The purpose of many cryptocurrencies is to be adopted as currencies that can be spent and received in our daily lives. Since the inception of Bitcoin, numerous stablecoin projects have come and gone, but not a single one has been able to solve the problem of price fluctuations.
Because cryptocurrencies waver in price every second, merchants are reluctant to accept them as a form of payment. Let’s say that I pay someone 1 Bitcoin, which is worth $10,000 in this hypothetical situation, to buy a crate of bananas. An hour after the payment is made, President Donald Trump posts a tweet that says “I hate bananas. I declare a ban on all bananas.”
Due to this news, the price plummets to $1,000 in minutes, and my banana trader has seen her rightfully earned money decimated. Will she ever do business with Bitcoin again? I highly doubt it.
Do you see the problem here? In a system where price fluctuations are wild, we need a mechanism that ensures price stability, but at the same time, we need cryptocurrencies to rise and fall in price as they ride the waves of supply and demand. Before we introduce the solution, why don’t we examine why other stablecoins failed.
Collateralized Stablecoins
Some cryptocurrencies are pegged to fiat currencies through collateralization to achieve stability. What is this in layman’s terms? It means that a unit of a cryptocurrency is backed by a government issued currency, like the US dollar. Tether, for example, is a cryptocurrency that requires an equal amount of US dollars in a reserve account. This means that in order for there to be 10 Tether coins, there must be a reserve of 10 US dollars. If this is the case, then I can pay 10 Tether coins to my architect, who can exchange the cryptocurrency for 10 actual US dollars. When she cashes out, the total Tether supply is reduced by 10, and the total reserve amount of US dollars is also reduced by 10. By doing so, we maintain an equal ratio of Tether to US dollars. So far so good, huh?
But there is a problem. As I just explained, Tether needs to be backed by actual money. Who is going to provide that money, and how can we be sure that we don’t run out of money? We can have 1 million Tether coins and 1 million US dollars in reserve, but if a Tether millionaire decides to cash out, we may end up with 0 Tether coins and 0 in reserve. Bye-bye, Tether!
A similar suggestion is to peg a cryptocurrency to another cryptocurrency through collateralization to achieve stability. Here we are dealing with two volatile entities, which means we cannot maintain a 1:1 ratio, like the one we observed in the Tether-US dollar example. In this case, we have to “over-collateralize.” What does it mean to over-collateralize? Let me begin my explanation with another example.
Let’s say 10,000 ABC coins are pegged at 1 US dollar each to Bitcoin, which is currently sitting at $10,000 apiece. One day, a critical bug is found in Bitcoin’s code, and people lose confidence in Satoshi’s masterpiece. People start selling their Bitcoin, and the price of Bitcoin tumbles from $10,000 to $2,000. Investors lose confidence and start panic selling their ABC coins because the crypto-collateral is losing is value, and eventually, the supply of Bitcoin is depleted. ABC coin has no more collateral to support it, and it has failed to serve as a stablecoin.
This is where over-collateralization steps in. To prevent collateral from being liquidated, we can put in more collateral, or more Bitcoin in this example. Going back to the previous example, let’s say we have 10 times the collateral than we do ABC coins. So for a supply of 10,000 ABC coins, we have 10 Bitcoin to back it, not 1. While this does improve stability of the system, we have to ask, “Who is contributing to this pool?” “Who is willing to take the risk in contributing large amounts?” In theory, crypto collateralization sounds like a possibility, but we simply do not know what will happen in a highly volatile market. Crypto-collateralized coins are not yet market tested and can fail depending on the market situation.
Non-collateralized Seigniorage Shares
Non-collateralized what? Seigniorage shares? It sounds difficult, but I will do my best to make it easy for you to understand. The idea of seigniorage shares is that a smart contract can be used instead of collateral to maintain a peg. Much like a central bank, the smart contract keeps a watchful eye on price changes to issue and buy back stablecoin units, whenever required. Let’s bring back our friend ABC coin. If ABC coin’s price falls, the smart contract triggers a buyback, thereby lowering supply and increasing the price to its original level. If the price of ABC coin rises, then new coins are printed to stabilize the coin.
In this case, we are assuming that the stablecoin will keep growing. The problem is we do not know if and when the market will fail on us. Once investors lose confidence in the market, they may lose confidence in the stablecoin and sell their shares.
Okay, we’ve seen the flaws in fiat-collateralized stablecoins, crypto-collateralized stablecoins, and non-collateralized seigniorage shares. We believe Xank offers a solution that is foolproof in both theory and practice.
Xank, a Free-Floating Cryptocurrency with a Stabilizing Feature
Xank is a third-generation stablecoin with features that I will briefly touch upon today. Why don’t we take a look at how it puts an end to the search for a working stablecoin.
1. Xank, a free-floating cryptocurrency
Xank is a cryptocurrency that falls in price and goes up in price. Just like Bitcoin, Ethereum, and Dogecoin, if demand for Xank is high, then price increases. If demand is low, then price falls. The free-floating nature of Xank renders it possible for investors to gain on their investments.
2. Xank and the Stable Pay feature
Stable Pay is an optional, per-transaction feature that allows merchants to receive or send Xank at a desired fiat price. The Stable Pay feature is not mandatory but optional, for someone can send Xank coins using this feature or without it.
3. The Xank Reserve
The Xank Reserve is a self-funding reserve that ensures that the fiat value of a Stable Pay transaction remains constant.
How is it self-funding?
Whenever a new block is produced, a percentage of the rewards is given to the Xank Reserve. Thus, the Reserve does not require any collateral from investors.
How does the Xank Reserve maintain a fixed fiat value for transactions?
The Reserve accomplishes this by increasing or decreasing the number of Xank coins in a transaction, whenever necessary. Because Xank the cryptocurrency fluctuates in price, the Xank Reserve adjusts the amount of Xank coins to counter these price changes.
4. Xank and the IMF’s Special Drawing Right (SDR)
Tether is pegged to a single currency, the US dollar. Xank, on the other hand, is not pegged to any currency when it comes to the Xank coin’s price. Instead, when Stable Pay is activated, Xank imports the price value of IMF’s SDR, a basket of multiple world currencies, which are the US dollar, Euro, Chinese renminbi, Japanese yen, and British pound sterling. Xank draws price data from the IMF to maintain a pegged fiat price when dealing with Stable Pay transactions. The reason Xank selected the SDR is a collection of currencies offers more stability than a single currency does. After all, the objective of Xank is to function as a stablecoin.
These four major characteristics are the foundation of the Xank stablecoin. We believe Xank is a completely novel idea for a stablecoin that removes the need for collateral while protecting itself from market uncertainty. In our future posts, we plan to further explain Xank’s self-thriving ecosystem, so stay tuned for more.
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Interesting approach to the stablecoin concept. I'm not aware of anyone else doing something similar.
I agree. Many have attempted to satisfy all four conditions, but I have yet to see a project actually do so. We'll have to keep an eye on how Xank does.