Stablecoins: A Quick Guide for the Non-Technical
While cryptocurrencies can definitely change the mechanics of traditional finance, stability has always been one of the most requested ingredients by risk-averse individuals. On this post, we analyze how stablecoins can help solve the volatility problem and foster mainstream adoption.
Introduction: The Birth of Stablecoins
To leverage the benefits of digital currencies while simultaneously ensuring minimal price swings, the idea of stablecoins came to prominence. Stablecoins are pretty self-explanatory, in that they are ‘coins’ that are ‘stable.’
Unlike cryptocurrencies, which typically exhibit strong price movements based on several factors such as market sentiment, project fundamentals or even manipulation by large investors dubbed ‘whales,’ stablecoins, as the name might suggest, offer unparalleled price stability. Think of stablecoins as a digital form of any precious metal or a fiat currency such as USD, GBP, CHF, JPY and others.
On this guide, we delve deep into stablecoins. We explore their benefits, prominent use-cases, and their potential to usher in an era of decentralized finance (DeFi).
Types of Stablecoins
Although stablecoins are a fairly novel addition to the crypto landscape, they are not lacking in infrastructure. Stablecoins can broadly be divided into two groups:
1) Fiat-Collateralized Stablecoins
These stablecoins are pegged to a fiat currency such as the USD, GBP, JPY, EUR, and others. Example: USDT, USDC, BUSD, GUSD, etc.
2) Cryptocurrency-Collateralized Stablecoins
These stablecoins are pegged to a cryptocurrency (or a basket of cryptocurrencies) and are typically “decentralized” in nature. Example: RDOC by RIF on Chain (ROC) is an example of a crypto-collateralized stablecoin as it uses the RIF token as collateral.
The Stablecoin Advantage
Now that we know the different types of stablecoins, let’s explore their utility. In simple terms, stablecoins amalgamate the low volatility of strong fiat currencies and the technological benefits of cryptocurrencies. However, there are some important differences. Stablecoins trump fiat currencies in the following ways:
1) Lightning Fast Speed
Due to their digital nature, stablecoins offer rapid transaction speed. Through smart-contracts, stablecoins can be used to provide instantaneous settlement for bank transactions. Furthermore, stablecoins allow 24×7 transactions whereas centralized options typically operate within set hours.
2) Economically Viable
Major credit card providers such as Mastercard, Visa and Amex charge processing fees on transactions which can be troublesome for small and medium-scale enterprises who ultimately have to transfer the fee to the customer or take cash only. This can prove to be financially detrimental to such companies. With stablecoins, the costs are historically smaller when compared.
3) Easy Mobility
By leveraging the borderless characteristic of cryptocurrencies, stablecoins cater to the need for instantaneous money transfer from the remotest areas of the world. This has proven to be tremendously beneficial for people living in countries with unstable economies experiencing hyperinflation. Individuals can save their wealth from dramatic erosion by buying stablecoins instead of local weak fiat currencies.
4) Customizable Currencies
Another interesting benefit of stablecoins is their incredible malleability. Fundamentally, stablecoins are made up of code, hence, just like any normal code or program, stablecoins can be tweaked to add cutting-edge features to them based on different requirements.
What Purpose do Stablecoins Serve?
At surface level, one would not think of stablecoins as a different option from a typical fiat currency. On closer inspection, however, we find that stablecoins can do everything that fiat currencies can and much more.
Currently, some of the real-world use-cases of stablecoins are as follows:
- Adoption by governments in the form of Central Bank Digital Currencies (CBDC)
- Powering the DeFi economy
- Act as a stable digital currency for seamless trading
- Act as a safe haven asset in the crypto industry
- Increased adoption by enterprises for payment purposes
- Use for payroll purposes to pay employees in digital currencies
- Automate the process of escrow
- Adoption by lending platforms offering attractive investment yields
Among the aforementioned, two use-cases, in particular, are gaining strong upward traction: CBDCs and DeFi. We will next explore these two exciting use-cases of stablecoin and attempt to gauge the extent to which stablecoins can re-engineer the DNA of traditional finance as we know it.
What are CBDCs?
CBDCs (Central Bank Digital Currencies) are essentially stablecoins issued by the central bank of a country. Stablecoins powered by blockchain technology have understandably piqued the interest of governments around the world who do not want to miss out on their slice of the pie. Hence, numerous central banks across the globe are fidgeting with distributed ledger technology (DLT) to issue CBDCs.
CBDCs offer a wide range of benefits to central banks over fiat. For instance, the digital nature of CBDCs enables central banks to keep a closer eye on the movement of money within and outside the economy. This way, law enforcement forces around the world are better equipped to identify and put an immediate check on funds being used for illicit purposes such as money-laundering, terrorism financing, etc. Several countries across the globe have already amped up their efforts to launch a sovereign digital currencies.
Economic powerhouses like China have already launched numerous pilots to gauge the viability and feasibility of a digital yuan. Japan is also following in the footsteps with talk of digital yen gaining more traction with each passing day. In the west, lobbyists are pushing hard for digital forms of GBP and USD to leverage the benefits of blockchain technology.
That being said, one should not expect a monumental change when they’re dealing with CBDCs as it will fundamentally still be centralized money in a digital form. The digital form of fiat would help centralized authorities get a better grip at overseeing every small movement of money within the economy while simultaneously clamping down on individuals’ financial privacy and freedom.
Some tech enthusiasts would view CBDCs running against the democratic and libertarian ethos of blockchain technology which birthed bitcoin (BTC). This ideological clash between CBDCs – a centralized form of money – against the technology empowering it, has, in turn, sowed the seeds for a decentralized finance (DeFi) marketplace. This leads us to the most prominent stablecoin use-case.
DeFi is everything that blockchain technology stands for. It is a decentralized financial infrastructure that does not discriminate among its users. Through DeFi platforms, anyone can gain access to funds without having to worry about their credit rating or monthly income. All they need to do is deposit a certain percentage of the borrowed amount as collateral with the platform.
In essence, DeFi is laying the foundation for a financial infrastructure that eliminates the reliance on centralized authorities such as central banks or financial institutions.
RSK and Money On Chain Make DeFi on Bitcoin Possible
Money on Chain (MOC), a bitcoin-collateralized DeFi protocol powered by RSK is one of the first major solutions to tap the premier cryptocurrency for DeFi. MOC is aimed toward investors looking for stability as well as profit-making potential associated with volatile currencies.
Having launched its mainnet in December 2019, the MOC protocol has been dishing out a wide array of decentralized financial products based on RSK’s blockchain. MOC aims to disrupt the fiat-dominated financial system which is unable to keep up with the dynamics of today’s business environment. To overcome the volatility problem, MOC offers a BTC-pegged stablecoin using a three-party system.
1) Dollar on Chain (DOC)
DOC is a USD-pegged token that also happens to be the first stablecoin backed by BTC. DOC is pegged to the USD 1:1 via a smart contract. The peg to the USD makes DOC ideal for risk-averse individuals who are not too keen on holding volatile currencies.
BPRO is a token that would be more up the alley for risk-seeking holders. BPRO is a multi-utility token that offers a wide array of uses to its users, including absorbing the volatility from the DOC. BPRO essentially functions as a bridge that passes on the volatility risk associated with BTC on to the leveraged bitcoin operations exchange, thereby generating passive income for its holders. The multiple utilities of BPRO can be pointed as follows:
Volatility Absorber: BPRO absorbs DOC’s volatility and as compensation generates passive income for its holders
Additional Leverage: BPRO receives free leverage from the DOC token holders
Receives Extra Fee: As an added incentive, BPRO holders receive fees paid by users of the MOC platform
3) The MOC Token
The MOC token is the MOC protocol governance token. This token serves the following purposes:
Governance Token: MOC token gives platform users the power to vote and veto the protocol updates
Discount Token: MOC token holders can get exclusive discounts while paying fees for using the platform services
Staking Token: MOC token holders can choose to stake MOC’s to generate platform fees and staking rewards
Incentive Token: MOC token holders can use the token to run MOC nodes and as an incentive to BPRO token holders
MOC Exponential Scalability with RIF Lumino
Bitcoin critics continually highlight slow transaction speeds and lack of scalability as its major drawbacks. However, the MOC protocol has a solution to this in the form of RIF Lumino.
For the uninitiated, RIF Lumino enables seamless access to any off-chain payment network, supporting any token deployed on the RSK network to facilitate rapid, highly scalable and low-cost off-chain payments.
MOC’s integration with the RIF Lumino payments network architecture not only provides tremendous scalability but also gives them Bitcoin-friendly off-chain payment capabilities consequently mitigating costs by orders of magnitude and increasing payment processing speeds.
The RIF On Chain (ROC) DeFi Platform
Similar to the MOC protocol, RSK powers another DeFi protocol called RIF On Chain (ROC). Launched on April 2020, the ROC platform is a Bitcoin-focused DeFi ecosystem developed by MOC on top of the RSK blockchain network. As explained in detail earlier, MOC and RSK blockchain together developed one of the earliest bitcoin-collateralized DeFi solutions that enable users to interact with a trustless and decentralized financial infrastructure.
By extending their tech expertise to the RIF ecosystem, MOC and RSK blockchain have developed a robust DeFi ecosystem backed by RIF tokens. ROC offers a rapid and safe platform for transacting RIF-backed products while simultaneously allowing RIF token holders to generate passive income.
ROC offers the best security and transparency to its users among all DeFi platforms by leveraging the Bitcoin network through RSK smart-contracts.
ROC offers three key features to its users:
- Enabling bitcoin holders to generate passive income from staking their BTC.
- Catering to users’ need for volatility-free digital currency by issuing bitcoin-collateralized stablecoins.
- Provide a bitcoin-leverage asset for users who wish to increase their long position exposure.
How to Interact with ROC?
To interact with the ROC platform, users must first ensure they have the necessary RIF tokens in a compatible cryptocurrency wallet such as the RWallet, Nifty, MetaMask,etc.
Once the RIF tokens are in the wallet, users are required to approve the automated connection of the wallet with the ROC platform. Users can then access the RIF platform and freely interact with the ecosystem tokens: RIF Dollar (RDOC), RIFpro (RIFP) and RIFX.
Akin to MOC, the ROC ecosystem is fuelled by three primary assets:
1) RIF Dollar (RDOC)
RDOC, short for RIF Dollar on Chain, is a USD-pegged stablecoin guaranteed by a smart contract powered by RSK´s blockchain network. RDOC is fully collateralized by RIF tokens and allows users to redeem their full position on the stablecoin at contract expiration or partial during the lifespan of the contract subject to the liquidity of redeemable RDOC tokens.
It’s also worth noting that unlike the vast majority of other DeFi protocol stablecoins where users are required to provide collateral or CDP to borrow funds, RDOC can be acquired by platform users directly without having to provide any collateral.
A key utility of RDOC is that it can be freely transferred among platform users and can be used for the purchase of goods and services including dApps blockchain products on the RIF Marketplace.
2) RIFpro (RIFP)
The RIFpro token (RIFP) can be considered the cornerstone of the ROC ecosystem as it enables the minting of RDOC and RIFX via a token staking model.
RIFP mirrors the volatility of the RIF token and receives a small amount of leverage from the RDOC stablecoins. The token benefits from a percentage of the transaction fees charged by the platform from to the RDOC users and RIFX traders.
The aforementioned characteristics of RIFP make it an ideal token for RIF holders who wish to generate some passive income with minimal leverage on their RIF token position.
The third token in the ROC ecosystem, RIFX is a RIF leverage decentralized long position. RIFX token is based on an automated smart contract that renews every 30 days and has a leverage factor of 2x at the very beginning of its lifespan and a variable leverage afterward based upon certain variables including the RIF token price and the amount of RDOC stablecoins in the ROC platform. RIFX tokens can be sold at any time without having to wait until expiration like in the RDOC stablecoins.
In a relatively short period, stablecoins have cemented their position as an indispensable part of the larger crypto landscape. Stablecoins play a significant role as an entry point for individuals who are typically on the fence about entering the crypto investment space because of its notorious price volatility.
RSK blockchain is spearheading the development and adoption of stablecoins in the Bitcoin ecosystem. The smart-contract platform is already powering numerous Bitcoin-based DeFi platforms, including Money on Chain and RIF On Chain. With DeFi gaining more traction in the crypto industry everyday, RSK would look to commit more to this novel and exciting space to foster financial inclusivity. Stay tuned!