The stablecoin industry looks quite different today than it did two years ago.
What was once a handful of relatively small projects has evolved into a multi-billion dollar subset of the cryptocurrency that is only continuing to expand–the market caps of many established stablecoins are trending towards growth, and new stablecoin projects are being born all the time.
Additionally, the advent of Facebook’s Libra project has brought quite a bit of new attention–flattering and unflattering–to the stablecoin space; attention that has raised important questions and concerns about the transparency of both the stablecoin ecosystem and the greater cryptocurrency ecosystem as a whole.
Recently, Finance Magnates spoke with Daniel Popa, CEO of Zug-based stablecoin company Anchor, to discuss the mechanics of algorithmic stablecoins and the evolution of the stablecoin industry.
What is Anchor?
“Anchor is a two-token, algorithmic stablecoin pegged to the sustainable, upward trend of global economic growth,” Popa explained.
What is an algorithmic stablecoin? Let’s back up for a moment: generally speaking, there are three kinds of stablecoins: fiat-pegged (cryptocoins that are ‘pegged’, usually on a one-to-one ratio, to a fiat currency), crypto-pegged (stablecoins that are pegged to other cryptocurrencies), and algorithmic stablecoins (which are stabilized by controlling token supply according to demand.)
Anchor’s algorithmic system as three important components: Anchor tokens themselves (ANCT), utility tokens known as “Dock Tokens” (DOCT), and a non-flationary stable peg of value, the Monetary Measurement Unit (MMU).
The MMU is “a financial index created by an algorithm that takes into account the GDP of more than 190 countries from the last 25 years, further stabilized with forex indicators from a basket of currencies and premium sovereign bond yields from 10 of the world’s strongest economies.”
#Stablecoins are offering solutions, but will they be able to drive adoption? @_DanielPopa comments on the use cases and the significance of stable currencies in #crypto. Read the English summary of Golden Finance’s original article >> https://t.co/Ae7RolPtUj
— The Anchor.io (@theanchor_io) October 31, 2019
“By developing an algorithmically calculated financial index based on global GDP, Anchor has created what is intended to be the first reliable financial standard and measure of value since the International Monetary Fund’s (IMF) Special Drawing Rights (SDR), circa 1969,” Popa continued.
“The SDR is exclusive only to IMF member countries and based on a basket of five currencies, whereas the MMU is decentralized, inclusive, and based on a dynamic currency basket of 10 of the strongest economies, based on their GDP and participation in the global economy each year.”
“The evaluation is completely objective and based on each country’s performance and participation on an annual basis, not related to a political agenda or affiliation.”
Elastic supply and demand
“Anchor is governed by anelastic supply and demand principle,” Popa explained to Finance Magnates.
It uses a two-token model that operates in relation to the MMU.
“Anchor is composed of Anchor Tokens (ANCT), that serve as the main currency/payment tokens; and Dock Tokens (DOCT), the utility tokens that stabilize the currency ensuring ANCT remains pegged to the MMU regardless of external fluctuations. DOCT cannot be used as a means of payment or transferred from one token holder to another,” Popa explained.
The supply of tokens is regulated by “Contraction and Expansion stabilizing mechanisms through which Anchor’s system programmatically contracts or expands ANCT and DOCT,” Popa explained.
“The system also mints/burns ANCT tokens in response to ANCT’s price deviations relative to the MMUDOCT is used as a utility token to incentivize participants to facilitate Expansion and Contractions Phases by exchanging one token for the other.”
”Fiat currencies and fiat-pegged stablecoins are susceptible to inflation, depreciation, and other external economic forces that cause instability.
Anchor isn’t the only algorithmic stablecoin on the market–since the crypto boom of late 2017, a growing number of competing stablecoins have entered the space.
Still, the algorithmic stablecoin model–as powerful as it may be–is in the minority.
“The stablecoin market is currently dominated by fiat-pegged stablecoins,” Popa said.
But here’s the problem: “While this is a natural transition in the evolution of digital currencies since fiat is what we are most familiar with, these assets are mere digitizations of the current flawed monetary systems.”
“Fiat currencies and fiat-pegged stablecoins are susceptible to inflation, depreciation, and other external economic forces that cause instability.”
Pure Markets' CEO Talks Business Model, 2020 OutlookGo to article >>
Anchor CEO @_DanielPopa offers a fresh perspective on #Brexit’s effect on forex markets; unveiling the fragile and volatile nature of traditional monetary systems, and a promising future for #stablecoins. https://t.co/BrZRkTI8Pn
— The Anchor.io (@theanchor_io) October 20, 2019
“Algorithmic stablecoins,” on the other hand, “offer transparency, long-term price stability and scalability without the risk of inflation by mediating volatile price swings and mitigating risks associated with supply and demand,” Popa told Finance Magnates.
“Algorithmic stablecoins are objective with a non-flationary peg of value and price is not determined by speculation, artificially induced, politically influenced, or manipulated.”
And perhaps a global trend toward the development of fiat-pegged national stablecoins could eventually evolve into a trend toward algorithmic stablecoins.
“As the world catches up with the digital financial industry, more and more nations are developing their own digital currencies. China has announced the development of their digital renminbi to compete with Facebook’s Libra, while Ecuador, Senegal, Singapore and Tunisia have all released their own digital currencies,” he told Finance Magnates.
In this week’s Crypto Roundup, we discuss how countries around the world are taking crucial steps towards the use and implementation of the #blockchaintechnology and #cryptocurrencies on a national level. Full roundup >> https://t.co/LeYIZ96eB6
— The Anchor.io (@theanchor_io) November 1, 2019
“Stablecoins are replacing outdated sovereign currencies as a method of payment all across the world. I predict that this trend will continue to grow as the international community realizes the benefits of digital currencies, and particularly algorithmic stablecoins like Anchor.”
Facebook’s issues with transparency could cause constructive change around transparency in the stablecoin space
In the meantime, however, quite a bit of buzz has been generated in the stablecoin space as a result of the saga around Libra, Facebook’s global stablecoin project that may or may not ever come to be.
So far, Popa sees Libra as a positive thing for the space: “I think the advent of Libra is a positive development for the stablecoin space because its drawing more attention to the innovative platforms that have been created in recent years,” he said.
“By broadening the discussion, more users are likely to become involved with stablecoins and platforms such as Anchor will devise increasingly innovative technologies to further enhance the market.”
Additionally, Facebook’s reputation with transparency and data privacy–poor though it is–could raise important questions about privacy and transparency in the stablecoin space.
“The transparency issues Libra faces will also likely draw attention to the space as a whole, hopefully increasing the transparency of our competitors, ensuring the safety of users across the globe,” Popa said. “Widespread concerns have plagued Facebook due to their access and handling of customer data that has resulted in controversy in recent years.”
Indeed, while “these concerns may ferment and cause further distrust of Facebook, calling into question the likelihood of widespread use of their digital currency,” Popa believes that “the questions surrounding Facebook and by default, Libra, will hopefully lead to an increase in compliance, best practices and an advanced regulatory framework across the stablecoin space.”
“I believe users will gravitate towards a stablecoin that is financially beneficial for them in the long run”
And the sooner that stablecoins can present themselves as completely transparent and reliable as possible, the better: “I believe users will gravitate towards a stablecoin that is financially beneficial for them in the long run and one that provides a level of reliability and stability that ensures trust,” Popa wrote.
“As such, I think this market is highly competitive. This competition drives innovation in the space,” he continued, adding that this was what eventually inspired the creation of Anchor.
For its own part, Anchor’s transparency model involves a decentralized governing body of Validators.
“At the heart of Anchor’s core foundation lies a decentralized governing body of Validators whom validate all external data, the integrity of the MMU, and Anchor’s price,” Popa explained.
“Anchor will commence a phased rollout of its governing body of up to 21 validators over the next 24 months. These Validators will be responsible for the decentralized consensus of the value of the MMU, token price, token volume, and other processes.”
“Validators offer suggestions to update the MMU based on official data from more than 190 countries as well as FX indicators from a basket of 10 of the world’s strongest currencies, and premium sovereign bond yields from AAA+ rated countries,” he said.
Anchor’s plans for the future
What else is on the roadmap for Anchor? Popa said that “in the coming months Anchor will be opening its doors for its first round of traditional fundraising offering up to 10% equity in the company to accredited investors.”
The company is also hoping to further its reach into new geographical territories. “Currently, we are developing Anchor’s first use case for remittances and will then expand into e-commerce in Asia,” Popa said.
“The next step will be working with various freelance platforms for cross-border payments, and then partnering with financial institutions to offer loans denominated in ANCT.”
“Following that, we will offer the MMU to pension funds as a service and ANCT as an asset class investment. Furthermore, the MMU has the potential to become a new financial standard and an ideal value peg for countries issuing their own sovereign cryptocurrencies, such as the Marshall Islands along with 18 other countries creating or researching the issuance of a decentralized digital currency. These are just some of our goals and objectives for the next five years.”