As the cryptocurrency market crashed following China’s announcement regarding a new wave of restrictions on their use. Some coins have kept their value, and seen their volume of exchange rise. Those are the stable coins.
As their name explicitly indicates, this type of cryptocurrency aims at maintaining price stability. Their goal is to provide the advantages of cryptocurrencies, namely decentralization, and the low-volatility behaviors of fiat ones. Over the course of massive sell-offs, people try to secure the value of their crypto investments, and tend to swap their assets to popular stable coins like Tether (USDT). In consequence, their market capitalization and volume of exchange increases during those times.
However, even though Tether dominates this current market, some competitors exist and provide different and ingenious ways to arrange price stability. Tether is called a fiat-collateralized currency, as it maintains a collateral reserve of US Dollar in order to issue new coins. Crypto-collateralized currencies also exist, in the form of MakerDao, which uses a reserve of ETH instead. But as ETH is still volatile, the amount of collateral needed before issuing one new coin is twice its current worth in ETH, which accommodates for up to 50% of swings in reserve currency. And then comes Ampleforth, providing its algorithmic stable coin.
Ampleforth aims to create a stable cryptocurrency that doesn’t use any collateral. Instead, the supply of coins in circulation is elastic and will fluctuate in order to raise or lower the coin’s price. Thanks to its digital nature, it is possible for the protocol to change the amount of money in every user’s pocket, and in the same proportion.
As an example: if at t0 bob has 1 AMPL worth 0.9$, he will have 0.9 AMPL worth 1$ at t1.
One challenge that is then raised, is the ability for a decentralized network to withdraw this price information without creating a single point of failure. In other words, it is important that the protocol receives price information from a multitude of sources, in order to avoid being compromised if one of them became malicious. Ampleforth does this using the technology of another Defi’s project called Chainlink, which provides the tools for decentralized price information sources in the form of an oracle.
Once the change of supply is put into action, the protocol will smoothly contract or expand the circulating amount of currencies, over the course of a few days before reaching its main goal of 1.03$ in value. This translates in real life into a coin that fluctuates more than its adversaries, going as high as 1.40$ during the last 90 days, and as low as 0.58$ as the market crashed yesterday.
To conclude, stable coins are an important tool in the world of cryptocurrencies, notably by securing assets during crashes. But it is important to know which method they use to provide stability, as some of them fluctuate more than the others.