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In crypto-currency news, we might heard about term of "stable-coins".

Can we define a stable-coin as follows:

A crypto-currency that is pegged to a fiat / formal currency to minimize the volatility of its price for having more stable price.

(1) Is this definition true?

(2) And if yes, Is it possible to pegging a crypto-currency such as Bitcoin to a fiat/formal currency?

(3) And if yes, How to do it ?

(4) Which technical characteristics does a crypto-currency need to be a stable-coin ? (In the sense of consensus mechanism, transaction validation process etc)

(5) And are stable-coins decentralized and trust-less like Bitcoin ?

(6) What are the most well-known stable-coins crypto-currencies ?


Related questions:

Can the price of Bitcoin ever be stable to the USD?

What are the obstacles to pegging the value of bitcoin to an established stable currency?

  • How about curve-bonded tokens? Is it considered stable if the price is always equal to the result of a fixed equation based on supply? Or does "stable" only mean 1X=1Y for some X and Y? – Andy Feb 19 at 20:25
  • That could be a part of my question as well. – Questioner Feb 20 at 9:38
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Lets tackle them one by one:

1) Is this definition true? Not entirely. Stable coin need not be pegged only to fiat currencies. We can also peg a stable coin to exchange traded commodities like precious metals whose price remain fairly stable. You can also have stable coins linked to cryptocurrencies via smart contracts.

(2) And if yes, Is it possible to pegging a crypto-currency such as Bitcoin to a fiat/formal currency? (3) And if yes, How to do it? The value of bitcoin is not linked to any physical or virtual asset. It has a value of its own. Until the whole Bitcoin community that is involved does not decide to abandon the decentralized approach and peg it against an asset, it is not going to happen.

(4) Which technical characteristics does a crypto-currency need to be a stable-coin ? (In the sense of consensus mechanism, transaction validation process etc) (1) In order to maintain the one-to-one peg ratio, Tether uses the Bitcoin blockchain, Proof of Reserves, and other audit methods to prove that issued tokens are fully backed and reserved at all times. The Tether transactional ledger is embedded in the Bitcoin blockchain as meta­data via the embedded consensus system, Omni. (2) TrueUSD work with multiple trust companies. User needs to pass a KYC/AML check, and send USD to a trust company with an escrow agreement. When they verify the funds, their API instructs TrueUSD's smart contract to issue the equivalent TrueUSD to user's public Ethereum address

(5) And are stable-coins decentralized and trust-less like Bitcoin? Physical asset backed cryptocurrencies are centralized as you need to hold a portion of physical asset for every stable coin you issue. Since asset backed stablecoins need to involve trust in the issuer (say US govt for USD) and the custodian (say Tether for showing they have the reserves) it is necessarily centralized. However, you can make stable coins which are decentralized. But those coins need to be backed by a decentralized cryptocurrency like say Bitcoin or Ether. The reason these stable coins are decentralized is because you can lock them in a smart contract.

(6) What are the most well-known stable-coins crypto-currencies? (1) Tether, TrueUSD are examples of stablecoins linked to fiat currencies. They have a physical backing of USD for every coin out there. (2) DGX is gold backed stable coin. Tiberius coin is backed by a baset of industrial and precious metals. (3) DAI coin offered on MakerDAO platform is an example of crypto backed by crypto. The DAI is issued by depositing the collateral (pooled ETH) into a smart contract called CDP (Collateralized Debt Position) in accordance with the liquidation ratio of the CDP.

  • This article (LINK) says: "1 Dai = $1" Does it mean that DAI is pegged to USD? But you say "DIA is an example of crypto backed by crypto." What can we conclude? DIA is decentralized and backed by another cryptocurrency? Or centralized and backed by USD? Thanks – Questioner Mar 5 at 13:59
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    DAI is decentralized as its solvency is not determined by any trusted party or locality. No one can alter the core mechanics of Dai, and although, like you said, the price of Dai is stable relative to the US Dollar, it is however achieved via an autonomous system of smart contracts. When you interact with the MakerDAO system, you lock up your Ether in a collateralized debt position (CDP). If the CDP shows that the value of ETH has gone below a threshold, the CDP is liquidated and ETH is auctioned off for Dai until there is enough Dai to pay back initial value that was obtained from that CDP. – Ugam Kamat Mar 7 at 11:54

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