There are a lot of people in both the cryptocurrency and gambling sectors hoping that online gambling one day has its own alt coin that acts as a universal token across every platform. We have written about the topic at great length here at Coinbet.com. However, a number of concerns have prevented such a currency from emerging. One of the biggest is volatility.
The volatility of bitcoin leads to volatility among virtually every other cryptocurrency out there. That volatility makes gambling operators and alt coin developers alike a bit nervous. Could stablecoins be the answer?
A stablecoin is a different kind of cryptocurrency that has been designed specifically to address volatility problems. There are a number of ways to accomplish the primary goal of stability, which we will discuss in this post. Needless to say that stablecoins are being pushed as a better alternative to traditional cryptocurrency because there is less risk involved.
How a stablecoin works
Regular Coinbet.com readers are fully aware that standard cryptocurrencies are valued according to supply and demand. Because nothing backs up bitcoin, for example, there is no government authority or central bank manipulating its value. The value goes up or down based on who is buying and selling.
This pure market valuation is responsible for bitcoin's volatility. A stablecoin is not nearly as volatile by design. In fact, you could make the case that a good stablecoin is less volatile than some fiat currencies.
In order to maintain stability, a stablecoin has to be controlled in some way, shape, or form. This is the sticking point. There are ways to control a stablecoin by pegging it to fiat currency or exchange-traded commodities. This would result in the coin rising or falling based on the particular asset behind it.
You can also control a stablecoin by pegging it to a traditional cryptocurrency. Finally, there are algorithmic and tethering options. With so many different ways to do it, is there one particular way that would allow a stablecoin to emerge as a default gambling currency?
The only way to figure that out is to go through the five different ways of controlling a stablecoin. In the end you should have enough information to make your own assessment.
1. Backing stablecoin with fiat
Creating a stablecoin backed by fiat currency is the easiest way to create a non-volatile crypto asset. It turns out that these kinds of stablecoins are the oldest and most common on the market. They are pegged to a fiat currency like the U.S. dollar or euro at a fixed ratio - let's say 2:1 for purposes of easy illustration.
For every two alt coins there is a single euro behind it, let's say. The backing of the stablecoin is accomplished completely off-chain, meaning it is the responsibility of a centralized bank or other certified financial institution to put up the euros. That institution also takes responsibility for tracking financial transactions.
The amount of stablecoin in circulation is also controlled by tying it to the amount of fiat behind it. So if the controlling bank reduces or increases the euro supply, the supply of the stablecoin changes commensurately.
As well as the system works, its primary disadvantage is that it is not decentralized. A fiat-backed alt coin is really just a digital representation of its backing asset controlled by a financial institution. This may be a great model for people who view cryptocurrency as nothing more than digital money, but it's a no-go if you believe in crypto as a means of taking governments and central banks out of the economics of individual citizens and business owners.
2. Backing with exchange-traded commodities
Another way to back a stablecoin is to do so with exchange-traded commodities. These are things like precious metals. Like fiat-backed stablecoins, commodity-backed stablecoins are pegged to a specific commodity at a fixed ratio. Value and supply are once again controlled by a central bank or other certified financial institution.
How does this model differ from the fiat model? Quite simply, governments do not exercise the same kind of control over commodities as they do their own currencies. There is a bit more market freedom in play here. The stablecoin still reflects the value of the commodity behind it, but governments cannot directly control the prices of said commodities.
This would seem the better of the first two options. But once again, commodity-backed stablecoins are not decentralized. They still require financial institutions for purposes of tracking transactions and determining the amount of coin in circulation based on the commodity backing it. A commodity-based stablecoin is more independent than a fiat-backed coin, but it is still not completely free.
3. Backing with other cryptocurrencies
The next option is the first of three considered completely decentralized. This option is to back a stablecoin with an existing cryptocurrency, like bitcoin. As strange as it sounds, there are ways to do this while still protecting the stablecoin against bitcoin's volatility.
A key feature of the previous two models is that the backing asset exists off-chain. In other words, it is completely separate from the stablecoin and not maintained by a blockchain. A cryptocurrency-backed stablecoin is different. It has an on-chain collateral. So there must be some other way to control value. They do it with smart contracts.
Purchasing a crypto-backed stablecoin automatically triggers a smart contract that essentially results in the buyer purchasing the backing asset and then using it to fund the purchase of the stablecoin. Everything is executed on-chain and in a decentralized manner.
Built into the smart contract is an automatic sell order should the value of the backing cryptocurrency fall too close to the value of the stablecoin. This works because the ratio of backing crypto to stablecoin is large enough to protect the value of the latter.
4. Algorithmic stablecoin
Fourth on the list of options is to peg a stablecoin to a decentralized autonomous organization (DAO) or a decentralized autonomous corporation (DAC). Both entities are nothing more than computerized platforms that autonomously control the value of the coin.
How does it work? The platform is coded to respond to fluctuations in the market by either issuing or destroying coins. Let's say demand is extremely high, causing the price of a coin to rise too quickly. The platform would automatically issue enough new coins to keep up with demand. This prevents a price boom.
Likewise, if the supply of coins grew large enough to trigger an excessive drop in price, the platform would destroy enough coins to stabilize the price. Everything is done automatically and in the background without any need for central banks or government interaction.
5. Tethered cryptocurrencies
The last model on the list is known as the tethered cryptocurrency. A stablecoin developed under this model doesn't rely on automation to control coin supply and value. Instead, it relies on consensus among all coin holders. Owners essentially agree among themselves to not allow the value of their stablecoin to rise or fall above or below a certain point.
These kinds of stablecoins are issued by owners of other cryptocurrencies. They can be pegged to anything issuers want to use as collateral. So one owner could issue coins backed by bitcoin while another could issue coins backed by fiat.
Central to a tethered cryptocurrency's success is fixed supply. In other words, the powers that be behind a new stablecoin determine beforehand how many coins will ultimately be made available. There will never be any more. The other key is the good faith of owners. They have to be able to somehow back up the coins they issue even if their backing asset fails.
Would any of them work for gambling?
Now that you know the five different ways to create a stablecoin and control volatility, the next question is whether any of them would work as a gambling coin. It is possible.
The first two models, fiat and exchange-backed securities, would make it very possible to come up with a universal gambling coin with inherent stability. There are already a number of such stablecoin already on the market. But there is a reason that gambling operators have not embraced them: they are still subject to government and bank interference.
One of the reasons for accepting bitcoin as a gambling currency is its decentralized nature. Gambling operators want to keep banks and governments out as much as possible. As such, it doesn't make sense to embrace a fiat or commodity-backed stablecoin.
The last two models, algorithmic and tethering, could also work in theory. Algorithmic is not ideal in that coins are constantly being created and destroyed. Yet it is decentralized. The tethering model probably wouldn't work for gambling operators because of the way coins are issued and backed.
That leaves gambling operators with the cryptocurrency-backed model. If they want a universal gambling coin that is also a stablecoin, this seems the best way to go. Smart contracts take care of volatility issues by preventing prices from climbing too high or falling too low. At the same time, the stablecoin is backed by a recognized cryptocurrency with real value on the open market.