On Reserve, Tether and Other Stablecoins

Vlad Costea
  • Tether has long been an indicator for market sentiments, and its increase in trading volumes can reflect a short-term bearish trend and the beginning of an accumulation period.
  • Naturally, other projects like the Coinbase-financed Reserve appear on the radar to supply this demand.
  • This article will compare some of the most popular stablecoins for their technical promises.

A couple of weeks ago I received an e-mail from a Reserve communication representative and got asked to feature their project in an article. The selling point of the entire exchange was that the team behind this new stablecoin project consists of former Google and OpenAI engineers, and that Coinbase and Peter Thiel are funding it.

Since there are thousands of new planned releases in the blockchain space, the financial support of such big industry names must mean a high degree of trust in the project, right? Well, that's the main dilemma I've had: is it really ethical to hype something that hasn't proved anything yet, but makes big promises? Will my journalistic integrity take a hit if I promote something that doesn't have a released product? Also, haven't we all learned something from the entire EOS saga?

These are the reasons why I decided not to write an irrationally-positive piece and approach the matter in a comparative way. I promised the communication representative that I would write an article (because he actually made the effort of sending me information and responded to all of my questions), but I will do it on my uncompromised terms.

Existing Solutions: Tether (USDT) and MakerDAO (DAI).

The cryptocurrency market is so volatile and unpredictable that every small event which affects the reputation of a coin can influence the trading behavior and volumes of almost every coin. Some blockchains get 51% attacks, there are coins that fail to deliver what they promised, banks spread institutional FUD about their cryptographic competition, and governments constantly promise regulation frameworks. This is all part of the game, and 10% fluctuations over a 24 hour time frame are no stranger to anyone who's been around for longer than a week.

Therefore, it makes a lot of sense for investors to demand ways of maintaining control over the value of their funds. Why constantly lose money exchanging your cryptos into fiat when you can simply do a quick trade into a coin which keeps its value no matter what? Wherever there is demand, people will generously supply. That's how stablecoins came to existence and the market's dynamics have never been the same since.

Tether (USDT) is the best know project in the field, and it operates on the Bitcoinblockchain (via the Omni Layer protocol) on a very simple rule: there are US dollars to back every amount of USDT. It has all the properties of a cryptocurrency, it can be traded and spent, but it suffers from the flaw of centralization. It's also a subject of perpetual controversy, as people question the 1 to 1 USD to USDT ratio and suspect the stablecoin of serving a purpose of market manipulation. Tether has been made famous by the Poloniex and Bittrex exchanges, and according to CryptoCompare has a market cap of 2.61 billion.

MarkerDAO (or DAI) is a stablecoin which runs on the Ethereum blockchain. On the plus side, it's much more decentralized than Tether and manages to keep its backing on the blockchain. The solution appears to be temporarily exclusive to the Bitfinex exchange and has significantly lower trading volumes than Tether (at press time, approximately $10,000). The main concerns surrounding this project refer to scalability, as its ability to transact high volumes is proportional to the capabilities of the Ethereum blockchain. Since the two factors are intertwined, we should see an upgrade once ETH switches to Casper PoS.

Planned Projects: Basis and Reserve.

As of late April, the Basis project consisted of 10 enthusiasts who raised around $130 million and decided to shoot for the stars. In its final form, Basis will have its own blockchain and have an automatic supply-adjusting mechanism which changes according to trading patterns. The model is imported from the practices of foreign central banks, only the end product aims for a greater degree of decentralization. If fully developed, Basis will also pay dividends to coin holders and issue tradeable bonds for investors when the price collapses. These techniques resemble tested real-life methods, but it still remains to be seen whether or not this attempt will outclass existing solutions.

Last but not least, there's Reserve, a project which promises to be different from everything else on the market or currenly in development. According to the PR official of the project, "Reserve is different from Tether in that it is backed with assets on the blockchain, different from Maker in that it is backed through a standard reserve approach instead of by issued debt, and different from Basis in that it is not purely backed via its own future growth". It also makes sense that Coinbase invested in a project that it can natively integrate in its platform, since Poloniex, Bitfinex, and Bittrex all have exclusive solutions for the volatiliy issue. 

Furthermore, Reserve doesn't just try to bring stability in the crypto market, and seeks to help fiat owners hold their money without worrying about the inflation rates generated by their central banks. Could the team of former Google engineers achieve what Bitcoin didn't? Well, it remains to be seen what the project actually delivers. However, it can never be as decentralized and censorship-resistant as the king of cryptos, and recent lessons on recreating a central bank on the blockchain (which we've definitely received from EOS) should make the entire market rethink their approaches. Furthermore, Reserve still lacks a formal whitepaper and their website only features a list of principles and a Medium blog post.

In conclusion, the idea of stablecoins as a way of fighting against crypto and fiat volatility is noble in itself, but opens up the gates of hell as soon as the slightest shadow of a doubt emerges. It could lead to a better way of storing value over time, yet we have yet to discover a cryptocurrency project which successfully achieves the trustlessness, decentralization, and censorship resistance of Bitcoin.