The foremost reason behind the creation of Bitcoin – the harbinger of all cryptocurrencies – was to eliminate the role of middlemen. This was seen as a move that would bring two-folds advantages – by reducing cost as well as time. At that time, Bitcoin was looked at as a purely P2P version of electronic cash that would enable a smooth flow of payments.
Good while it lasted, the Bitcoin adequately filled the required spaces for some time. However, volatility became a major challenge and weakened the magnitude of the dependability of Bitcoins, especially when it comes to using them as the standard medium for exchange. After all, how do you depend on an asset that might be worth a Lamborghini one day, 20 grams of gold the other day, and 2 McDonald’s burger another day?
These limitations are precisely what brought Stablecoins to lime light. Another breakthrough in the crypto world, Stablecoins are the largest Technology Acceptance Model (TAM) when it comes to dependable currency. As a result of that, “how to make a Stablecoin?” is something you’ll see being asked frequently – especially in the crypto circle.
The vision behind the creation of Stablecoin is much broader than that of Bitcoins. Stablecoins, in essence, are currencies that have stabilized price, and can stand as a challenge to the legitimacy of weak governments around the world.
In this post, we’ll help you understand Minddeft’s recipe for creating Stablecoins that are efficient. We’ll cover all the required concepts step-by-step, including:
– How to make a Stablecoin
– How to launch a Stablecoin
– Cost of creating a Stablecoin, and
– The requirement of developers for creating a Stablecoin.
– Applications of Stablecoins
But before we talk about how to make a Stablecoin, it’s important you understand a few key terms – so, let’s begin by talking briefly about the various kinds of Stablecoins. That will give you a better context of what’s to follow!
Types of Stablecoins
A Stablecoin is a type of cryptocurrency that does not exhibit any volatility in its value and maintains a fixed value proportional to an underlying asset or a basket.
The primary task of the Stablecoin is to arrive at a fine point that preserves the benefits of distributed currency like Bitcoin while bringing in the advantages of constant value which extends its utility to becoming a reliable medium of commercial exchange.
The applications of Stablecoins are wide – despite their classification. Broadly. there are different kinds of Stablecoins.
Collateralized Stablecoins are ideally those whose values are backed by, or pegged to, some or the other collateral. Based on that, these are further classified as:
(a) Fiat-Backed Stablecoins
These Stablecoins have their value pegged to reserves of fiat currency. One of the first fiat-backed Stablecoin was Tether (USDT), and it introduced the concept of a cryptocurrency pegged to the value of the US dollar and backed by reserves representing the total market capitalization. Other examples of Fiat-backed Stablecoins includes the USD Coin (pegged to the Dollar at 1:1) and Paxos Standard (PAX).
(b) Crypto-Backed Stablecoins
These Stablecoins are backed by cryptocurrency but they use protocols to make sure that the value doesn’t vary with the price of the backing token. One of the most profound examples. The DAI token is backed by Ether and pegged to the value of USD. DAI holds its price via the Maker Smart Contract, which creates and destroys MKR tokens in response to fluctuations in the price of ETH.
(c) Asset-Backed Stablecoins
Asset-backed Stablecoins are basically underpinned by various other assets except for fiat or cryptocurrency. This category is fairly new, especially when compared to the other two, but it definitely comes with the potential to become huge. The asset-based tokens aren’t necessarily pegged to the price of the fiat currency but to their underlying asset’s value. As an example, Digix is backed by and pegged to the price of gold. Similarly, Paxos, the issuer of the Paxos Standard, also offers a gold-backed token called Paxos Gold.
Non-collateralized Stablecoins, also known as Algorithmic Stablecoins or Seigniorage Shares, stay true to the basic principle of cryptocurrencies, that is, decentralization. Collateralized tokens fail in this regard, as they aren’t decentralized in nature. Many crypto enthusiasts have argued that Stablecoins, at least in the long run, should not be centered around an asset, but instead use algorithms to derive value.
And that is precisely what has led to the formation and rise in usage of these algorithmic Stablecoins.
As these Stablecoins are not pegged to any collateral – whether an asset, or fiat, or crypto – they offer a much higher degree of independence, and therefore decentralization. The financial power, in this case, is not dependent on a central body/entity but is based on a formula that is derived from demand-supply. For working with these solutions, you will need developers for creating Stablecoins.
Just like Tether is a standout example for asset-backed Stablecoins, Basis stands out when talking about algorithmic Stablecoins.
The Basis raised $133 Mn from Bain Capital Ventures, GV, and Polychain Capital, and became the talk of the town. While still finding their way around regulatory challenges, the Basis is considered to be one of the flagbearers when it comes to non-collateralized, algorithmic Stablecoins.
The Basis comes with multiple entities, like:
- The Basis tokens – these are Stablecoins pegged to the USD.
- The Bond tokens – these tokens represent one Basis token if the price of that Basis falls below the peg.
- Share tokens: these function crypto assets that derive their value from market forces.
As the name suggests, Hybrid Stablecoins use the best of both worlds. They are pegged to a resource (whether fiat, or an asset, or crypto), but are modeled algorithmically. While these are a lot more diverse and offer variety, it can be confusing to understand hybrid Stablecoins, plus most of the laws end up limiting these projects.
With the types of Stablecoins laid out, let’s move on and talk about the real deal – creating and launching Stablecoins.
To simplify navigating the further section, we’ve kept it in a step-by-step QnA format. We’ll tackle all the questions that arise, starting from how to make Stablecoins, how to launch Stablecoins, to how to find the right developers for creating a Stablecoin, to even what the budget for creating a Stablecoin should be.
How to make a Stablecoin?
The Minddeft Way!
Step 1: Identify the type of Stablecoin that needs to be developed
As discussed above, there are two broad categories of Stablecoins, with the first category having further sub-categories. Now, it is not ideal to say that a particular kind of Stablecoin is superior to another kind. In the end, it all boils down to the requirements at hand. If the goal is long-term stability, then the route should be an algorithmic one, but in case of short-term of situations where the underlying asset is reliable, one can opt for collateralized Stablecoins, too. The cost of creating a Stablecoin, too, will depend on the type of Stablecoin you’re looking to create.
So, the first question that you should ask, after asking “how to make a Stablecoin”, should be, “what kind of a Stablecoin do I want to make?”
If the requirement at hand demands you to make a centralized ecosystem, you can take the collateralized route. However, if the requirement is of a strictly decentralized system – one that follows the core concepts of cryptocurrency – then algorithmic solutions are the way to go.
https://www.elementzero.network/ is a next-generation payment network based on an algorithmic Stablecoin creation platform – created by the folks at Minddeft!
To identify the kind of Stablecoins you need, ask yourself the following questions:
- What amount of independence/decentralization do I want?
- What kind of rules do I want my Stablecoins governed by?
- How much liquidity do I want from my Stablecoins?
- How many audits can I afford to reduce risk and increase trust in my Stablecoins?
- How complex or simple do I want the entire architecture to be?
Once you have the answer to the above-listed questions, you’ll be a step closer to deciding the type of Stablecoin you want to create.
Step 2: Identify the platform for building the Stablecoin
Once you’ve narrowed down to the type of Stablecoin you want to develop, now is the time to pick the platform for developing the said Stablecoin. Three years ago. Ethereum would have been the way to go for building Stablecoins, but that is not the case any longer.
Back in 2016, there were just 11 Stablecoins in the market. Another 10 were added in 2017. Nowadays, there are 70+ Stablecoins, and over 140 others still in development. The overwhelming majority of these Stablecoins were running on Ethereum before 2018, without any indication suggesting that this might change.
But the script has flipped, according to Blockchain.com’s “2019 State of Stablecoins” report: Only 50% of all Stablecoins are now built on Ethereum, and the latest Blockdata report also highlights this decrease.
Instead, we are witnessing newer entrants into the blockchain market that depend on a sort of asset-backing mechanism. Decentralized finance (DeFi) frameworks such as MakerDAO, Compound, and Equilibrium, which are not only responsible for new mechanisms that generate Stablecoin assets, but are also liberating developers to build advanced DeFi applications on top of them.
Some prominent names in this domain include Telegram’s TON, Polkadot, Hedera’s HashGraph, and Dfinity, which offer interoperability out of the box while promising new scalability opportunities to Stablecoins.
With so many options, it is important to know which platform to choose. For that, let’s discuss a bit about the different platforms, and help you choose the platform for building your Stablecoin. Remember, there is no right answer, and it depends on your requirements.
Ethereum still manages to be a viable choice for developers creating price-stable currencies, but there are two drawbacks worth considering: product differentiation and scalability.
At its core, a Stablecoin should be easy and intuitive for the user. It should also be scalable for widespread adoption, and be capable to support high volumes of transactions as well as maintain various on-chain mechanisms. The key reasons in favor of Ethereum include:
– Built-in on-chain logic and regulation: Ethereum is both the biggest and most accessible Blockchain environment providing on-chain logic support. Most current assets are based on Ethereum, and the emerging DeFi industry has a strong need for Stablecoins designed to work within the same chain. To add to this, Ethereum smart contracts pass multiple audits and are kept under close observation by security watchdogs, which sometimes ends up affecting the Ethereum price.
– Proof-of-work: Ethereum uses a highly secure consensus mechanism using PoW which is tamper-proof when compared to delegated proof-of-stake (DPoS) models. More importantly, for this level of security, one needs to compromise on computation efficiency and speed.
– Compatibility with the existing infrastructure: Ethereum-based frameworks are undoubtedly more compatible with the existing crypto environment. ERC-20, the Ethereum token, allows for easy interoperability with other Ethereum-compatible software and hardware wallets. Ethereum-based projects have been enjoying access to a rich and thriving ecosystem from day one. But this is limited ONLY to Ethereum users, there’s no cross-interoperability here.
Other platforms (also known as Generation 3.0)
Other platforms include TRON, EOS, and more. There are further some live and prelaunch Stablecoins that even have combined platforms.
For instance, Carbon was initially released on Ethereum, then added EOS support a few months later — and even plans to eventually move to Hashgraph’s distributed ledger.
Others have chosen well-known forks (such as Kowala, Nos or Xa nk), their own blockchain platform or another proprietary one (such as Terra, Mile or Celo), or they’ve chosen to master the market’s current blockchains — with White Standard and Stronghold USD running on Stellar, Phi on Dfinity, and Cryptopeg on Bitcoin.
At the same time, the last year became a banner year for EOS-based Stablecoins. We have seen a number of EOS Stablecoin projects like EOSDT, Carbon (CUSD), EUSD, and Tether go live on EOS, and more are joining their ranks on the market.
Except for the added layer of complexity, these platforms are comparable, if not better, to Ethereum. However, there are two key benefits that these platforms provide that Ethereum doesn’t:
- Higher transaction bandwidth and scalability.
- Greater interoperability.
With the pros and cons of all the platforms laid out, you can now make a more informed decision on the platform you wish to go ahead with.
Once that is done, we move to the next step.
Step 3: Maintaining liquidity
If the liquidity is lost, the entire point of how to make a Stablecoin goes for a toss.
We take the following steps to ensure utmost liquidity:
- Measuring inflation and value: We have an automated monitoring system to provide daily currency rates as well as the index rates from the Personal Consumption Expenditures (PCE) and the Consumer Price Index (CPI).
- Protecting from high demand: Once the STO is completed, all Stablecoins can be purchased at fixed face value. This removes any incentive for buyers to purchase the Stablecoins on a secondary market at a higher price.
- Protecting from high supply: Users who wish to sell or redeem their Stablecoins will be able to do so within the system at current face value, minus transaction fees. This removes any incentive for sellers to sell their Stablecoins on secondary markets at discounted rates.
- Transaction fees: We allow the Stablecoin partners to impose any transaction fee they choose. Revenues from transaction fees will be split, with some portion going to the Stablecoin partner, and the remaining streamed into the Liquidity Reserve to increase the liquidity/
- Circuit breaker: Element Zero’s protocol employs a circuit breaker mechanism designed specifically to prevent, or at least minimize, the effect of high volatility. We will have a daily limit of some portion of on processing redemption requests, and in times of any extreme volatility, the system will halt trading, similar to how stock exchanges behave.
Step 4: Designing and developing the token
Once all the other steps are taken care of, now is the time to go ahead and design and develop your required token. Keep in mind that in the case of algorithmic Stablecoins, it is important to transfer their value to a currency, in order to keep the stability at a decentralized level.
With that done, let’s move to the next important question – that of how to launch Stablecoins?
How to launch a Stablecoin?
Once you’ve designed and developed your Stablecoin, here are the steps you can take to launch it:
- How to launch a Stablecoin begins with first launching it on a Test Net. If you’re using Ethereum as your underlying platform, you’ll find many tests net available in the market.
- Allow different groups of people to QC your developed product on the test net and leave feedback and comments for improvement.
- Fix any comments that might have crept up during the previous beta testing phase.
- Ensure, especially for asset-based tokens, that the required reserve of assets (like the USD), is all set.
- Once the above-listed pointers are checked, launch the token on the main net!
With the entire process outlined in an elaborate manner, you might be wondering “what is the cost of creating a Stablecoin?”. Let’s discuss that a bit!
What is the cost of creating a Stablecoin?
The cost of creating a Stablecoin, in all honestly, depends on the applications of Stablecoins that you want to leverage. It also depends on the type of Stablecoin you’re developing.
So, in the case of asset-based collateralized Stablecoins, that are comparatively simpler to design and develop, and are fairly widely known in the market, the cost of creating a Stablecoin is lesser – somewhere around 10k-12k USD.
Algorithmic Stablecoins, on the other hand, work on modules of code and are extremely flexible and customizable. As a result of that, the cost of creating a Stablecoin that is algorithm-based can lie anywhere 15k USD and above – depending on the features, and therefore algorithms used, and the complexity of protocols we want to build with Smart Contracts.
Do I need developers for creating a Stablecoin?
While not necessary for collateralized Stablecoins, developers for creating a Stablecoin can come in supremely handy when you’re working on algorithmic approaches to creating Stablecoins.
Since these approaches are fairly technical and require a fair amount of expertise, it is recommended to get developers for creating a Stablecoin, and work in tandem with them to create the Stablecoin as per your requirements.
What are some of the applications of Stablecoins?
As we’ve discussed in the beginning, Stablecoins stay true to the core feature of cryptocurrencies – decentralization. As a result, there is a huge array of applications of Stablecoins. Here are a few of them:
- Protection against market crashes, volatility, and holding the assets short term, for the time being.
- Holding the asset long term and protecting against inflation.
- Making or receiving payments without any need for intermediaries, in a way that doesn’t require you to sign up or disclose your information.
While this isn’t a comprehensive list of applications, we’ve talked about them in bits throughout the post. By now, you have a good understanding of all the benefits and applications of Stablecoins, especially when compared with traditional currency, or even Bitcoins.
We hope this post helped you answer some key questions around how to create a Stablecoin and more. If you started this article with a basic understanding of Stablecoins and you’ve followed us so far, you’ve gained enough knowledge to go ahead and develop your Stablecoin. However, keep in mind that due diligence is important at all stages – whether it is picking the kind of Stablecoin to develop or selecting a platform to use.
If you follow our recipe step-by-step and introspect on your needs, goals, and requirements, you’ll definitely succeed in this process. If you feel stuck at any point, or at any instruction, or are seeking general help, do write to us in the comments below, and we’ll get back to you soon!