The largest stablecoin Tether with the USDT mark can now be sent via blockchain Algorand. It is the first stablecoin on this blockchain based on the Pure Proof-of-Stake (PPoS) concept.
The main benefit of Tether implementation on Algorand's blockchain should be immediate transaction confirmation, as the blocks' finality for Algorand is in a matter of seconds. Another indisputable advantage is the very low price.
But let's go first and look at what stablecoins are, what types we have depending on their characteristics.
One of the main obstacles to mass adoption of cryptocurrencies is their volatility. Many people, and especially traders potentially accepting cryptocurrencies, are discouraged by fluctuations in their price, which can drop by tens of percent in one day. However, the merchant has a fixed price for rent, energy, employees, etc.
It is this property of cryptocurrencies that solves stablecoins, which have very low volatility. They are linked to the existing fiat currencies such as the US dollar or the euro.
Stablecoins are also used on cryptocurrency exchanges when a trader does not have to use fiat currency when exiting a trade and therefore think about taxation after each trade. In some legislation, getting into fiat is a taxable event. In addition, stablecoin can be deposited on its hardware wallet. This is not possible with normal fiat money, the dollar has no private keys.
However, the problem with stablecoins arises in transaction scaling. The Ethereum network running the ERC-20 USDT token has a low network throughput and transaction delays can occur if there is a large volume of transactions. Likewise, there is a problem with the finality of transactions, as the current blockchains do not always offer 100% finality after a confirmed block, especially on PoW blockchains.
Stablecoins have also begun to implement financial institutions and technology firms in their systems. The stablecoin Libra from Facebook was supposed to be based on the currency and commodity package, but now it is struggling with legislative obstruction and it is not known when and whether it will be launched at all.
Types of stablecoins
1. Centralized IOUs
It is a simple transition between the cryptocurrency and the real world, as it is a cryptocurrency with the underlying price of a fiat currency or some commodity.
IOU (I Owe You) indeed describes their characteristics. These are tokens that are backed up at a 1: 1 ratio with real dollars/euros in their issuer's bank accounts.
However, the disadvantages of this type of stablecoin are centralization and the necessity of trust, since in this case they must be trusted by their issuer. It is here that long-term controversy of Tether, where it is necessary to trust their 100% backup in their bank accounts. At the same time, regulators can strike at this point.
2. Crypto-collateralized stablecoins
Crypto-collateralized stablecoins have a more decentralized approach. Their stable value is derived from transparent holdings of assets in smart contracts. Thanks to the use of smart contracts on the blockchain and also multi-sig wallets, these instruments can be managed by a community without a central manager.
DAI and SAI
The best-known stablecoins are the ERC-20 single-collateral DAI (SAI) and multi-collateral DAI (DAI) tokens, which are issued by the blockchain organization MakerDAO based on collateral locked in a smart contract. The only difference is in the nature of the collateral, where only the SAI can be used for Ethereum, and the DAI has more options.
Their principle is that these stablecoins are covered by a given crypto-collateral (deposit), but due to the volatility of the underlying asset (ether, etc.) not in a 100% ratio like Tether, but at 150%. So, if you want to borrow SAI worth $ 1000, you need at least $ 1500 of an ether. This is to cover risks in the event of an ether price drop. Indeed, as the price of the ether falls, the borrower is called upon to increase the collateral or return the SAI. If it fails to do so, its CDP position is liquidated and the debt is settled by selling its ethers at the market price. However, if the price of ether is rising, there is no problem with CDP.
CDP = Collaterized Debt Position
Tether on Algorand blockchain
The largest in terms of coin volume, the most famous, but also the most controversial stablecoin Tether is now running on the third-generation blockchain called Algorand. Algorand works on the Pure Proof-of-Stake concept, which solves all three points of the so-called blockchain trilemma, i.e. scaling and security, without sacrificing decentralization. It uses a random selection of block proposers and approvals through Verifiable Random Functions (VRF).
The main advantage of using Algorand is the transaction speed level. Tether will use Algorand Standard Asset (ASA) technology and transactions will be confirmed directly on the first layer of blockchain within 5 seconds.
Another indisputable advantage is the transaction price, which on average is worth 0,001 ALGO, i.e. expressed in dollar value of about $ 0,0003.
For Algorand, Tether is the first stablecoin to be sent on his blockchain. However, USDT can be sent on the blockchains Ethereum, EOS, Tron and Bitcoin with Omni and Liquid Network protocols. Tether is still considering deploying his stablecoin on the other two major blockchains.
According to Cryptoslate.com, the market cap USDT is 4,64 trillion USD, with USDC on the second place with ten times less capitalization. The ERC20 token DAI has a market cap of $ 122 million. Here you can see the stablecoin ranking - https://cryptoslate.com/cryptos/stablecoin/
CEO of Algorand Inc., Steven Kokinos said that
“Tether’s issuance of their asset on Algorand will be a gamechanger for global DeFi participants as it is one of the fastest and safest ways to move money around the world.”
What is Tether?
Tether project has been in operation since 2014 and is currently the largest stablecoin in terms of both coin volume and trading. Due to its non-volatile nature, it is used not only for trading on stock exchanges but increasingly also as a means of sending financial amounts on a global scale.
What is Algorand
Algorand is a decentralized blockchain platform from the Algorand Foundation, founded by the Turing Award-winning, MIT professor Silvio Micali. The Turing Award is considered to be the Nobel Prize in the IT world.
Algorand prides itself on low computing, inexpensive transactions, and rapid network promotion involving the entire community. By utilizing Verifiable Random Functions (VRF) to create a block, a high degree of scaling, security, and decentralization is achieved.
The first block of Algorand was mined on 11 June 2019, since then more than 5 million blocks have been mined. The new Algo coins are being released gradually through the Dutch auction until the total amount of 10 billion Algos is reached.
Algorand gives Tether great scalability and transaction finality after every single block, which is validated in about 5 seconds. At the same time, it maintains an excellent level of security.
Along with the low price of transactions, these are key features for deciding on which blockchain to deploy their stablecoins.
For Algorand, there is the advantage of using the largest stablecoin on its blockchain and increasing the prestige and awareness of this blockchain platform. This cooperation is therefore beneficial for both parties.
Photos source: Pixabay