing Stablecoin

2012. There are first headlines in Ukrainian media about providing cryptocoins system abroad. That was the 1st wave of Bitcoin popularity in Eastern Europe. It is interesting, but in 2012 first café with crypto payment system appeared in Prague. 

Bitcoin had directly become the part of darknet. And cryptocoins had appeared to be a fundamental challenge, because of the range of risks. For example, money laundering or terrorist bands financing. 

Scandinavia goes to e-currency

Sweden was the first country in the North Europe, who announced the launch of new finance project: e-krona currency. The project was inspired by blockchains industry. 

The thing is that Sweden had become a cashless country very fast: less then in a 4 years. Nearly everyone uses a mobile payment application and moreover due to Applepay and Google pay every tourist can make a transaction with the credit card of his national bank all over this Scandinavia country. 

Nowadays Sweden government had a new ambitious aim: to stop accepting cash by 2023. According to this concept, crypto cashless system had appeared in the country. By the way, near 78% or Sweden bank clients proofed their agreement for providing cashless system at all. 

Gabriel Söderberg the economist of central Riksbank is sure: more and more private companies are motivated about to virtual payments, because that is the best client-friendly practice which gain the great profit. 

Digital transaction accessible to everyone – is a new motto of Sweden financial systems.

The new design of crypto crona will be ably for publicity up to February 2021.

Germany makes e-currency to be a national one

The federal government of Germany (BaFin) admitted Bitcoin to be a new financial instrument. That was a first country which make cryptocurrency to be legal. 

The reason is – to provide stability into virtual coin system.  By making a range of laws to prevent the risks and cash flowing into darknet, German government earned extra money to its budget. 

Nowadays even German legal entity could make deals and exchange stablecoin* 

It’s interesting, that nowadays more than 40 most popular banks with the large branch system request permission for using stable for managing the most popular finance transactions. 

Czech Republic is an engine of providing stable coin in the Eastern Europe

His nickname was “Slush” and in the early 2010s, he became to be a real pioneer of cryptocurrency in the Czech Republic. 

“Crypto mining it was like a story from a fiction book. In 2010 it seemed to be impossible to make financial transactions via virtual cash. There was no real information about cryptocoins, no since explorations. I got acquainted with some real nerds who tried solo-mining. But they were only at square one” – tells IT-inventor Marek Palanitus, whose mining pool “Slush pool” had become a third-place leader of developing cryptocurrency system. 

“My project was not about money-making. I was really interested in how far we will be willing to do the real mining-pool. After our success, my team start thinking of the new reasonable idea: how to keep e-money. Then we created a virtual wallet Trezor” – shares  Marek Palanitus. 

In spite of the fact, that stablecoin still illegal currency in Czech Republic, their government has not taken any measures against cryptocoin. And blockchain app development had become a leading IT-industry in the country. 

Tech insights on implementation the stable coin 

We can classify all the stablecoins in 2 major categories – custodial and non-custodial. The first group is fiat-backed meaning that there is some bank account that confirms the on-chain supply and such stable coins are cencorable (1 2). This category has subcategories as well. 

Source: LINK

There are stablecoins that are regulated and thus hold verifiable fund reserves. Examples include TUSD, USDC. A second type, including Tether, resembles a bank or money market fund, and holds Fractional Reserves. This sort of stablecoin faces bank-run-like depegging risks. USDT demand would go away because it’s neither uncensorable or verifiable. Regulated stablecoins are less risky than USDT for users that don’t need a censorship resistant store of value. Censorship resistant stablecoins are less risky than USDT and Regulated stablecoins for users that need censorship resistance. 

Source: LINK

The other major non-custodial stablecoins category includes stablecoins algorithmically backed by a collateral. That means that issuance of such coins is regulated by a complex system of smart contracts in a trustless way by using other crypto assets as a collateral. The peg is maintained by the market and ecosystem player which we’ll elaborate later on. The economic structure of the basis of value in the stablecoin, primarily derived from market expectations in some systems. There are three types:

a) Exogenous collateral: collateral that has a use outside of the stablecoin system, e.g., ETH with Maker.

b) Endogenous collateral: collateral which is created with the purpose of being collateral for a stablecoin.

c) Implicit collateral: where rather than using explicit collateral, market mechanisms are used to dynamically adjust supply to stabilize price. This resembles endogenous collateral with important differences around the obligation to absorb losses.

Let’s dive into how the most popular stablecoin DAI works:

1. Alice has 10 ETH and needs some money to pay rent, but she believes that ETH will go up thus doesn’t want to sell it. That’s why she decided to take a loan in the form of DAI using ETH as collateral. So she deposits 10 ETH to the vault.

*  Vault- a core component of the Maker Protocol that facilitates the creation of Dai against locked up collateral

* Collateral – assets locked in a Vault. Currently, MakerDAO supports ETH, BAT, WBTC, USDC, BAT, ZRX, KNC

* The system is overcollarazied meaning that the user has to provide 150% worth of collateral to take the desired amount of credit. This is needed to keep the system solvent.

2. Then she can borrow 1333 DAI (if 1 ETH = $200) and keep a 150% collateralization ratio.

* there is no limit of time to return a credit. For taking a loan she has to pay the stability fee which is accrued to the debt each Ethereum block (15 sec). On the time of writing the stability fee is 0% for ETH collateral.

3. If the price of collateral, ETH in the example, goes up, collateralization ratio is increasing meaning that Alice can borrow more DAI.

4. But if the price of ETH goes down, Alice has to provide more collateral to keep the ratio or her collateral will be liquidated by Keeper and Alice may lose all of it paying an additional 13% liquidation penalty. Keeper is the ecosystem player that maintains the system stable by keeping the peg of DAI to USD 1:1. Practically they liquidate undercollateralized vauls with some discount compared to market price which is their incentive. 

The Keeper ecosystem was an attack vector on MakerDAO on 12-13th March. After that, the first open non-custodial keeper pool was launched by the third-party Atomica team.

5. If Vault remains safe and no liquidations occurred, Alice pays back the loan and can withdraw underlying collateral.

Due to statistics of 2018, 1.1 billion of adults have a mobile phone, but only half of them are satisfied with their e-bank system. The main lack is based on limited access to the payment system and techs problems with the transaction. It’s interesting the range of gaps of bank-branches even have already got the special name “financial inclusion”.

The pros of stablecoins, we need to highlight is a clear value regulation. The first wave of Bitcoin implantation had a huge fluctuation. 

So ecosystems of stablecoins are appropriately designed and operate safely and efficiently in accordance with public policy. It has a huge potential growth in upcoming 10 years. 

Clark

Head of the technology.

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