Stablecoin development - outsourcing company Boosty Labs

Stablecoin development

Stablecoins are crypto assets with a fixed rate, or resistant to significant fluctuations. This class of digital assets adds to the well-known advantages of cryptocurrencies a low volatility of the exchange rate (or its almost complete absence). It can be achieved by linking Stablecoins to various assets (including fiat currencies, gold, SDRs, digital currencies or baskets of cryptoassets), or by replicating on a decentralized basis some elements of monetary policy used by central banks (the seigniorage shares concept). For several years Boosty Labs team has been successfully involved in stablecoin development outsourcing. We are a world-class fintech and cloud engineering team with a solid background of practice that combines consulting, strategy, design and engineering at scale.

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Specifics and application areas

Categories of stablecoins

Depending on the underlying security of stablecoins, there are three main categories of stablecoins:

  • backed by fiat currencies (examples: Tether, TrueUSD);
  • Backed by digital currency or a basket of cryptocurrencies (BitUSD from Bitshares, created on the MakerDAO platform and backed by Ether Dai tokens);
  • Algorithmic stablecoins that are not tied to fiat currencies or cryptocurrencies. Price stability is achieved solely through algorithms and smart contracts that govern the delivery of tokens.

Benefits of fiat-backed stablecoins

  • easy to understand;
  • one hundred percent stability (subject to full security);
  • low susceptibility to vulnerabilities and risks of hacker attacks on the network;
  • collateral is not contained in the blockchain.

Benefits of stablecoins backed by cryptocurrency

  • there is no need to rely on a third party to provide custody of the collateral;
  • higher level of decentralization;
  • on-chain transactions make it possible to more quickly regulate the supply of "stable coins";
  • higher liquidity than fiat-backed Stablecoins (just one on-chain transaction is enough to redeem "stablecoins" with the corresponding amount in cryptocurrency);
  • a high level of transparency with no need for an external auditor (monitoring is available for everyone).

Benefits of unsecured (algorithmic) stablecoins

  • no need for collateral;
  • theoretically, a higher degree of decentralization and independence, since there is no binding to any fiat currencies or cryptoassets (however, with a general decline in the cryptocurrency market, a decrease in demand for Seigniorage Shares is possible).

Special Considerations

Portfolio hedge tool

Traders and investors can use stablecoins to hedge their portfolios. Allocating a certain percentage of your portfolio in stablecoins is an effective way to reduce your overall risk.

Additional opportunity to fix the balance and exchange digital currencies

The main advantage of stablecoins is the additional ability to fix balances and exchange digital currencies. Due to the high level of volatility, cryptocurrencies have not been able to find their use in everyday life, for example, for making various payments. By providing a higher level of stability, such stable currencies act as a solution to this problem.

Safe haven asset

Stablecoins do not have such a problem as rate fluctuations. This type of asset tracks insignificant price movements and changes in the value of the underlying asset or the fiat currency that they emulate. As such, stablecoins act as a safe haven asset amid volatile markets.

There are positive and negative aspects of the stablecoin boom. The creation of stablecoins can attract users to the digital asset market. This will lead to an increase in the use of the remaining coins and mass adoption.

On the other hand, most stablecoins run on the Ethereum blockchain. This entails an increase in network fees and actualizes the problem of scaling the second largest cryptocurrency in terms of capitalization.

Stablecoins are popular with traders as liquid and low-risk assets and as stable collateral in the DeFi space. They are actively used in Ponzi schemes like MMM, online retail payments, and even find application in export-import transactions bypassing capital controls.

Obviously, many stablecoin use cases are balancing on the brink of legality. This attracts the attention of influential supranational organizations, including the FATF. The latter expresses concern about the growing popularity of stablecoins and focuses on the need for their issuers and cryptocurrency exchanges to comply with strict regulatory requirements.

According to the supranational regulator, stablecoins can pose the same threat to fiat money as cryptocurrencies, due to their privacy, global reach and potential for illegal use.
The organization proposes to consider stablecoins as virtual assets or traditional financial products, and oblige their issuers to follow the established AML/CFT rules.

According to the new standards being developed by the FATF, even for decentralized exchange stablecoins, money transfer service providers and custodian wallets will be required to implement appropriate AML/CFT procedures.

The organization will also oblige virtual asset service providers (VASPs) to introduce mandatory transaction monitoring to control the movement of funds.

Stablecoins are not only used as a medium of exchange and store of value in the context of centralized exchanges and cryptocurrency wallets. These assets have become a key element of the rapidly growing decentralized finance (DeFi) market.

Central banks are closely watching the growth of the stablecoin segment. The latter are not eager to compete with anyone and revise the usual instruments of monetary policy.

The combination of the advantages of blockchain and the low volatility nature of sovereign currencies creates a powerful value proposition. This is confirmed by transactional activity, which significantly exceeds the performance of traditional cryptocurrencies.

Prospects of stablecoins

We can assume that in the future stablecoins:

  • continue to integrate with the DeFi sector and contribute to its further growth;
  • revitalize the forecasting and decentralized file storage markets;
  • will continue to grow in the online payments segment, challenging centralized systems like Venmo, PayPal or Cash App;
  • will be actively used for cross-border transfers, especially where the financial infrastructure is not developed;
  • will continue to be used for large B2B payments bypassing capital controls.