THE QUEST FOR THE STABLE TOKEN PART III

As the sun has set on the crypto wild west this week so to speak with decreases in Ethereum’s value exceeding 40% just recently together with other cryptocurrencies, the concept of a stable token on blockchain is slowly gaining traction. In the tradition of our project we are publishing the third part of the follow-up on stable tokens.

There are currently dozens of attempts at introducing the aforementioned token to the public, some in the initial stages, some already available on exchanges. The diversity of ideas behind stable tokens allows authors to use different classifications. This variety of approaches to stability also lends credibility to the idea that there is room for several stable tokens to coexist in the crypto space.

The previous blog post on stable tokens divided them into centralized and decentralized. This overview takes a slightly different approach, dividing stable tokens into three categories: tokens backed by a fiat currency or commodity, tokens targeting parity with a fiat currency or commodity in a decentralized way and unique tokens.

Important note: Some projects intend to issue tokens pegged to different currencies or a basket of assets in the future.

 

THE DIFFERENCE BETWEEN CENTRALIZED AND DECENTRALIZED STABLE TOKENS

The centralized type of token is or should be exchangeable for a unit of a fiat currency or commodity at any time. The approach requires the token to be fully backed by fiat or by a commodity. A trusted custodian is necessary for the placement of holdings. USD seems to be the choice of the great majority of the fiat-backed tokens, followed by other major global currencies like EUR.

On the other hand, decentralized tokens have a complex approach to targeting parity. The idea behind the decentralized type of token is that decentralization must be maintained and stability must be achieved by means other than having a storage of something stable in a bank or vault, ready to be exchanged. These projects endeavour to achieve stability through an interplay of two or more tokens. Usually one of the tokens acts as collateral. To maintain a fiat (USD, EUR, etc.) parity, the supply of one of the tokens is algorithmically adjusted in response to changes in the market environment.

Decentralized stable tokens still target a 1:1 ratio to a fiat currency but in a more roundabout way. This arrangement makes fluctuations around the peg more likely as the necessary measures for stabilization of the price may not act instantaneously and markets take that into consideration.

 

CONSEQUENCES OF CENTRALIZED AND DECENTRALIZED PARITY TARGETING

What the two categories above have in common is the desire to maintain parity to a certain fiat currency or commodity. In other words, to be pegged. A stable token tied to a currency or commodity is at best as stable as the said currency. For instance, USD itself is not without volatility as its exchange rate fluctuates. It is also, like any currency, subject to erosion of purchasing power through inflation. Gold’s role as a store of value has already been questioned in this blog.

Much has been written about the need for transparency and safety of centralized models. What is heard less often is the fact that decentralized models also require an oracle to feed the system the price, which can also be considered a point of vulnerability. There are projects that plan to decentralize this process by having the community vote on the price of the token. It is too early to say if this is the right path of development to bypass the centralized feed, but it is likely to increase the complexity of the system.

 

PERFORMANCE OF STABLE TOKENS DURING SEVERE MARKET EVENTS

It remains to be seen how decentralized stable tokens act in sudden severe market downturns. The question is: does their system provide enough firepower to maintain the peg?  Since the peg can be maintained only as long as you have means to bridge the difference between the opinion of the market and the peg (Many central banks have lost this battle: Zimbabwe in the 1980s, the UK in 1992, Thailand in 1997, Argentina in 2001, Venezuela in 2007).

To maintain stability, one has to alter either the supply of the token itself or the supply of the token acting as collateral. Both cases rely on new demand which is why these systems require incentives to cause holders/buyers to act in a certain way. It appears that reliance on market confidence that value will be restored must be present. This is the reason why some projects state in their whitepapers that they are ready to act as a buyer of last resort.

The performance of these two major stable token categories is dependent on certain outcomes and has to rely on a few variables to align for them to perform in a stable way. The centralized stable token with a fixed peg will be subjected to the fluctuations of the underlying currency or commodity. Commodity crashes do happen often. Sometimes they are like a chorus sharing a similar faith and can cause a sudden loss of a good portion of value at any point. On the other hand, for the users of the decentralized stable tokens the resilience to constant market change is dependent on preconditions that need to exist. If some of the preconditions fail, the system needs to resort to arbitrary measures in fighting the negative circumstances. How the arbitrary function can actually protect performance we will hopefully learn soon.

 

UNIQUE TOKENS

This third category of stable tokens deserve this designation since they offer something a holder may not get anywhere else. They are a tokenized financial service that may be available also in a non-tokenized form by the same provider but nowhere else than at the provider. One might argue that every stable token will provide its holder with a unique service due to oscillations around the peg forming a pattern unique to the individual token. This is correct, but the classification is made in regard to the target price and not side effects. Whilst the previous two categories’ target might be substituted by holding a fiat currency or a commodity, this is not the case with unique tokens.

For example, one could substitute 1 USD with 1 USDT or vice-versa and effectively it would be the same in a lot of situations. Unique tokens add more to this, so such a substitution is not available and the user can solve a particular problem only with the provider of the token. The open question is, do unique tokens also provide unique or premium value to their service, which goes beyond mere tokenization?

 

HUMAN FACTOR INVOLVEMENT

Many projects assure clients that they are ready to intervene to maintain their value in case of a black swan event. Some of the unique tokens also need regular intervention to maintain their peg to an assortment of currencies or commodities or even to reboot the entire system. This may be done on a quarterly basis by a governance committee, stability board, a group of financial experts…

Where there is human intervention, there is always the distinct possibility of human error. Moreover, there is the question of consensus. Is it reached arbitrarily or are there protocols to follow? In the latter case, how long does it take for a protocol to be implemented?  What happens in the event of lack of consensus? Why is there a need for human intervention? Such questions arise when human agency is involved. The major part of the reason for the human involvement proceeds from the systems not being fit to fully automatically and comprehensively handle market shocks on their own.

 

X8CURRENCY

X8currency sits firmly in the unique token category. Having an AI at its core constantly shifting funds between 8 major currencies and gold enables it to remain more stable than a major fiat currency without expanding or contracting supply. This provides an incentive to go from fiat to X8C to preserve value instead of the other way around. 

Another unique characteristic of the X8currency system is that by being fully automated it does not require any human intervention at any point. Not even in the occasion of black swan events. This feature makes X8C a proper system, where the term “system” denotes gapless operation and no need for outside intervention. In that sense X8C is the ultimate systemic solution to value preservation. It focuses on minimizing idiosyncratic and systemic risk, whilst market volatility boosts the ability of the X8C token to fight inflation and therefore make the step up from stable token to value preservation token. Its dual token model enables users to exchange X8C for fair value at any time and to see X8C subjected to market forces on exchanges. The purpose of the design is the most efficient free market mechanism that provides the best price.

What X8C has in common with some other stable tokens is the centralized 100% backing by funds and the opportunity for arbitrage. Together this creates a broader diversity of business opportunities within the X8 system for professional and non-professional users. What really makes X8currency stand out is that it works as an active safety system with ARM AI-provided unparalleled value preservation. The AI has done this by operating live accounts for an extended period of time without the need for human intervention.

 

PERFORMANCE SO FAR

Let us compare stable tokens listed on CoinMarketCap with what X8C will provide from an investor’s point of view.

Source: CoinMarketCap All Time data

 

 

The three pie charts clearly show that the market capitalization of stable coins is still very low, although it increased from 0,1% of total market capitalization in January 2017 to 1,26% of total market capitalization in July 2018. This mostly shows how much more potential there is left in the stable token segment.

 

 

The market cap factor chart on the other hand reveals that the same market capitalization is increasing at a significantly higher rate for stable coins than the market capitalization of all other non-stable coins. Furthermore, market capitalization seems to be increasing at a very healthy rate for stable coins, while the non-stable sector cooled down somewhat.

 

 

Market volume share on the other side shows a very different story than the one that we can see from market capitalization figures. In 2017 the share of volume for stable coins was also very low (1%), but after 2017 a big shift has happened. In January 2018 stable coins already had 8% of total market volume. This development did not pause after that. In recent months stable coins have taken up 23% of total volume transaction activity. Are stable tokens about to take over or at least come closer to 50% of total overall volume in the market?

 

This situation allows us to observe very different behaviour between stable and non-stable coins. The histogram chart shows that while the volume in the non-stable part of the market represents from 1% to about 4% of the value of these coins, stable coins can have a daily volume which exceeds their market capitalization value.

 

Finally, this brings us to a conclusion at this stage of the market development. Relative volume factor reveals a very interesting situation. Stable coins have shown anywhere from 10-times more daily volume in 2017 all the way to 35-times more daily volume relative to their market capitalization value compared to what non-stable coins did during the same period. Stability obviously enables much higher transaction activity. 35-times more volume relative to market capitalization perhaps means that investors are willing to buy, sell or transact stable tokens much more frequently because they trust that after the transaction they can decide again, at a later point, to move back to the stable token since it will have a similar value, something that they cannot be sure of in the case of volatile non-stable coins.

 

SUMMARY

Although at first sight it seems that the stable tokens are lagging in the market, they in fact have a different manner of satisfying investors, which in return reward these stable tokens and projects with more volume activity. Should this trend continue, we will soon observe a much more balanced crypto market overall. With that conclusion we can establish that the stable coin market is still in development. With new solutions like X8currency coming up, this situation could improve even further since the quality and the stability of this segment will make the next step forward. Once the issue of value preservation will have been thoroughly addressed, it will provide a stable foundation for existing users and, also more importantly, for new users to take the step to enter the crypto market.

 

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David Prezelj
David Prezelj

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