Comparison of Stablecoins

July 1, 2022
Posted in Info
July 1, 2022 Christoph Impekoven

The European single currency has advanced to become the second largest player on the global currency market in the last 20-plus years. Nevertheless, a 100% digital, cryptographically secured variant of the euro is missing, similar to what is already the case for the US dollar with Tether (USDT).

Now, one could argue that with the emerging Central Bank Digital Currencies (CBDC), a stable coin should be obsolete, but this is not the case at all, as CBDC are not compatible with decentralized systems such as Ethereum. The Ethereum network is by far the largest decentralized financial system in the world, so it would be fatal if no euro-denominated stable coin existed in this system. In the final analysis, this always means that all European players in the decentralized financial sector (DeFi) must expose themselves to US dollar exchange rate risk and cannot trade in domestically denominated currency.

What is a stablecoin?

A stablecoin is a cryptocurrency that is pegged to the price of another asset, usually another currency.

Definition for this linkage is the price parity, i.e. a token corresponds to one currency unit, e.g. one US dollar. These The price stability mechanism can be established in several ways. The volatility of the underlying value (underlying) can be seen. The respective underlying is also referred to as “backing” and is defined by the relationship of one unit of token to one unit of underlying. (Example: one gram of fine gold always underlies one gold token).


As in the traditional currency market, the price stability of this underlying is also relevant here.

In the specific taxonomy, a differentiation must be made between the following four types – in order from tending to be stable to tending to be unstable:

1. physically-backed

2. credit-backed

3. algorithmically

4. trust-backed


Physically-backed stablecoins are tokens that are backed 1:1 by another asset, with another good, value or asset, which is often a commodity of stable value, value-stable commodity such as the precious metal gold.

The Euros Token (DCE) also falls into this category, as each token is backed by one euro. In this category, the first decisive factor is how so-called “pegging” functions, i.e. the coupling of token and collateralization. Secondly, it is relevant is how the underlying is stored and kept in custody – in this respect, security and costs are decisive


The credit collateralized category is stablecoins that are collateralized with receivables (typically accounted for as debt). These external debtors such as governments or companies, for example in the case of bonds or commercial for example, in the case of bonds or commercial papers that serve as underlyings.

serve as the underlying. This is the case with Tether, the stablecoin “USDT”.

There are various variants on the market, which are backed by money market funds, money market. What they all have in common is the risk of default (credit risk).

If a critical mass of investment volume accumulates, a similar problem arises as with the asset-backed securities (ABS) of the 2007 financial crisis.

A large demand of high-yielding assets such as commercial paper are disproportionately demanded and thus bundled into a money market fund-like construct such as Tether. Meta’s (formerly Facebook’s) Diem project (formerly LIBRA) also falls into this category, as prior to the sale of the project it was planned to collateralize the stablecoin with various securities such as bonds. Stablecoins collateralized with conventional book money through banks (“Giralgeld”)

also fall into this category, since there is a risk of default of the bookkeeping institution (counterparty risk).

Algorithmically (backed)

Synthetic or algorithmic stablecoins do not work with direct pegging. pegging, but the price stability mechanism works on the basis of programmed heuristics. based on programmed heuristics. Basically, when the price

the underlying is pegged against the stablecoin token if the price falls below the specified sold against the Stablecoin token and sold again when the price exceeds it, so that the price settles at the desired price threshold.

A distinction must now be made between unbacked algorithmic stablecoins such as IRON Finance, Empty Set Dollar, or Terra LUNA’s UST and the mostly cryptocurrency-backed stablecoins such as “DAI”. MaderDAO’s stablecoin “DAI” works with “Ethereum-based assets” as the underlying, these

are usually always “over-collateralized”, so more collateralization than money creation must be deposited to compensate for price fluctuations.

There are also hybrids that work algorithmically but invest credit-based, such as TrueUSD (TUSD).

Algorithmically (not backed)

The idea behind uncollateralized, algorithmic stablecoins is capital efficiency. Thus, no “dead capital” should be deposited as collateral, but rather value stability should be achieved without

collateralization as much as possible. This price stability mechanism works well as long as fluctuations are minimal and

the underlying medium of exchange (LUNA as swap) has a stable value.

LUNA’s Terra stablecoin “UST” works by creating (“mining”) new LUNA tokens and selling them off, while vice versa also destroying (“burning”) LUNA tokens to maintain price stability.

If the price of the UST falls below one dollar, the money supply of the UST is reduced in which one UST is birthed and one LUNA is mined. This works as a swap in the exchange principle both off-chain on the crypto exchanges and on-chain with the Terra protocol. If the price of the UST rises above one dollar, the money supply of the UST is increased again in an analogous way, by mining one UST

is mined for one born LUNA.


In summary, then, the algorithmic stablecoins operate with either no crypto-collateral or crypto-collateral, which is the also the case with “DAI,” and parity is automatically achieved through swaps or arbitrage (buying and sales in the market) automatically via smart contracts.


Trust-based stablecoins are not collateralized and are thus issued by by trustworthy private or public institutions, which therefore imply the imply the underlying countervalue.


DLT-based central bank digital currencies (CBDC) fall into this category, as here – analogous to the conventional FIAT currency – they are not subject to any explicit collateralization of value. Here, the market’s trust in.

(i) the basic social order and (ii) the economic strength of the issuers as an implicit underlying. In addition, (iii) confidence in the integrity of the issuers is also required (governance).

Most central banks do not rely on distrubuted ledger technology or even permissionless crypto in this regard, although there are positive exceptions such as at the Banque de France. Another example is the use of a digital euro in the EIB issue in April 2021.


Finally, it is worth noting in this category that, from a historical perspective, most most currencies have been pegged to some other value. For unbacked FIAT currencies is a historical novelty. It was not until the last century, or until the gold standard was abandoned in 1971, that price stability price stability was debated.


It is important to understand that not all stablecoin is the same. It is necessary to differentiate between the various types. Many market participants still lack the the necessary intuition and market knowledge. The underlying

underlying thesis of this popular opinion is that stablecoins are not stable per se and therefore pose a risk to investors and the financial ecosystem. In this market overview, we present the counter thesis that not every every coin that claims to be stable is actually stable in price. Furthermore

that there is very well a need for actually stable tokens, which however are unlike Tethers’ USDT, they must not be a money market fund-like construct because these tokens invest in debt instruments that are at risk of default.

While the latter has the great advantage of being able to earn interest, it has the inherent disadvantage that there is a default risk. Exactly this problem is solved with a stablecoin that tokenizes cash directly.

In this context, it is interesting to note that Tethers’ USDT also lost more than 5% of its own value in the course of the “crash” and was trading at only $0.9485. Although this circumstance did not last long, it shows that some market participants do not trust even the largest stablecoin in the world.

Trust. Since the Digital Euro Token is a 100% collateralized financial instrument, unlike Terras’ UST, there is no comparison. Token is a 100% collateralized token, there is no comparability and a similar “crash” scenario is ruled out due to the cash deposited in the vault. reserve deposited in the vault

Digital Cash - secure as cash and fast as crypto

Tokenized cash combines the positive features of cash and cryptocurrencies. One has the physical security of cash without the possibility of it being encumbered by third-party claims. This is the case, for example, with bank or giro money, as the owner is always exposed to the risk of default by a central party namely the bank. At the same time, as the owner, I can carry out transactions worldwide in a few seconds, and the costs for this are considerably lower than the costs of a comparable fiat transaction due to the correspondent banks involved.

One uses the “digital twin” – the banknote itself remains in a safe place in the vault and I as the user can still use it as liquidity and trade with it, for example.

There is no longer any need for a separate safe for the cash; instead, I always have my cash with me in digital form. Of course, there are also associated disadvantages; the cash has to be stored, which involves considerable logistical requirements and costs. These costs are borne by Digital Cash as part of the business model, so holding the Euro Token is and remains free of charge for the user.

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