It's the Holy Grail of cryptocurrencies - an asset with all the benefits of decentralisation but none of the volatility.
Tether, which claims to be pegged one-to-one to the dollar, is the most prominent among so-called stable coins. It's also the most controversial, with U.S. regulators and investors trying to sort out whether it's a scam. Even with Tether under a cloud, demand is rising for tokens seeking to dull price swings and increase the use of virtual money.
"Stable coins are potentially the key to unlocking widespread adoption of cryptos," said Rafael Cosman, the 24-year-old co-founder of San Francisco-based TrustToken, which issued a token named TrueUSD last month.
Their creators say stable coins can be used by merchants to price goods, send remittances abroad and serve as a reliable store of wealth. They can also act as a haven from the wild price swings that often accompany Bitcoin and other popular tokens.
Tether has become a popular substitute for dollars on crypto exchanges worldwide, with about US$2.2 billion ($3 billion) of the tokens outstanding. While Tether has said all of its coins are backed by dollars held in reserve, the company has yet to provide conclusive evidence or have its accounts audited. The US Commodity Futures Trading Commission sent subpoenas on December 6 to Tether and related virtual-currency exchange Bitfinex, Bloomberg News reported.
NuBits, launched in 2014 by what's known as a decentralised autonomous organisation, also said its coins are pegged at one-to-one with the dollar and are meant to be redeemable, though the platform doesn't guarantee the coins are fully backed. Instead, the funds are stored in a "trustless liquidity pool," a blockchain-based system that claims to not rely on third parties, in which users are in control of their own funds.
NuBits mints new coins to respond to demand from users, if current users vote to do so. The network controls the supply of coins in circulation to maintain price stability, and has mostly been able to maintain the price at $1 since its inception, according to CoinMarketCap.
Maker's Dai coins, which are pegged to the dollar, also depend on an automatic mechanism that controls supply and demand. Coins are backed by each user's own Ethereum-based digital assets, which are held as collateral in so-called smart contracts. Dai coins were listed in December and have been able to roughly maintain the peg.
Tokens issued by Maker have soared by almost five times this year to about $15 million, and those issued by NuBits soared by 14 times to almost $14 million, according to CoinMarketCap. That compares with Bitcoin's market cap of about $200 billion. The coins' trading volume also increased almost seven-fold, though at a high of 1.3 percent of total volume, according to Brave New Coin, the sector is still a speck in the cryptocurrency market.
Critics of stable coins say decentralised currencies and stable prices simply don't mesh, as the process needs to be centralised at at least one stage. The projects will need to rely on banks to hold funds, auditors for verification and centralised price feeds, said Tone Vays, a New York-based analyst known for his skepticism of most cryptocurrencies other than Bitcoin.
"They will only function under an initial set of assumptions and if that's not properly calculated, and it can't be because reality isn't a test lab, the only way to fix it in the future is by having full control of the project," said Vays. "It's an illusion."
Even so, the pipeline of stable coins is growing. Some propose to back their coins one-to-one with an asset, fiat currency or a basket of those assets kept on reserve. Instead of a traditional currency, other coins would be pegged to cryptocurrencies. In a third type, an algorithm automatically controls the supply of coins so that the price doesn't fluctuate relative to the peg.
"More people coming into crypto want to hedge into something less volatile, especially when the market is falling," said Fran Strajnar, head of cryptocurrency technical analysis firm Brave New Coin. "Stable coins are set to climb the ladder as some of the most in-demand crypto assets as the industry matures and more institutional participants enter the marketplace."
TrueCoin, whose tokens haven't been listed yet, is a dollar-backed model, like Tether, but they make it clear they don't have much else in common with their biggest rival, with a section in their website dedicated to answer the question "How is TrueCoin different from Tether?"
While Tether is responsible for its reserve funds, TrueCoin keeps funds in custodial accounts only investors can access. Investors are also legally entitled to redeem TrueUSD tokens for dollars kept in their custodial accounts, which will be audited by third parties. The team aims to have accounts with multiple banking partners. Alliance Trust Co. of Nevada is one of their partners and they are in talks with others, Cosman said. Tether had declined to name which banks are holding its funds.
"We're learning from other projects to try to be the best coin that we can be. Tether has done several things well, and they have maintained a stable price, but they've broken trust and that's hard to repair," Cosman said.
Still in progress is Basecoin, which is backed by some of the most well-recognised cryptocurrency investors, including Andreessen Horowitz, Polychain Capital, Pantera Capital and MetaStable Capital. Basecoin wants to peg its coin to an exchange rate or basket of goods which will be automatically uploaded to the blockchain, either from a single feed of prices, from the median price of many feeds, or from the price agreed in a decentralised voting system. The Basecoin protocol will then expand or contract the coin supply with an algorithm to keep the price peg.
The first attempt to create a stable cryptocurrency dates back to at least 2014, with BitShares. Like most stable coins after it, it tried to back its coins with assets but the peg hasn't worked well enough to curb price movements.
The non-crypto world has plenty of examples where pegged currencies don't work, such as Argentina, Zimbabwe and Switzerland, where economies that were too fundamentally strong or weak relative to the peg caused the system to unravel. Of course, cryptocurrencies work differently, but just like national economies, all it takes is the loss of trust for the currencies to collapse.
"These stability coins have found their natural base in the ecosystem mainly from the trust that you get cash in exchange for cryptos," said Charles Hayter, head of research firm CryptoCompare. "The risk is if the tide goes the other way and you lose that trust. All you need is for the tide to change."