How to Create a Stablecoin on Ethereum?
Cryptocurrencies have taken the world by storm with the introduction of Bitcoin and a later launch of Ethereum. Unlike BTC, the Ethereum network originally represented an ecosystem on which plenty of other blockchain-based products could be created, including new platforms and coins that would circulate on them.
For many years, Ethereum has dominated the stable cryptocurrency creation market because of the flexibility of its technical solutions and a universal ERC-20 standard, allowing interoperability of the coins in the blockchain universe. However, since 2019, numerous DeFi frameworks have emerged to diversify the toolkit for stablecoin developers. To date, blockchain engineers can use Compound, MakerDAO, and Equilibrium, among others, to create stablecoin projects and launch them to the crypto market.
At present, there are 35 crypto stablecoins available on the market, with new offers launched every year. The top popular stablecoin with the largest market capitalization is Tether (USDT), equaling over US$62 billion, followed by USD coin (USDC) and Binance USD (BUSD). The total market cap of top stablecoins (as of August 2021) has exceeded US$115 billion, promising a bright future and sustainable growth for the stablecoin niche of the crypto market.
So, as you can see, creating your blockchain project with a native stablecoin is always a financially attractive idea. It guarantees you a steady inflow of investors and active circulation of your currency within the dedicated community. Besides, the stablecoin’s value is expected to grow exponentially with the expansion and popularization of your blockchain solution. In this article, our financial software developers explain the principles behind stablecoin use, the benefit of employing stablecoins in your project, and the process of stablecoin development.
What Is a Stablecoin?
There are thousands of cryptocurrencies currently circulating the exchanges and blockchain platforms, as this medium of exchange gains popularity due to its greater affordability, anonymity, and security than fiat currencies provide. However, along with the advantages of immutability, security, transparency, and transaction speed, cryptocurrencies also come with a high degree of uncontrollable volatility that pushes investors and lay users away.
Stablecoins emerged to bridge the advantages of cryptocurrencies and the low volatility characteristic of fiat money. This type of crypto asset is thus pegged to a particular stable asset (fiat asset), thus giving its holders a greater degree of stability and predictability of its exchange rate. These coins are typically pegged to an international currency (e.g., USD) or assets (e.g., gold, silver, oil), with their exchange rates moving in tandem with the collateral on which they are based.
Types of Stablecoins
The fundamental feature of stablecoins is their pegging to some other asset, which is considered more stable and predictable in terms of exchange rate fluctuations. Thus, depending on the choice of collateral, the stablecoins are divided into four main types:
Fiat-collateralized coins are pegged to an international currency that is much more stable than national ones and gives users greater confidence about volatility avoidance. The most popular currency is USD, and the top fiat-backed coins are Tether (USDT), PAXOS Standard, and the USD coin.
Commodity-collateralized coins are pegged to popular commodities, such as gold, silver, diamonds, oil, and even real estate. The principle behind their work is a hypothesis that these globally traded commodities won’t rise and fall in value abruptly, thus giving the stablecoin users a greater degree of predictability and stability. Famous examples of such coins are Tether Gold (XAUT) and Paxos Gold (PAXG).
Crypto-backed stablecoin variants are more complex as they are typically pegged to some stable cryptocurrency and are also backed by the fiat currency’s value. This formula of their value calculation prevents abrupt volatility fluctuations and limits the degree of divergence of its value from the pegged cryptocurrency’s current price. A good example is the DAI token pegged to ETH and USD at the same time.
Non-collateralized coins are a distinct type of stablecoins that don’t use any stable currency or asset for pegging but are based on specific algorithms determining their value change. Their prices change based on the dynamic correlation of demand and supply. Recently launched coins of this type include GV and Polychain Capital.
Benefits of Using Stablecoins
Individual users of crypto funds derive numerous benefits from using stablecoins for their everyday transactions:
- Lower volatility as compared to other cryptocurrencies
- Transaction speed
- Interoperability and support by major digital wallets
- Low commissions
However, every person using stablecoins for transactions should keep in mind that the privacy of the crypto world comes at a price. Thus, if they fall prey to fraudsters and send money to criminals, they won’t have any chance to return the payment. In addition, caution should be exercised when choosing exchanges; DEXs can also be a place where scams hunt for the money of unwise users as they are decentralized, not overseen by any auditing authority.
Besides, businesses and active traders can find the use of stablecoins quite beneficial. They receive an opportunity to secure their investments by holding assets in stablecoins without the risk of losing money due to high volatility. Stablecoins can be easily exchanged for fiat currency, which means businesses can quickly swap crypto assets and fiat money depending on their needs. Finally, using stablecoins for international payments is much quicker and more affordable as you avoid the SWIFT commissions or several days of waiting for the transaction’s settlement.
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How Do Stablecoins Work? Use Cases
Over the years of stablecoin existence in the crypto market, they have found numerous applications in various spheres due to price stability.
- As a medium of exchange, stablecoins are frequently used in crypto trading operations and serve business goals. Besides, medium-term and long-term savings in cryptocurrencies (even BTC and ETH) are highly risky as the exchange rate of such coins changes abruptly because of bad news or legal changes. Thus, by storing money in stablecoins, investors can enjoy greater security and predictability.
- Stablecoins’ use as a unit of account is also widespread as most popular coins are pegged to USD, so they can act as a digital representation of that fiat currency. With so many accounts done in USD, like prices for services and products, employee salaries, the calculation of profit and loss, etc., stablecoins can also be used as an understandable, stable unit of account.
- Stablecoin use in dApps is quickly spreading as new dApps join the Ethereum ecosystem and ensure greater circulation of crypto assets among blockchain platforms. Besides, the blockchain community sees the coming shift from the isolated crypto-asset use to their broader adoption by the masses, contributing to lower stablecoin volatility and greater similarity to the fiat currency.
- Stable, sustainably appreciating cryptocurrencies can also perform the role of stores of value as people invest money in the newly launched projects in hopes of seeing them prosper in the near future.
- Performance measurement is also convenient with the use of stablecoins as they are pegged to specific assets. Thus, measuring the asset inflation by evaluating the coin’s dynamics is efficient and convenient for many.
- Transfer convenience is a benefit that stablecoins bring to financial transactions. They still remain a quicker and less costly option compared to the use of traditional banking institutions.
- Another sphere of stablecoin application is lending. Because they are pegged to fiat currencies or stable physical assets, stablecoin lending is more predictable and secure than lending in other currencies might be. Besides, this type of coin can be used for position hedging.
What to Consider When Developing Your Stablecoin?
As soon as you decide to create your own stablecoin, here are some considerations you need to keep in mind and incorporate in the planning process.
Your Ultimate Goal
At this point, it’s vital to understand why you need to create a stablecoin. What are your business needs and intentions? What goals do you expect the coin to serve? What features should it possess, and what degree of liquidity does it need to possess?
Now comes the time to choose the blockchain platform on which it will be based. It’s not only Ethereum; today, you are free to choose among a much larger number of options, including TRON, EOS, MakerDAO, etc.
To circulate on the crypto market efficiently, stablecoins should be liquid enough. A fair degree of liquidity guarantees that people trading the coin won’t experience significant slippage, and the exchange rate won’t come as an unpleasant surprise to them.
There is a visual design and style behind every coin. So, you should develop a visually appealing and professional-looking platform for your asset so that investors coming to its trust your project.
Blockchain Integration and Launch
The implementation aspect is highly significant as it gives your stablecoin a life. After the project gets integrated into the live blockchain, it must be free from bugs and security vulnerabilities. Otherwise, hackers can intrude on it or steal all your investors’ money, thus ruining your project and causing legal trouble for you.
Step-by-Step Guide on How to Build a Stablecoin
Now let’s proceed to the steps you need to take when creating a stablecoin.
Step 1. Token Development
The first task you need to complete is minting the token you’re planning to launch for circulation. At this point, it’s critical to discuss all technical details with your development team, such as the planned supply of your coin, its price, operational features, the blockchain platform you’ll use, etc. Security features should also be considered.
Step 2. Branding
Similar to website development, token development also requires back-end and front-end work. While the first step we discussed represents the back-end development aspect, branding and visual design are the front-end of your stablecoin. Make sure that your asset possesses a unique visual appeal and looks memorable and sleek.
Step 3. Smart Contract Development
As all transactions within blockchain take place with smart contracts, you should also create a smart contract algorithm that will let users exchange your coins for other crypto-assets and fiat currency.
Step 4. Planning the ICO
The final stage of stablecoin development requires you to plan the token’s distribution to investors and other users. You can either launch the coin to some crypto exchange, thus giving the community of crypto enthusiasts a chance to buy it from a free float, or allocate the coins to those who bought them at the pre-launch stage (direct allocation to ICO investor wallets).
Thinking of a Stablecoin Project?
If you’re excited about the massive set of monetization opportunities that stablecoins offer, welcome to 4IRE for blockchain consulting and turnkey blockchain development solutions. Our team has in-depth expertise with white label stablecoin development from scratch. Thus, we can consult you on every step of the project, calculate its cost, and perform all blockchain engineering for your business success.