Tether’s USDT and Circle’s USDC are the most popular centralized stablecoins design.

This design is quite easy to understand. Let’s say that a bank or a company wants to issue crypto tokens with a stable value relative to the Dollar.

Whenever you give this bank or company one dollar, it gives you one crypto token (a stablecoin), and whenever you give it one token, you receive one dollar. The bank’s tokens are convertible against the dollar and conversely. We say that the tokens issued are collateralized at a 1:1 rate: there are always enough financial assets (collateral) backing the stablecoins.

These tokens can then be traded in the open markets on any centralized or decentralized exchanges supporting them. These tokens will therefore have a market price.

The convertibility between collateral and tokens just described is what ensures that the market value stays close to the peg. It indeed creates profitable arbitrage opportunities whenever the price of the stablecoin deviates from its peg.

Let’s say that the crypto tokens issued trade at a price below $1. Then, people have incentives to buy the token on the market (Kraken, Coinbase, UniSwap, Sushiswap…) at the lower price, and redeem it for $1 with the issuer. By doing so, they on the one hand immediately get a profit, but on the other hand, they also reduce the offer of tokens on the market thus increasing the price closer to $1.

When the price trades above $1, people have incentives to ask me to issue crypto tokens for $1 and then sell it on the open market for more than $1, thus getting a profit, increasing the market supply of my tokens, and hence decreasing the price to $1$.

At each price deviation from the peg, there are profitable incentives to bring the price of the tokens back to peg. In the end, the tokens have a stable market price: they are stablecoins.

Although really stable and very simple to understand, there are several limits to this design.

The first one is that this design is centralized. While the goal of crypto-currencies was to eliminate the need for a trusted third party, with centralized stablecoins you need trust in the company issuing tokens. In particular, you need to trust the company for always keeping more reserves in banks than stablecoins minted even though such companies are not transparent or auditable by everyone. It is also very possible that a centralized stablecoin company decides to black-list some owners of stablecoins, meaning that these stablecoins are in the end censorable.

There is also an important regulatory risk for centralized stablecoins. Centralized stablecoin companies, because it can be considered that they contest the monopoly of states on currency issuance, could well be shut down by governments, and this can be an important point of failure for Dapps and people using such stablecoins.

Another issue is that this centralized approach can only work for a limited number of assets. It works really well for USD (with USDT and USDC), for BTC (brought on Ethereum with Wrapped Bitcoin), but it can hardly work as well for imaginary assets (imagine a stablecoin pegged to the temperature in New York City) as centralized solutions require the issuer to effectively hold the assets in reserve.

Centralized approaches do not work very well neither for some real assets like the Euro. There are currently negative interest rates in the Euro zone meaning that it costs money to have deposits in the bank: unless it takes substantial risks with its reserves or charges high fees, a Euro stablecoin company cannot keep more reserves in the bank than it has minted stablecoin. Some companies (Stasis with the EURS, Lugh with the EURL) are currently trying to make it work but they have not managed to bootstrap a lot of liquidity so far. Tether also has plans to grow its EURt.

Assuming that this centralized approach can be replicated for any asset, there is still a scalability issue. A centralized solution can be scaled around one or two assets (like Tether does with USDT and its EURt), but it’s hard to scale to dozens or hundreds of assets (like all Forex for instance). You’d typically need one bank account or safe per asset type, making the logistic too complex.

• Centralized stablecoins are backed by fiat (or any financial asset) in a bank account or in a safe.

• Direct arbitrage makes these coins really stable.

• They require trust in the third party holding the collateral.

• Centralized stablecoins are censorable.

• Centralized stablecoins are subject to an important regulatory risk

• This design is not scalable to multiple assets.

Angle protocol makes the best of the drawbacks of this centralized approach while still keeping its advantages.

For more details about Angle, you can look at this Introduction Article or at the docs of the protocol.

Overall, similarly to centralized protocols:

• Angle keeps this full convertibility between collateral and stable assets in both senses (collateral to stablecoins and stablecoins to collateral) thus allowing for the stablecoins to be fully stable thanks to arbitrage opportunities.

• Angle has more reserves than centralized stablecoin issuers usually do thanks to its liquidity providers (Hedging Agents and Standard Liquidity Providers) adding collateral to the protocol.

Additionally, Angle improves on some areas:

• Angle is decentralized and reserves are public and auditable by everyone.

• Angle can work for any type of asset (Euro, Dollar, Korean Won, gold, global GDP, potentially temperature, …) provided that there is an oracle for it.

• Angle is a single protocol that could be used to create many different types of stablecoins.

  

  Note that we have only explored here the case of centralized stablecoins that are collateralized. There can be under-collateralized centralized stablecoins: this is the case of Central Bank Digital Currencies (CBDC) which are stablecoins backed by governments. There is no widespread CBDC so far.

  These currencies may not even be considered as crypto-currencies since they rely on centralized ledgers and are thus not so different from real fiat currency or money in your bank account except for the fact that it’s easier to transfer it globally.

  In Part 2 of this series, we will explore other designs, in particular, decentralized and overcollateralized stablecoins, and again see how Angle compares with them.

Tether’s USDT and Circle’s USDC are the most popular centralized stablecoins design.

This design is quite easy to understand. Let’s say that a bank or a company wants to issue crypto tokens with a stable value relative to the Dollar.

Whenever you give this bank or company one dollar, it gives you one crypto token (a stablecoin), and whenever you give it one token, you receive one dollar. The bank’s tokens are convertible against the dollar and conversely. We say that the tokens issued are collateralized at a 1:1 rate: there are always enough financial assets (collateral) backing the stablecoins.

These tokens can then be traded in the open markets on any centralized or decentralized exchanges supporting them. These tokens will therefore have a market price.

The convertibility between collateral and tokens just described is what ensures that the market value stays close to the peg. It indeed creates profitable arbitrage opportunities whenever the price of the stablecoin deviates from its peg.

Let’s say that the crypto tokens issued trade at a price below $1. Then, people have incentives to buy the token on the market (Kraken, Coinbase, UniSwap, Sushiswap…) at the lower price, and redeem it for $1 with the issuer. By doing so, they on the one hand immediately get a profit, but on the other hand, they also reduce the offer of tokens on the market thus increasing the price closer to $1.

When the price trades above $1, people have incentives to ask me to issue crypto tokens for $1 and then sell it on the open market for more than $1, thus getting a profit, increasing the market supply of my tokens, and hence decreasing the price to $1$.

At each price deviation from the peg, there are profitable incentives to bring the price of the tokens back to peg. In the end, the tokens have a stable market price: they are stablecoins.

Although really stable and very simple to understand, there are several limits to this design.

The first one is that this design is centralized. While the goal of crypto-currencies was to eliminate the need for a trusted third party, with centralized stablecoins you need trust in the company issuing tokens. In particular, you need to trust the company for always keeping more reserves in banks than stablecoins minted even though such companies are not transparent or auditable by everyone. It is also very possible that a centralized stablecoin company decides to black-list some owners of stablecoins, meaning that these stablecoins are in the end censorable.

There is also an important regulatory risk for centralized stablecoins. Centralized stablecoin companies, because it can be considered that they contest the monopoly of states on currency issuance, could well be shut down by governments, and this can be an important point of failure for Dapps and people using such stablecoins.

Another issue is that this centralized approach can only work for a limited number of assets. It works really well for USD (with USDT and USDC), for BTC (brought on Ethereum with Wrapped Bitcoin), but it can hardly work as well for imaginary assets (imagine a stablecoin pegged to the temperature in New York City) as centralized solutions require the issuer to effectively hold the assets in reserve.

Centralized approaches do not work very well neither for some real assets like the Euro. There are currently negative interest rates in the Euro zone meaning that it costs money to have deposits in the bank: unless it takes substantial risks with its reserves or charges high fees, a Euro stablecoin company cannot keep more reserves in the bank than it has minted stablecoin. Some companies (Stasis with the EURS, Lugh with the EURL) are currently trying to make it work but they have not managed to bootstrap a lot of liquidity so far. Tether also has plans to grow its EURt.

Assuming that this centralized approach can be replicated for any asset, there is still a scalability issue. A centralized solution can be scaled around one or two assets (like Tether does with USDT and its EURt), but it’s hard to scale to dozens or hundreds of assets (like all Forex for instance). You’d typically need one bank account or safe per asset type, making the logistic too complex.

• Centralized stablecoins are backed by fiat (or any financial asset) in a bank account or in a safe.

• Direct arbitrage makes these coins really stable.

• They require trust in the third party holding the collateral.

• Centralized stablecoins are censorable.

• Centralized stablecoins are subject to an important regulatory risk

• This design is not scalable to multiple assets.

Angle protocol makes the best of the drawbacks of this centralized approach while still keeping its advantages.

For more details about Angle, you can look at this Introduction Article or at the docs of the protocol.

Overall, similarly to centralized protocols:

• Angle keeps this full convertibility between collateral and stable assets in both senses (collateral to stablecoins and stablecoins to collateral) thus allowing for the stablecoins to be fully stable thanks to arbitrage opportunities.

• Angle has more reserves than centralized stablecoin issuers usually do thanks to its liquidity providers (Hedging Agents and Standard Liquidity Providers) adding collateral to the protocol.

Additionally, Angle improves on some areas:

• Angle is decentralized and reserves are public and auditable by everyone.

• Angle can work for any type of asset (Euro, Dollar, Korean Won, gold, global GDP, potentially temperature, …) provided that there is an oracle for it.

• Angle is a single protocol that could be used to create many different types of stablecoins.

  

  Note that we have only explored here the case of centralized stablecoins that are collateralized. There can be under-collateralized centralized stablecoins: this is the case of Central Bank Digital Currencies (CBDC) which are stablecoins backed by governments. There is no widespread CBDC so far.

  These currencies may not even be considered as crypto-currencies since they rely on centralized ledgers and are thus not so different from real fiat currency or money in your bank account except for the fact that it’s easier to transfer it globally.

  In Part 2 of this series, we will explore other designs, in particular, decentralized and overcollateralized stablecoins, and again see how Angle compares with them.