How to Create a Stablecoin?
With the introduction of Bitcoin and later Ethereum, cryptocurrencies have taken the world by storm. While initially, crypto tokens were meant to be used for specific utilities, many utility tokens that went on the market did not meet this criterion. After cryptocurrencies and tokens became volatile, buyers began considering them an investment. So, it was necessary to find a solution to overcome the problem of cryptocurrency volatility. This caused the emergence of stablecoins, a kind of token that features the best aspects of cryptocurrency combined with the stability of FIAT currency.
Because their prices are tied to a reserve asset such as the U.S. Dollar or gold, stablecoins can bridge the worlds of cryptocurrency and fiat currency. This significantly reduces volatility when compared to Bitcoin. It also results in a digital currency that is suited for everything, from daily commerce to transfers between exchanges.
Today, almost 200 currencies are sanctioned by the United Nations, from the US dollar to the European Euro to the Japanese Yen and more. These currencies are often used to purchase goods and services across global economies. Despite inflation, fluctuating exchange rates, and other factors, the value of these currencies is subject to a little change on a day-to-day basis. It enables several economies to depend on the use of these government-issued currencies to operate. For example, you can buy bread from your favorite bakery and pay $4 for it today, knowing that it’s unlikely that it will fall to 99 cents tomorrow drastically.
In this article, we will discuss stablecoins in detail, including the process of how to create them.
- What is Stablecoin?
- What are the types of Stablecoin?
- Why are stablecoins important?
- What can you do with Stablecoins?
- How to create a Stablecoin?
- Example of creating a Stablecoin
What is Stablecoin?
A stablecoin is a cryptocurrency whose value is pegged or tied to another currency, commodity or financial instrument. Stablecoins are designed to offer an alternative to the high volatility of most cryptocurrencies, such as Bitcoin, making crypto investments less appropriate for common transactions.
In simpler terms, Stablecoin is a form of digital money that aims to imitate traditional and stable currencies. A stablecoin is a cryptocurrency that is collateralized to the value of an underlying asset.
Many stablecoins are secured at a 1:1 ratio with specific fiat currencies, such as Euro or US dollar, which can be traded on exchanges. Stablecoins can also be pegged to other kinds of assets, for example, precious metals like gold or even other cryptocurrencies.
Stablecoins do not deal with the issues of extreme volatility as compared to other cryptocurrencies. They leverage the benefits of cryptocurrencies, including immutability, transparency, security, fast transactions, digital wallets, privacy and low fees, without losing the trust and stability of fiat currency.
Let’s understand the different types of stablecoins.
What are the types of Stablecoin?
Stablecoins are categorized mainly into the following types:
Collateralized stablecoins are coins whose values are backed by specific collaterals. They are further classified as:
- Fiat-backed stablecoins
- Asset-backed stablecoins
- Crypto-backed stablecoins
Fiat-backed stablecoins are pegged to the value of fiat currency. The first fiat-backed stablecoin was Tether (USDT), which brought the concept of a cryptocurrency pegged to the US dollar value and supported by reserves representing the total market capitalization. Other examples of fiat-backed stablecoins include PAXOS Standard and USD coin.
Asset-backed stablecoins are backed by other assets except for cryptocurrency or fiat. Asset-backed tokens are pegged to the prices of assets, for example, gold, silver, diamond, oil, real estate and many more.
Crypto-backed stablecoins are underpinned by cryptocurrency; however, they use protocols to ensure that the value does not vary with the backing token price. DAI token is a crypto-backed stablecoin supported by Ether and pegged to the US dollar value. It maintains its price via Maker Smart Contract that destroys and creates MKR tokens according to the fluctuations in ETH price.
Also known as Seigniorage shares or algorithmic stablecoins, non-collateralized stablecoins implement the basic principle of cryptocurrencies: decentralization. Since many crypto enthusiasts have argued that stablecoins should be focused on an asset but should use algorithms to derive value, the concept of non-collateralized stablecoins has come to the fore.
The financial power in non-collateralized stablecoins does not rely on a central entity but a formula derived from demand-supply. Basis is one example of algorithmic stablecoins that raised $133 million from Bain Capital Ventures, Polychain Capital and GV and gained a lot of popularity.
Algorithmic stablecoins may hold reserve assets. The primary difference is their strategy to keep the stablecoin’s price stable by controlling its supply via an algorithm. This is essentially a computer program that runs a preset formula.
This is not very different from central banks, which don’t depend on a reserve asset for keeping the currency’s value stable. It is important to note that a central bank such as the U.S. Federal Reserve sets the monetary policy publicly based on well-understood parameters. The fact that it is the issuer and holder of legal tender adds credibility to that policy.
Now that we have explained the basics of stablecoins, we shall move to the next section, i.e., why are stablecoins important?
LeewayHertz Stablecoin Development Services
Create and launch your stablecoins backed by preferred real-value assets.
Why are Stablecoins important?
For several reasons, stablecoins are essential for financial transactions in the crypto-verse:
- These are the best way to trade volatility
- They are the easiest way to convert fiat currency into cryptocurrency
- The most common way to transfer money on a blockchain
- They are the core building block of DeFi
Stablecoins were the first way traders of non-fiat crypto trading platforms could move in and out trades because they had low volatility. Since the first crypto exchanges didn’t have U.S. dollars or other fiat currencies on and off ramps at their start, a stablecoin was needed as an equivalent fiat currency. To protect their gains, traders can move to the stablecoin once they have closed a position.
Before investing in cryptocurrency, most investors first convert their fiat currency to cryptocurrency. The easiest way to do this is by purchasing stablecoins that have a fixed value to your fiat currency. If you want to convert dollars into cryptocurrency, you can trade dollars for USD coins (USDC). Tether, originally known as Realcoin, was founded in 2014. It was the first stablecoin to be created. It has a 1:1 peg to US dollars. Market participants can transact on the blockchain with USDT-denominated money after converting fiat into USDT.
Tether can be used on many public chains, including Tron, Ethereum and Algorand. The Ethereum chain is where it was last seen as an ERC20 token.
Tether (USDT), the most traded cryptocurrency asset in the world on any given day, often surpasses the combined trading volumes for Bitcoin and Ethereum, which are the largest cryptocurrencies by market capitalization. Tether is fourth in market capitalization at $74 billion.
Other stablecoins like USD coin (USDC) are also growing quickly, managed by a group of companies, including Coinbase and Circle. They are the ninth-ranked digital asset according to market capitalization.
While many cryptocurrencies can be used for different purposes, stablecoins are the best for moving assets on a blockchain.
DeFi is dependent on stablecoins in many ways. For example, Curve, one of the largest DeFi protocols having more than $20 billion total locked value, serves primarily as a marketplace for traders to trade different stablecoins with low fees. When a trader swaps stablecoins using Curve’s liquidity, investors who have added their stablecoins to Curve receive a portion of the trading fees.
Many DeFi protocols have designed their platforms to allow investors to trade on Curve. These protocols have helped investors to participate in Curve’s stablecoin pools and build multi-billion dollar investment funds.
DeFi lending protocols such as Aave and Compound allow lenders to lend to borrowers using stablecoins. These loans would not work if they were denominated as volatile assets such as bitcoin. Borrowers’ collateral would not be sufficient to cover the loan value, and borrowers would have less money if bitcoin dropped. These lending protocols would then be in constant chaos. Because borrowers get their loans in stablecoins, which have a constant value for the term of the loan, they can function.
What can you do with Stablecoins?
- Minimize volatility: The value of cryptocurrencies such as Bitcoin and Ether fluctuates dramatically, sometimes even by the minute. A stable currency is a better option for sellers and buyers to ensure that their tokens do not crash or rise in the future.
- Trade or save assets: Stablecoins can be held without a bank account and are easy to transfer. Stablecoins can be easily sent around the world, even to countries where it may be difficult to get the U.S. Dollar or unstable currency.
- Earn interest: It is possible to earn interest on stablecoin investments, which are typically higher than what banks would offer.
- Transfer money cheaply: You can transfer any amount of money with minimum transfer fees with stablecoins.
- Internationally send money: Stablecoins such as USDC are a great choice for sending money around the globe because they offer fast processing and low transaction fees.
LeewayHertz Stablecoin Development Services
Create and launch your stablecoins backed by preferred real-value assets.
How to create a Stablecoin?
You need to consider the undermentioned steps to create a stablecoin.
1. Identify the type of stablecoin to be developed
As mentioned above, there are two significant categories of stablecoins, i.e., collateralized and non-collateralized stablecoins. Therefore, it is difficult to say one kind of stablecoin is superior to another type. If you aim to bring long-term stability, then you should prefer algorithmic stablecoins. But if the goal is short-term stability where the underlying asset is reliable, you should opt for collateralized stablecoins. To identify the type of stablecoins you require, ask yourself the following questions:
- How much liquidity do I need from my stablecoins?
- What kind of decentralization/independence do I seek?
- How many audits can I afford to increase trust and reduce risks in my stablecoins?
- How simple or complex do I want the whole architecture to be?
Once you get the answer to the questions mentioned above, it will be easy for you to decide the type of stablecoin you want to build.
2. Identify the blockchain platform and technologies required to build a stablecoin
Once you narrow down the type of stablecoin you want to develop, it is time to select the platform to create your stablecoin. Initially, Ethereum was the only platform for building stablecoins, but it is no longer the case.
The majority of stablecoins were running on Ethereum before 2018, but now, we are witnessing new entrants into the blockchain market. Other new platforms coming up to build stablecoins include Tron, EOS, and more. In 2019, we saw a huge number of EOS stablecoin projects such as Carbon (CUSD), Tether, EUSD, and EOSDT launched on EOS. People preferred building stablecoins on EOS as compared to Ethereum because of the following benefits of EOS:
- Greater interoperability
- High scalability and transaction bandwidth
With the pros and cons of all the available platforms, you can make an informed decision on the platform you want to work on. Once you select the platform and technologies you want to use for developing stablecoins, you need to move to the next step, where you should consider the maintenance of liquidity.
3. Think about the maintenance of liquidity
If the liquidity is lost, the entire concept of building a stablecoin might go in vain. We recommend the following steps to ensure good liquidity:
- Evaluating inflation and value
- Transaction Fees
- Protecting from high supply
It is essential to integrate an automated monitoring system to offer daily currency rates and index rates from the Consumer Price Index and Personal Consumption Expenditures.
Revenues from transaction fees should be split, with some parts going to the stablecoin partner while the remaining going into the liquidity reserve to improve the liquidity.
Users who want to redeem or sell their stablecoins should be able to do so at current face value minus transaction fees. It removes any incentive for sellers to market their stablecoins at discounted rates on secondary markets.
4. Create a smart contract
Smart contract development is another crucial step in stablecoin development which is another key factor in crypto-business success. Smart contracts ensure security through digital agreements. To ensure stablecoin reliability and authenticity on a decentralized platform, you need to decide which protocols you will use when you get smart contract development services. Developers create, test, and launch smart contracts on the test network with virtual wallets.
5. Create visual and technical designs for the system
Now, it is time to go ahead and design your required token. Designing a stablecoin means understanding the flow of transactions of a stablecoin and how the entire system will work. Also, in this step, you may need a system design that will help your users interact with your token. For instance, you may require a website or a mobile app to enable interaction with a stablecoin. Therefore, this step requires designing screens for web/mobile apps. Our stablecoin experts also provide technical designs for a stablecoin that represents the entire workflow of a stablecoin.
6. Development, integration of a blockchain platform and launching to mainnet
Once the designs are ready, the next step is to develop the system. In the development stage, you write smart contracts required to interact with a stablecoin and launch nodes on the blockchain platform that you are using. When features of the stablecoin are developed and connected to the blockchain backend, the next step is to launch it on the test net. If you are developing a stablecoin using the Ethereum platform, you will find various test nets to use. Ask different groups of people to check the quality of your developed product on the test net and provide feedback for improvement. Fix issues that might have arisen during the testing phase. Once all the issues are fixed, you can launch the stablecoin on the mainnet.
Let’s understand the process of creating a stablecoin in a detailed way with the help of an example.
Example of creating a Stablecoin
Suppose you need to build a gold-backed stablecoin on the Ethereum platform supported by verified allocated physical gold holdings. The gold-backed token represents the value equivalent to that of 1 gram of gold. Each gold-backed stablecoin should provide the benefits of physical gold that is liquid, tradable, transferrable and fully backed by verifiable gold holdings.
To create a stablecoin, the owner of the stablecoin should have the underlying assets. So, in the case of a gold-backed stablecoin, you should have the gold in its physical form, which you can keep with the custodian. Once you submit the gold to the custodian, timestamped records of the gold serial number, custody events, purchase receipt, and digital signatures of the custodian need to be stored on the distributed ledger to create proof of ownership of the gold asset.
Gold-backed tokens can only be minted once the gold gets submitted to the custodian. As soon as the timestamped records of custody events are recorded on the blockchain, smart contracts get triggered to mint tokens. The minted tokens are added to your organization’s holdings and can be issued to users.
To make your token compliant, you can integrate third-party AML/KYC APIs to help you onboard reliable and authentic users.
To develop the entire stablecoin infrastructure, you will need proper front-end and back-end components. Front-end components can be native iOS/Android or web apps. You will need the blockchain platform to build the backend of the app. Alphapoint Blockchain Network is one platform used to tokenize, mint and burn tokens.
Following are some of the third-party integrations that can be integrated into the system:
Coinbase wallet or any other third-party wallet can be used to store and transfer stablecoins.
Stock exchange API
Any specific stock exchange API can be used to fetch a real-time gold value from an exchange where you have stored a physical gold asset. Users can access the current value of their assets using this API.
Bank merchant account APIs
Bank merchant account APIs can be integrated to enable various payment methods for buying gold-backed tokens.
It’s important to note here that our team understands what is required to build a fully-compliant and tradable stablecoin.
The focus in the world of cryptocurrencies has always been on creating a less volatile and more liquid digital asset. The stablecoin is considered the holy grail of the crypto world that can facilitate transactions without friction between stakeholders transacting with cryptocurrencies and between parties that may need to shuttle between crypto and fiat.
We hope this article will help you understand how to create a stablecoin. Our team of Stablecoin developers can also assist you throughout the development process, from ideation to designing a token and developing it.
Akash's ability to build enterprise-grade technology solutions has attracted over 30 Fortune 500 companies, including Siemens, 3M, P&G and Hershey’s.
Akash is an early adopter of new technology, a passionate technology enthusiast, and an investor in AI and IoT startups.
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