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