What is a Native Stablecoin? The Only Truly Way To Decentralized Payments

A native token is a digital asset inherent to a specific blockchain. A native stablecoin, in turn, features the same characteristics but comes with a value pegged to another asset such as fiat currency or gold.

In this article, we are going to review the phenomenon of native stablecoins. Also, we are going to give some clues on how to take apart true native stablecoins from fake ones.

Key Takeaways

• A native token is the primary asset of an underlying blockchain. It serves as the key means of exchanging value and as an incentive for the network validators.
• A stablecoin is a digital asset with its value pegged to another asset such as fiat money or precious metals.
• A stablecoin may be backed by fiat, crypto, or precious metals. Alternatively, it may rely on algorithms that maintain its value stable
• A native stablecoin is a token inherent to a specific blockchain with the rate pegged to another asset.
• A true native stablecoin must possess the following characteristics: permissionless, fully backed by collateral, redeemable, censorship-resistant, governance-free, and not secure by admin keys.

What is a Native Stablecoin?

To answer this question, let’s first define both characteristics of this asset, i.e. native and stable.

What is a Native Token?

Applied to crypto, the concept of “native” points to the fact that a given asset is inherent to a specific blockchain. It means that this asset serves as the primary means of payment for all the network participants within the given ecosystem.

Native tokens enable users to exchange value and, at the same time, cover transaction fees. They serve as incentives for validators. They enable their holders to participate in the network governance after all.

At this, these assets, also known as base tokens, are the most fundamental tokens of their underlying networks. 

What is a Stablecoin?

Now, let’s move on to the next characteristic. 

A digital asset can be considered stable if its value is pegged to another asset class with little to no fluctuation.

Created with the key goal to reduce volatility and make cryptocurrencies a better fit for daily use, stablecoins usually derive their value from fiat currencies such as USD. At this, there are four key categories

Fiat-collateralized stablecoins. 

These assets rely on fiat currencies to keep their value stable. Here’s what the process looks like.

A company accepts fiat currency to its bank account and mints a corresponding amount of stable assets on the blockchain. Since fiat money serves as collateral, the value of minted tokens must always be equal to the value of fiat currency in the company’s reserves. 

The largest threat that such assets possess is high centralization. Fiat-collateralized stablecoins always come with a counterparty risk as the issuing company may deceive its users or simply go bankrupt.

Commodity-collateralized stablecoins.

Similar to stablecoins described above, commodity-collateralized stablecoins are backed by real-world assets with precious metals being the most popular option. 

The underlying assets are usually stored in a centralized vault. Thus, the security of such stablecoins is dependent on the goodwill of the issuing party.

Needless to say that such stablecoins have the same problems with security and transparency.

Crypto-collateralized stablecoins. 

Backed by volatile cryptocurrencies, these stablecoins derive their stability from over-collateralization. If the value of the underlying asset suddenly drops, there should always be a sufficient amount on a smart contract to maintain a stable rate.

Perhaps, the largest disadvantage of such coins is the inefficient usage of collateral. Because of high volatility, its volume is usually significantly higher than the volume of minted stablecoins.

Algorithmic stablecoins. 

Finally, there is one more asset class that relies on algorithms to keep its value stable. 

These stablecoins usually have other cryptocurrencies as collateral that reduce their price fluctuations. Also, there is an on-chain protocol that mints or burns the collateral to control its price.

So far, this type of stablecoin has proved to be the closest option to a truly decentralized and secure asset. It is not controlled by any centralized party, and neither does it depend on fiat-collateralized assets.

Yet, algorithmic stablecoins may come with their own pitfalls. Associated problems usually come from errors in their architecture rather than from centralized governance, though.

Native Stablecoin Definition

A native stablecoin combines the two characteristics described above.

Thus, it represents a digital asset inherent to a specific blockchain with its rate pegged to another asset.

Some of the stablecoins are not limited by a single blockchain, though.

For example, USDT is issued on Ethereum, Bitcoin, EOS, TRON, and a few other networks. At this, each of these versions is native to the corresponding system.

The Key Problem of Popular Native Stablecoins

According to CoinMarketCap, native stablecoins with the largest capitalization are USDT, USDC, and BUSD. 

But… there is an important question to ask.

All of these stablecoins are native to their underlying networks and maintain a stable rate. But can they be called true native stablecoins?

Each of them is issued by a single entity and backed by fiat which makes these assets pretty risky. Thus, the answer is obviously “no”.

Also, there is a crypto-collateralized DAI. While its issuance is governed by a decentralized organization MakerDAO, the key asset that makes up the largest part of its collateral is a fiat-backed stablecoin USDC.

Same song, different verse. Decentralized management has no use here.

True vs Fake Native Stablecoins

With centralization as the key problem of existing stablecoins, here comes the next question.

How to properly create a true native coin that would be decentralized, secure, and at the same time, feature stability?

The solution is not as complicated as it may seem. A true native stablecoin must come with the following perks:

1. It must be fully backed by collateral. Ideally, it should be overcollateralized so that there would always be a sufficient amount of underlying assets to soften any serious price fluctuations.
2. It must be permissionless. Users should not require any permission in order to be able to use the asset.
3. It must be redeemable by anyone at any time. There should not be any third party capable of blocking asset redemption at its own will.
4. It must be censorship-resistant and governance-free. This is the only way to make an asset truly secure.
5. There must be no centralized vaults secured by admin keys. Such vaults can be hacked by malicious actors and result in money losses. This is exactly what happened to an unlucky Ronin Network in 2022.

Do true native stablecoins exist? Indeed, they do.

USDL is an example of such a coin.

It is fully backed and redeemable by PLS which is a permissionless decentralized digital asset. It cannot be censored or blocked by any third party. Neither does it have a centralized vault curated by admin keys.

At this, it represents a truly decentralized and secure stable asset available for anyone to use.