How to Make a Stablecoin: a Quick Guide

Cryptocurrencies have proven their utility in a number of industries and use cases. However, they are still subject to high volatility, which makes relying on cryptocurrency as a common payment method complicated. 

Luckily, 2014 delivered something more resistant to exchange rate fluctuations. In this article we will be talking about stablecoins, the idea behind this type of cryptocurrency, and how to make a stablecoin.

What is Stablecoin?

Stablecoin is a digital coin, the value of which is tied to a specific asset. The Mastercoin project team first announced this type of cryptocurrency concept in 2012. Since then, there have been several attempts to create a stablecoin based on the euro or yuan. However, as of late 2014, the first successful stablecoin known as Tether (USDT), was launched by a group called Tether Limited. Since then, the number of stablecoins has significantly increased. 

According to BofA, the market value of stablecoins has surged from $24 billion to $140 billion over the last year. Much of this is concentrated in a handful of coins, including Tether (USDT), at $73 billion; USD Coin (USDC), at $34 billion; and Binance USD (BUSD), at $13 billion.

Stablecoins are pegged to the value of the US dollar at a 1:1 ratio. Due to their high stability, stablecoins can be an effective and convenient method of exchange, as well as for storing savings. Experts believe that stablecoins can become a good alternative to fiat currencies in countries with unstable economies and can even be used to pay salaries and pensions.

What are the Types of Stablecoins

At the moment, there are two main stablecoins types on the market:

  1. Collateralized
  2. Non-collateralized

Let’s take a closer look at them.

Collateralized

Collateralized Stablecoins depend on a specific type of collateral. Let’s look at the different forms of collateral for the various stablecoin types:

  • Fiat-backed stablecoins depend on the value of a fiat currency. Examples of these are Tether (USDT), which is pegged to the value of the US dollar, PAXOS Standard, and USD coin. 
  • Asset-backed stablecoins are backed by different assets except for cryptocurrency or fiat. They can be pegged to the price of gold, silver, oil, real estate, diamonds, and more.
  • Crypto-backed stablecoins are underpinned by a cryptocurrency. At the same time, they use special protocols to ensure that their value does not depend on the price of the backing cryptocurrency. An example is the DAI token supported by Ether and pegged to the US dollar value. 

Non-collateralized 

This type of stablecoin depends on a formula derived from demand-supply, and not on any particular entity. The stability of the coin rate is achieved through seigniorage.

Seigniorage is the income generated by the issuing of money and appropriated by the issuer. To maintain the stablecoin rate at a specific level, issuers control its supply volume using smart contracts.

The most prominent example of a non-collateralized stablecoin is Basis. 

How to Make a Stablecoin?

  1. Find out what type of stablecoin you want to create.

Begin by choosing between the two main categories mentioned above. To better figure out what type best suits your needs, ask yourself these questions: 

  • How much liquidity do you want to achieve using stablecoins?
  • What kind of decentralization do you need?
  • How many audits can you afford to reduce risk in your stablecoins?
  • How simple or complex do you want the entire architecture to be?
  1. Decide on your platform and technologies to make a stablecoin

In 2016, there were around 11 stablecoins on the market. Ten more variations appeared in 2017. Today, there are more than 70 stablecoins with another 140 in development.

Before 2018, stablecoins were running on Ethereum. But today you can choose among other different platforms such as Tron, EOS, and more. 

Consider the advantages and pitfalls of every platform to make an informed decision that will help you achieve your desired result. 

  1. Think about maintenance for liquidity

It is critically important to have an automated monitoring system. With its help, you will be able to offer your customers daily updates for currency and index rates.

Consider splitting transaction fees. These fees should be organized in a way that some part goes to the stablecoin partner while other parts go into the liquidity reserve for further improvements.

Users who want to buy or sell stablecoins should be able to do this at the current face value minus transaction fees. In this way, sellers won’t be able to market their stablecoins at discounted rates on secondary markets.

  1. Design and develop the system

This step requires a deeper understanding of how the system will work. You may need a system design to help customers interact with your coin. This may be a website or mobile application. Therefore, it is necessary to design screens for apps.

You should write smart contracts and launch nodes on the platform you use during the development stage. Once the features are developed and connected to the blockchain’s backend, it’s time to launch it on the testing environment. 

In order to make a stablecoin that has the best chance to stand the test of time, it’s better to contact special consulting services. They will help shape your idea into a viable product by leveraging the expertise of professionals in the industry.

In Conclusion

Thanks to various mechanisms, stablecoin, as a type of digital currency with its fixed price, is able to remain more or less stable. This extends their utility for use not only as a means of exchange but also as a way to create a balance for traders and investors.

Despite the fact that stablecoins were originally developed as an effective risk management tool for traders, it is already clear that their usage goes far beyond trading. Stablecoins are a powerful tool that can strengthen the cryptocurrency space as a whole and act as a substitute for unstable alternatives where appropriate.