How to Create a Stablecoin?
Whenever we talk about cryptocurrencies, there’s the word “volatility” that comes to our mind. One of the significant reasons that Bitcoin was introduced was to eliminate the mediators’ role in eCommerce. It looked like a peer-to-peer version of electronic cash that would allow a seamless flow of online payments from one party to another without a financial institution’s intervention.
Though Bitcoin started to fill the space for a while, the Bitcoin volatility has weakened its magnitude of dependability when it comes to leveraging it as a medium of exchange. The significant fluctuation within prices has led to another breakthrough in the cryptocurrency world, known as the “Stablecoin.”
Our article consists of the following contents:
What is Stablecoin?
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 would fall to 99 cents tomorrow drastically.
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 provided by fiat currency.
Let’s understand the different types of Stablecoins.
Types of Stablecoins
Stablecoins are categorized mainly into the following types:
- Collateralized Stablecoins
Collateralized Stablecoins are coins whose values are backed by specific collateral. They are further classified as:
- Fiat-backed stablecoins
Fiat-backed stablecoins are pegged to the value of fiat currency. The first fiat-backed stablecoin was Tether (USDT) that 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
Asset-backed stablecoins are backed by other assets except for cryptocurrency or fiat. The asset-backed tokens are pegged to the price of assets, for example, gold, silver, diamond, oil, real estate and many more.
- Crypto-backed stablecoins
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.
- Fiat-backed stablecoins
- Non-collateralized stablecoins
Also known as Seigniorage shares or algorithmic stablecoins, Non-collateralized stablecoins implement the basic principles of cryptocurrencies, which is decentralization. Since many crypto enthusiasts have argued that stablecoins should be focused around an asset but should use algorithms to derive value, the concept of non-collateralized stablecoins has come into the picture.
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.
- Hybrid stablecoins
As the name indicates, Hybrid stablecoins are the combination of both collateralized and non-collateralized stablecoins. These coins are pegged to a resource but modeled algorithmically. It is quite confusing to understand hybrid stablecoins and even most of the laws put limitations on these projects.
Now that we have explained the basics of stablecoins, we shall move to the next section, i.e., how to create a stablecoin.
How 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 stablecoin. 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 require?
- How many audits can I afford to increase trust and reduce risk 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, you will decide the type of stablecoin you want to build.
2. Identify the platform and technologies required to build stablecoin
Once you narrow down to the type of stablecoin you need to develop, it is the time to select the platform to create a particular stablecoin. Initially, Ethereum was the only platform for building stablecoins, but it no longer the same case. There were around 11 stablecoins in the market in 2016, while 10 more were added in 2017. But today, there are more than 70 stablecoins and 140 are in development.
The majority of these 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 wasted. We recommend the following steps to ensure utmost liquidity:
- Evaluating inflation and value
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.
- Transaction Fees
Revenues from transaction fees should be split, with some part going to the stablecoin partner while the remaining goes into the liquidity reserve to improve the liquidity.
- Protecting from high supply
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 visual and technical designs of 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.
5. Development, Integration of 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 are 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 tests net in the market. 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 to create a stablecoin in a detailed way with the help of an example.
Example of creating a Gold-backed Stablecoin
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 the physical form that can be stored at the custodian. Once you submit the gold to the custodian, timestamped records of gold serial number, custody events, purchase receipt and digital signatures of custodian need to be stored on the distributed ledger to create a 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 the 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 the front-end and back-end components.
Front-end components can be native iOS/Android apps or web apps for users. To build the backend of the app, you will need the blockchain platform. There is one platform, Alphapoint Blockchain Network, that is used to tokenize, mint and burn tokens.
Following are some of the third-party integrations that can be integrated into the system:
- Coinbase Wallet
Coinbase wallet or any other third-party wallet can be used to enable storing and transferring of 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.
Our team understands what all is required to build a fully-compliant and tradable stablecoin.
The emphasis of cryptocurrencies has always been to create a less volatile and more liquid digital asset. The stablecoin is considered the holy grail to the crypto world that can facilitate transactions without friction, not only between stakeholders transacting with cryptocurrencies but also between parties that may need to shuttle between crypto and fiat.
We hope that 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.
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