Welcome to the next installment in our series on developing cryptocurrencies and tokens!
In Part I, we laid the foundations by providing a comprehensive guide on how to create a custom crypto token, compile and deploy it, and make it tradable for others. The main focus of this post is one specific type of cryptocurrency: stablecoins.
This post is self-contained, i.e. will teach you everything you need to know about developing and deploying your own stablecoin — but some fundamental topics will be introduced somewhat briefer, as we covered them extensively in Part I. Thus, if you haven’t read it yet, and want to dive deeper into this fascinating topic — I highly recommend checking it out.
Stablecoins have become a cornerstone of the cryptocurrency ecosystem, offering the stability of traditional currencies while maintaining the benefits of blockchain technology. Whether you’re trading, providing liquidity, or using decentralized finance (DeFi) platforms, stablecoins like USDT, USDC, and DAI have proven invaluable for navigating the volatility of crypto markets.
But have you ever wondered what goes into developing a stablecoin of your own?
In this post, I’ll take you through the fundamentals of building a collateral-backed stablecoin from scratch. From understanding the different types of stablecoins — fiat-collateralized, crypto-collateralized, and algorithmic — to writing and deploying a Solidity smart contract that mints and burns stable tokens based on collateral reserves, we’ll cover it all.
By the end of this guide, you’ll have a solid grasp of the mechanisms that keep stablecoins “stable” and an appreciation for the intricacies of decentralized finance. Whether you’re a developer curious about Web3 technology or someone fascinated by the intersection of finance and code, this journey into stablecoin development is sure to broaden your understanding of the crypto space.
We’ll begin with an introduction to stablecoins, then code our smart contract, and eventually conclude the post by writing the necessary website for buying and selling our stablecoin. Code for all will be shared GitHub. With that said, let’s dive into it.
Introduction to Stablecoins
Over the last years, cryptocurrencies have made an unprecedented impact on the financial ecosystem, establishing themselves as a powerful new asset class. Whereas most of the introduced coins and tokens came with a purpose and problem they intended to solve, investors soon began to realize their enormous potential, among others for speculation — leading to high volatility of the market. This in turn gave birth to stablecoins: stablecoins are tied to some “real” asset, such as the US dollar, or gold — and thus combine the best of both words, traditional fiat money and blockchain technologies.
Types of Stablecoins
Stablecoins mostly fall into one of two classes: collateralized stablecoins and algorithmic stablecoins. Collateralized stablecoins are tied, or pegged, to some other asset. When acquiring the stablecoin, the buyer transfers assets of corresponding value to the vendor, who keeps it safe — upon selling, the asset is returned. Algorithmic stablecoins on the other hand try to control supply and demand in an algorithmic way, manipulating the price to stay in the desired window.
Let’s first look at collateralized stablecoins. Here one can again distinguish fiat-backed, asset-backed and crypto-backed coins — which denote against which kind of asset the coin is pegged against. Fiat-backed stablecoins are tied against some traditional fiat money. One example is Tether, which is pegged against the US dollar. Asset-backed stablecoins are tied against some “physical” assets, such as gold or silver. And lastly, crypto-backed coins (you guessed it), are pegged against other crypto currencies.
In this post, we will develop such stablecoin together. Before diving into the details in the next section, let’s roughly sketch how this is done. Core idea is to always store amounts of the asset corresponding to the value of the minted crypto coin. For example: we could make a coin and open a shop. Whenever somebody brings us one nugget of cold, we mint one of our coins, and send it to their crypto wallet. Now, one coin is worth one gold nugget! The gold we keep safe in our vault. When the person wants to sell the coins, they send them to us — we burn them, and return the gold — thus keeping the needed ratio of gold in our vault / available tokens. Of course, the given example is not the most convenient for a Medium tutorial. Thus, we create a virtual shop, and develop a crypto-backed stablecoin — in particular, we will peg against BNB. The “shop” is a small website, where one can connect their Metamask wallet and then buy or sell coins with a fixed BNB price: we keep the client’s BNB “safe” while they hold our stablecoin, and return it when they sell the stablecoin. One consequence of this is, that we cannot list our token on a common cryptoexchange, such as PancakeSwap — doing so would allow users to freely trade our token, and the price would go up or down based on demand.
A token allowing that we will develop in the next post — where we will introduce algorithmic stablecoins. These are traded on “common” cryptoexchanges — and contain a smart algorithm manipulating the price in the desired way. When the token is bought, additional tokens are minted, to keep the price at the desired level. When the token is sold, a corresponding amount of token is burned.
Now that we have a theoretical understanding of stablecoins, let’s come to the practical implementation. As mentioned, we’ll implement our own crypto-collaterialized stablecoin, pegged to BNB.