In a blog post outlining ways to improve the XRP ledger and wider ecosystem, Ripple CTO David Schwartz has proposed the creation of a stablecoin (a cryptocurrency whose price is linked to a fiat currency like the US dollar) that is collateralized with the XRP cryptocurrency.
Typically, stablecoins involve one party looking after a huge supply of the fiat currency, which is used to give value and stability to the cryptocurrency by allowing anyone to cash out at any point in time. But instead of tying its mooted stablecoin to a fiat currency, Ripple would back it with the equivalent amount of value in XRP. “The key distinguishing property of this proposal is that the stablecoin is always redeemable for XRP on the ledger from the collateral pool,” he said.
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Schwartz noted that the scheme isn’t perfectly decentralized. “Some organization or federation still must supply the price the asset is pegged to on a continuous basis or the stablecoin will freeze,” he said.
The issue is that, even though a stablecoin can be created using smart contracts on a decentralized blockchain, it needs to know the current price of the US dollar—which means a centralized party needs to keep it up to date. (There are solutions to this problem on other blockchain platforms, such as Chainlink).
Another concern with cryptocurrency-collateralized stablecoins is that the value of crypto held in reserve could drop below the value of the stablecoin in circulation. That’s not beyond the bounds of possibility, given the volatility of the crypto market. With XRP’s price in decline, it could make a stablecoin tied to the cryptocurrency a risky venture.