Stablecoins have emerged as an integral part of blockchain ecosystems.
For Web3 applications to be as convenient and viable as traditional financial services, users must have the means to transact in secure, efficient, and stable currency.
With Bitcoin, many stablecoins have been introduced across the network’s layers. Now, Bitcoin users have several options to choose from for storing and exchanging other cryptocurrencies that are valued based upon real-world assets.
In this article, we will break down stablecoins, explain how they work on the Bitcoin network, and provide some examples of Bitcoin stablecoins.
What is a Stablecoin?
A stablecoin is a type of cryptocurrency derived from an underlying asset with a relatively constant value.
The price of a stablecoin should not change over time, giving the holders peace of mind knowing that their asset should forever be worth the same amount. The reserve asset could be fiat money, precious metals, commodities, or even another cryptocurrency. Most commonly, stablecoins are pegged to fiat currencies, like the US dollar (USD) or Euro (EUR).
There can be many different stablecoins for a single underlying asset. For example, both USDC and USDT are pegged to the US Dollar (meaning 1 USDC/USDT token is redeemable for $1 US Dollar). However, not every stablecoin is created the same. Stablecoins are developed by separate entities who employ different mechanisms to manage their token supply and reserve assets.
In just the past couple years, stablecoins have experienced unprecedented growth. According to CoinMarketCap, at the time of this article’s writing, stablecoins represent over $140 billion in market capitalization across all blockchains.
There are many benefits to tokenizing a traditional fiat asset like the US Dollar. Whether you are interacting with DeFi applications, sending and receiving payments, or buying an NFT, stablecoins play an important role in stable, on-chain value exchange.
Moreover, bringing dollar-based currencies on-chain can be monumental for parts of the undeveloped world. With a digital wallet, anyone can gain access to a stablecoin without the need of a traditional bank account.
Does Bitcoin Have Stablecoins?
Bitcoin has multiple stablecoin assets on its layered solutions including Stacks, RSK, and Liquid Network. Since the Bitcoin base layer only has one native asset, BTC, other tokens like stablecoins must be issued on layers built on top of Bitcoin. While not currently possible, a stablecoin could eventually come to the Bitcoin base layer, as well as the Lightning Network (more on this later).
How Do Bitcoin Stablecoins Work?
To understand how a Bitcoin stablecoin works, we must first discuss why layers are used in the first place.
Bitcoin’s protocol is very simple. The protocol has limited programmability, which makes developing complex smart contracts on the base very difficult.
Moreover, Bitcoin is constrained by its throughput of about 7 transactions per second. Executing transactions on Bitcoin’s base during network congestion results in slowed finality, and expensive fees.
Under these circumstances, Bitcoin may seem like an unscalable blockchain. However, Bitcoin’s simplicity is its biggest strength, as it allows it to be the most decentralized, secure, and reliable blockchain in the world.
With Bitcoin serving as the ultimate foundation, layers can be built on top to add more efficiency and functionality to the larger Bitcoin network.
Bitcoin Layers for Stablecoins
Bitcoin layers implement more advanced technologies like smart contracts to make Bitcoin transactions faster, cheaper, scalable, and more programmable.
While each layer has unique mechanisms by which it connects to and interacts with the Bitcoin blockchain, every layer ultimately achieves final settlement on Bitcoin’s base.
Each Bitcoin layer hosts its own ecosystem to use stablecoins with, including applications and projects like:
- Digital wallets
- Lending protocols
- Decentralized exchanges (DEXs)
- Payment platforms
Stablecoins play an integral role in the expansion of Bitcoin DeFi. In a growing number of use cases, crypto investors are looking for alternative assets to BTC to store and exchange within the Bitcoin network. Stablecoins on Bitcoin layers allow users to hold stable assets without having to off-ramp their BTC to fiat.
Stablecoins on the Bitcoin Network
Let’s take a look at some of the popular stablecoins that currently exist within the Bitcoin network.
Issued by Arkadiko on Stacks, USDA is a decentralized stablecoin that is soft-pegged to the US Dollar. Arkadiko’s non-custodial liquidity protocol lets users mint and borrow USDA. Minting USDA is completed by depositing STX tokens from a Stacks wallet as collateral into an Arkadiko Vault. In addition to minting, users can also exchange their other Stacks assets for USDA through a decentralized exchange.
DoC (Dollar on Chain) is a 100% bitcoin collateralized stablecoin with a 1:1 peg to the US Dollar. The DoC token falls into a collection of Money On Chain tokens, each providing different use cases on the RSK layer. A stablecoin like DoC gives users viable means for daily transactions, and helps traders avoid volatility. Anyone can buy DoC on the secondary market through exchanges, or mint their own stablecoins (at lower costs) through the smart contract.
rDAI is another RSK stablecoin that serves as a cheap alternative to DAI on the Ethereum network. DAI is an algorithmic stablecoin that maintains its 1:1 peg to the US Dollar by using collateralized debt denominated in ETH.
Rather than paying high transaction fees on Ethereum, users can bridge their DAI over to RSK DAI (rDAI) and pay fees of approximately .15 cents per transaction.
BRZ is a multi-chain, Brazilian stablecoin. The token is pegged to the Brazil’s Real (BRL) fiat currency, which equips Brazilians with seamless on-ramping to blockchain. BRZ token’s infrastructure will enable near instantaneous, cheap transactions that are far more efficient than traditional payment methods in Brazil. Now, Brazilian citizens can access international crypto markets without immediate exposure to volatile cryptocurrencies.
Liquid-based Tether (L-USDt) is one of many stablecoin assets on the Liquid Network - a Bitcoin Layer for asset issuance. Along with issuing assets, Liquid Network offers speedy settlement and increased confidentiality for Bitcoin transactions. This added layer of privacy is advantageous for professional traders wanting to avoid unconfirmed transactions and exchange front-running.
Taro and Stablecoins
For now, stablecoins only exist on Bitcoin layers, and not its base. However, this could all change with the implementation of Taro.
Taro (Taproot Asset Representation Overlay) is a protocol for minting, sending and receiving assets on Bitcoin. Taro assets, such as stablecoins, could be natively issued on the Bitcoin base layer, and even exchanged on the Lightning Network. Lightning Network already enables fast, cheap, and secure transactions for BTC, but unlocking stablecoins with the same infrastructure could be monumental for global adoption of the Bitcoin network.
Interested in learning about the difference between Bitcoin-backed and Bitcoin-secure stablecoins?