What Are Stablecoins and Why Do We Need Them?
The Volatility Problem
Bitcoin can gain or lose 10% of its value in a single day. Ethereum swings wildly with market sentiment. This volatility makes cryptocurrencies excellent for speculation but terrible for:
- Daily transactions
- Store of value
- Salary payments
- Savings accounts
- Anything requiring price stability
The problem: If you’re paid in Bitcoin on Monday, by Friday your salary could be worth 20% less—or 20% more. That’s not money, that’s gambling.
The Stablecoin Solution
Stablecoins solve this by maintaining a stable value, typically pegged to:
- Fiat currencies (USD, EUR)
- Physical assets (gold, commodities)
- Algorithmic mechanisms
- Real-world price observations
The goal: Create digital money that behaves like traditional currency—stable, predictable, usable in daily life—while retaining the benefits of blockchain technology.
The Four Types of Stablecoins
1. Fiat-Backed Stablecoins
How they work: For every stablecoin issued, the issuer holds an equivalent amount of fiat currency in reserve.
Examples:
- USDT (Tether): Pegged to USD, backed by USD reserves
- USDC (USD Coin): Pegged to USD, backed by USD reserves
- BUSD (Binance USD):Pegged to USD, backed by USD reserves n
The mechanism:
1 USDT issued = $1 USD held in reserve
User deposits $100 → Receives 100 USDT
User redeems 100 USDT → Receives $100 USD
Pros:
- Simple to understand: 1 coin = 1 dollar (or other fiat)
- High liquidity: Easy to buy/sell
- Widely accepted: Most exchanges support them
- Strong value: Directly tied to fiat currency, so share the same stability as his referencial which is why strong fiat currencies are mainly used. n
Cons:
- Centralization risk: Single entity controls reserves
- Trust required: Must trust issuer holds reserves
- Regulatory risk: Governments can freeze reserves
- Audit concerns: Reserves may not be fully verified
- Limited supply: Can’t exceed fiat reserves, stablecoin often force governments to emit new fiat reserves, creating debt
- Treasury Debt Creation: Stablecoin already represent one of the highest source of the U.S. treasury debt.
- Censorship possible: Issuer can freeze accounts n
Real-world issues:
- Tether (USDT) has faced questions about reserve backing
- Regulatory scrutiny increasing
- Some issuers have frozen user funds n
Best for:
- Trading and arbitrage
- Quick value transfer
- Users who trust centralized entities n
2. Asset-Backed Stablecoins
How they work: Backed by physical assets like gold, silver, or other commodities held in reserve.
Examples:
- PAX Gold (PAXG): 1 PAXG = 1 fine troy ounce of gold
- Tether Gold (XAUT): Backed by physical gold
- Silver-backed tokens: Various projects n
The mechanism:
1 PAXG issued = 1 ounce of gold in vaultPrice fluctuates with gold market
User can redeem for physical gold (with fees)
Pros:
- Tangible backing: Real assets in vaults
- Inflation hedge: Gold historically maintains value
- Transparency: Assets can be audited
- Store of value: Unlike fiat, gold has intrinsic value
- Decentralization potential: Less dependent on governments n
Cons:
- Price volatility: Gold price fluctuates
- Storage costs: Vaults cost money
- Redemption complexity: Converting to physical assets
- Limited scalability: Can’t exceed asset reserves
- Custody risk: Assets must be securely stored
- Not truly stable: Value follows underlying asset and the law of supply and demand n
Best for:
- Long-term store of value
- Inflation protection
- Users wanting asset-backed security
3. Algorithmic Stablecoins
How they work: Use algorithms and smart contracts to maintain stability, often without direct backing.
Examples:
- DAI (MakerDAO): Over-collateralized with crypto assets
- FRAX: Fractional algorithmic stablecoin
- UST (Terra): Failed in 2022, showing risks n
The mechanism (DAI example):
User locks $150 worth of ETH as collateral
Receives 100 DAI (worth $100)If ETH price drops, user must add collateral or face liquidation
System maintains 150%+ collateralization ratio
n Pros:
- Decentralization: No single entity controls
- Transparency: Smart contracts are auditable
- No fiat reserves needed: Works with crypto assets
- Censorship resistant: Can’t be frozen by governments
- Programmable: Can add features via smart contracts n
Cons:
- Complexity: Hard to understand for average users
- Collateral risk: Underlying assets can crash
- Liquidation risk: Users can lose collateral
- Failure risk: Can depeg under extreme conditions (see UST)
- Volatility exposure: Still tied to volatile crypto markets
- High gas fees: Ethereum-based solutions expensive n
Real-world failures:
-
Terra UST (2022): Lost peg, collapsed from $1 to near $0
-
Iron Bank: Multiple depegging events
-
Various algorithmic coins: Many have failed
n Best for:
-
DeFi users comfortable with complexity
-
Users wanting decentralization
-
Advanced crypto users
4. Calibration-Based Stablecoins (The O Coin Approach)
How they work: Value is calibrated to real-world price observations rather than backed by reserves.
Example:
– O Coin: Calibrated to water price in each currency
The mechanism (O Coin):
1 O_USD = Average price of 1 liter of water in USD
1 O_EUR = Average price of 1 liter of water in EUR
One O currency per fiat currency, all representing the average cost of one liter of water in each fiat currency
Value determined by user measurements and online bots, not reserves
Unlimited supply possible (because not backed by physical asset)
Stability maintained through economic incentives
How O Coin maintains stability:
1. Water price measurement: Users and bots measure water prices globally per fiat currency
2. Calibration: Each O currency = 1 liter of water average price in each fiat currency
3. Exchange rate monitoring: System and users observes market exchange rates
4. Economic incentives: Unstable currencies generate coins for stable currency users
5. The principle: “The offender’s sanction is the reward of the offended”
Learn More at https://o.international n
Pros:
- Unlimited supply: Not limited by reserves
- Universal reference: Water is accessible everywhere humans live
- No backing needed: Value from calibration, not assets
- Decentralized measurement: Users validate prices and exchange rates
- Stable referential: Based on basic human necessity, suppress inflation
- Can fund Universal Basic Income: Unlimited supply without backing enables universal basic income
- Can fund earth cleaning: No ROI needed, just stable value creation n
Cons:
- New concept: Less proven than traditional approaches
- Measurement complexity: Requires user participation
- Adoption challenge: Needs critical mass of users
- Understanding curve: More complex than “1 coin = 1 dollar”
- Regulatory uncertainty: New model, unclear regulations n
Unique advantages:
- Sovereignty: Each country keeps its currency name
- No currency competition: All O currencies equally stable
- Universal applicability: Works for all 142+ currencies
- Purpose-built: Designed for UBI and earth cleaning n
Best for:
- Universal basic income systems
- Funding activities without ROI
- Countries wanting currency stability without losing sovereignty
- Long-term economic transformation n
Comparison Table: Stablecoin Types
| Feature | Fiat-Backed | Asset-Backed | Algorithmic | Calibration-Based |
|—-|—-|—-|—-|—-|
| Stability Mechanism | Fiat reserves | Physical assets | Smart contracts | Price observation |
| Decentralization | Low | Medium | High | High |
| Supply Limit | Yes (reserves) | Yes (assets) | Yes (collateral) | No (unlimited) |
| Trust Required | High (issuer) | (custodian) | Low (code) | Medium (users) |
| Regulatory Risk | High | Medium | Low | Medium |
| Complexity | Low | Low | High | Medium |
| Use Case | Trading, payments | Store of value | Defi | Universal Basic Income, Earth Cleaning |
| Failure Risk | Medium | Low | High | Medium |
The Stability Challenge: Why Stablecoins Fail
Common Failure Modes
1. Reserve Insufficiency (Fiat-Backed)
– Issuer doesn’t hold enough reserves
– Run on the bank scenario
– Users can’t redeem n
2. Asset Price Collapse (Asset-Backed)
– Gold price crashes
– Backing becomes insufficient
– Depegging occurs n
3. Death Spiral (Algorithmic)
– Market panic causes selling
– Algorithm can’t maintain peg
– Collapse (see Terra UST)
n 4. Measurement Failure (Calibration)
– Insufficient user participation
– Manipulated measurements
– Loss of calibration accuracy
The Trust Problem
Fiat-backed: Trust the issuer has reserves
Asset-backed: Trust the custodian has assets
Algorithmic: Trust the code works
Calibration: Trust the measurements are accurate
The question: Which trust model is most reliable? n
Real-World Examples and Lessons
Success Stories
USDC:
– Well-audited reserves
– Transparent reporting
– Regulatory compliance
– Lesson: Transparency builds trust
DAI:
– Survived multiple market crashes
– Over-collateralization works
– Decentralized governance
– Lesson: Conservative design matters
Failure Stories
Terra UST (2022):
– Lost peg in days
– $40+ billion lost
– Algorithm couldn’t handle panic
– Lesson: Algorithmic stability has limits
Iron Bank:
– Multiple depegging events
– Liquidity issues
– Lesson: Liquidity is critical
The Future of Stablecoins
Regulatory Landscape
Current state:
– Increasing scrutiny
– Reserve requirements
– Transparency demands
– Trend: More regulation coming
Impact:
– Fiat-backed: Most affected
– Algorithmic: May face restrictions
– Calibration: Unclear, new model
Innovation Directions
n 1. Hybrid Approaches
– Combining multiple mechanisms
– Fiat + algorithmic
– Asset + algorithmic
n 2. Better Decentralization
– Less reliance on single entities
– Community governance
– Transparent reserves
n 3. New Calibration Methods
– Beyond water price
– Multiple reference points, all human-validated and cross-country
– Real-world value observation eliminating inflation
n Choosing the Right Stablecoin
For Trading
– Best: Fiat-backed (USDT, USDC)
– Why: High liquidity, easy conversion
For Store of Value
– Best: Asset-backed (PAX Gold)
– Why: Inflation hedge, tangible backing
For DeFi
– Best: Algorithmic (DAI)
– Why: Decentralized, programmable
For Economic Transformation
– Best: Calibration-based (O Coin)
– Why: Unlimited stable supply without human trust or confidence, UBI and earth cleaning potential
For Daily Use
– Best: Fiat-backed or Calibration-based
– Why: Stability and usability
The O Coin Innovation: Calibration Without Backing
Why Calibration Matters
Traditional stablecoins are limited by their backing:
– Fiat-backed: Limited by reserves
– Asset-backed: Limited by assets
– Algorithmic: Limited by collateral n
The problem: You can’t fund universal basic income or earth cleaning if you’re limited by reserves. n The solution: Calibration-based stablecoins don’t need backing—they need accurate measurement.
How O Coin Works
1. Water Price as Universal Reference
– Water is accessible everywhere
– Basic human necessity
– Price reflects local economic conditions
– Universal but local
2. Unlimited Supply
– Not backed by physical asset
– Can create coins for UBI
– Can fund earth cleaning
– No reserve limitations
3. Economic Incentive Stability
– Unstable currencies generate coins for stable currencies
– Governments and individuals incentivized to maintain stability
– Self-correcting system
4. Sovereignty Preservation
– Each country keeps its currency name
– OUSD, OEUR, O_JPY, etc.
– No currency competition
The Vision
Traditional stablecoins: Digital version of existing money
O Coin: New money for new purposes
Use cases:
– Universal Basic Income
– Earth cleaning funding
– Economic equality
– Immigration reversal n
Conclusion: Understanding Stablecoins in Context
Stablecoins aren’t just “crypto dollars”—they’re experiments in digital money stability. Each type offers different trade-offs:
Fiat-backed: Simple but centralized
Asset-backed: Tangible but limited
Algorithmic: Decentralized but complex
Calibration-based: Unlimited but new
The future:
As cryptocurrency matures, we’ll likely see:
– More regulatory clarity
– Better transparency
– Hybrid approaches
– New calibration methods n
The key:
Understand what backs your stablecoin, who controls it, and what happens when things go wrong. Not all stablecoins are created equal, and the “stable” in stablecoin is a promise, not a guarantee.
Stability is based on the referential used and the volatility risk is associated to the volatility risk of the reference (fiat currency, Assets…)
For those interested in economic transformation:
Calibration-based approaches like O Coin offer something unique: the ability to create unlimited, stable currency for purposes that traditional economics can’t fund. Whether that’s universal basic income, earth cleaning, or other global challenges, the potential is significant.
The question isn’t whether stablecoins will succeed—it’s which approach will prove most reliable, useful, and transformative for humanity’s future.
References & Further Reading
– Stablecoin Market Analysis (various crypto research sources)
– Terra UST Collapse Analysis (2022)
– MakerDAO DAI Documentation
– Tether Reserve Reports
– O Blockchain Whitepaper (o.international)
– Stablecoin Regulation (various regulatory sources)
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Note on Content: This article provides an educational overview of stablecoin types and mechanisms. DYOR.
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This article is published under HackerNoon’s Business Blogging program.
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