1. What is a stable currency
1.1 Definition
Stablecoins are a type of cryptocurrency designed to minimize price volatility. The underlying logic of stablecoins is to establish a payment system for the entire blockchain world.
1.2 Generate background
l There is no conversion intermediary between legal currency and cryptocurrency
At present, most exchanges do not support the direct trading of cryptocurrencies with fiat currency. Investors can only exchange stablecoins with fiat currency first, and then trade stablecoins with other cryptocurrencies. Need to bear huge price fluctuation risk.
l The price of currency for settlement of demand in business scenarios is stable
In real-world scenarios where cryptocurrencies are used for settlement, such as cross-border payment, futures trading, prediction quiz, etc., users hope that the price of the settlement currency used is stable so as to ensure the rights and interests of both parties or parties to the transaction.
Against this background, stablecoins emerged as the times require. It has the functions of trading medium, value storage, accounting unit, etc., and is universal and not restricted by national borders. It has great convenience in liquidation and settlement. It can be seen that the value of stablecoins is not limited to being an entrance to the cryptocurrency world, it will eventually become a payment system in the blockchain world, users will use stablecoins to engage in various financial activities in the blockchain world, and governments of various countries The window period for cryptocurrency corresponding to its own legal currency has not yet been launched, and the stable currency independently generated by the market will be widely and profoundly used in the entire blockchain world.
2. Status of Stablecoins
2.1 Classification
At present, the mainstream stablecoins in the market are mainly divided into three categories: fiat-backed stablecoins, on-chain asset-backed stablecoins, and algorithmic stablecoins.
Fiat-collateralized stablecoin
This type of stablecoin is actually a kind of cash-backed bond issued centrally. It borrows from the "gold standard". For stablecoins purchased, the choice of legal currency assets generally tends to choose the US dollar, mainly because of its higher stability and wide usability.
The issuance process of USDT is as follows:
1. Users need 100w usdt
2. The user pays USD 1 million to Tether (the issuer of USDT)
3. Tether deposits 1 million in the bank and issues 1 million to users
(In fact, the issuance process of USDT is more complicated. Here we will not discuss whether Tether has a license, whether it needs to be audited, and whether Tether is overissued.)
On-chain asset-backed stablecoins
Algorithmic Stablecoins
Algorithmic Stablecoins
This type of stable currency draws on the way the central bank issues currency, and based on the theory of the quantity of money, increases or decreases the currency circulation through smart contracts to maintain the stability of currency prices. This model is based on the theory of the quantity of money, assuming that the stable currency is anchored to the U.S. dollar 1:1. When the market demand for the algorithmic stable currency is strong, the liquidity will increase, and the actual market price of the stable currency will be higher than 1 US dollar. At this time, the smart contract will New coins will be automatically issued and put on the market; when the market demand drops, the smart contract will start to recycle stable coins. The usual method is to issue bonds to repurchase stable coins, withdraw liquidity, and stabilize the currency price by reducing supply.
Three Types of Stablecoins
2.2 Risks of Stablecoins
1) In the long run, the biggest risk of stablecoins comes from the issuance of cryptocurrencies by the government. When cryptocurrencies endorsed by the state appear, the living space of stablecoins for private projects will be greatly reduced, and the government obviously has better credit endorsement. The best period for the development of stablecoins is the current window period. Under the existing regulatory policies, we can fully explore the construction of the blockchain payment system, and provide practical experience for the government to build a cryptocurrency payment system in the future.
2) The risks of different types of stablecoins are different, and we discuss them based on the following risk theories:
We believe that the current risks of stablecoins mainly include three aspects:
l Market risk, because the risk caused by changes in market demand is manifested as bullish or bearish market demand for stablecoins. Algorithmic stablecoins mainly have market risks, because they are based on the theory of the quantity of money and assume the long-term market demand for stablecoins. When the value of stablecoins shrinks, the system will issue bonds to reduce supply and adjust prices. However, if the currency price falls , so that users lose confidence in the stable currency, then the algorithmic stable currency will fall into a death spiral, and eventually the entire monetary system will collapse.
l Floating risk refers to the risk arising from fluctuations in the price of stablecoins. Cryptocurrency-collateralized stablecoins mainly have this kind of risk. Since the collateral assets are cryptocurrencies, and the price of cryptocurrencies fluctuates greatly, when the market generally goes up or down, it will lead to a great floating risk of stablecoins.
l Trust risk, which refers to the market's risk to the currency issuer whether it will faithfully perform its duties as agreed.
Fiat currency-backed stablecoins mainly have trust risks. Because they are anchored to fiat currency, their prices are relatively stable and the risk of floating is relatively small. Accepting audits is prone to over-posting, spamming and other black-box operations, which lead to trust risks.
Compared with the three stablecoins, the fiat currency-based stablecoins are simple and straightforward, and the model is quite stable under the normal operation of the issuer. However, such stablecoins cannot bypass the trust of the issuer, which will lead to centralization problems. For example, USDT, which currently has the highest market value, has historically experienced problems such as limited information disclosure, non-disclosure of key information, over-issuance and additional issuance, and rejection of tripartite audits. Political influence; while asset-backed stablecoins on the chain are highly decentralized and transparent, but due to the extreme instability of mortgage assets, there are floating risks; algorithmic stablecoins are decentralized and are not affected by geopolitics. The risk depends on whether the market has long-term expectations for such stablecoins.
3. Stablecoin map
4. Representative projects
4.1 Legal Currency Collateral - Tether
Currency: USDT
Introduction: USDT is a stable currency issued by Tether, which accounts for about 77% of the market value of the stable currency market.
Circulation: 1,706,421,736
Total supply: 2,580,109,502
Comments: USDT is still the stablecoin with the highest listed value in the market, and has high liquidity, but its over-issuance problem has not been resolved, and because it is tied to a bank, it will be subject to more regional controls.
4.2 On-Chain Asset Mortgage - MakerDAO
Currency: DAI (stable currency) + MKR (functional token)
Introduction: MakerDAO is a decentralized autonomous organization and smart contract system on Ethereum, and DAI is the first stable currency on Ethereum issued by it
Circulation: 72,034,579
Evaluation: DAI adopts the over-collateralization model, which is based on the issuance of assets on the chain. It has a high degree of transparency and can solve the problems of liquidity and solvency. The main problem is the extreme instability of anchor assets and the lack of diversity of anchor assets. .
4.3 Algorithm - Terra
Currency: Terra (stable currency) + Luna (functional token)
Introduction: Terra is a stable currency project launched by South Korea's second largest e-commerce platform TMON. In addition to being backed by the e-commerce platform TMON, Terra will also cooperate with e-commerce companies including Woowa Brothers, Qoo10, Carousell, Yanolja Pomelo, and TIKI.VN Partners jointly established the Terra e-commerce alliance, covering more than 40 million users. In the early stage, the Terra stable currency will gradually assume the responsibility of payment in the e-commerce alliance, and later it will be used for payment in the blockchain world.
Terra features:
1. Dual currency mechanism: algorithmic stable currency (Terra) + functional token (Luna)
l Terra: Algorithm-based stablecoin, which ensures the price stability of Terra stablecoin through algorithmic issuance and supply tightening;
l Luna: The functional token of the Terra platform, which can be compared to an equity token. Its value comes from the handling fee charged when paying on the Terra network. Therefore, as the transaction volume of the Terra stablecoin increases, the value of Luna will increase. higher;
2. Luna fund pool: users deposit Luna into the fund pool to obtain income rights. The fund pool guarantees a minimum deposit reserve ratio of 120% in real time. The guarantee of decentralization also avoids various speculative and regulatory risks.
Terra stabilization mechanism design:
l The prerequisite for the stability of Terra is that the fund pool is sufficient. There are two main aspects to ensure the sufficient fund pool: holding Luna to enjoy the transaction fees in the Terra network, attracting investors to buy Luna and causing Luna prices to rise; the ecology of the Terra network is getting better Prosperity, the wider the application of this payment system, the more fees it receives, which also promotes the price increase of Luna.
l When Terra is oversupplied and its value is lower than the anchored asset price, the algorithm will borrow Luna from the fund pool to repurchase Terra in the market for destruction, so the value of the fund pool is higher than Terra’s circulating market value, which is the fund The reason why the pool has to guarantee a 120% reserve ratio.
Advantage:
Advantage:
1. Highly decentralized, unlike most stablecoins in the market that try to anchor a single asset, the value of Terra anchors the value of goods and services in its network, and does not depend on regional currencies and economic policies, with a high degree of decentralization Attributed.
2. Full reserve, the system compulsorily sets a reserve rate of no less than 120%, which fully guarantees the stability of the currency value.
3. At the initial stage, it anchors the payment and transaction scenarios in real life. Backed by TMON and its e-commerce alliance, the business scenario is stable enough and the number of users is huge. Combined with the functional token Luna used by Terra, it can solve our previous problems to a certain extent. Risks mentioned in market expectations.
4. Strong investors, including Binance, Huobi, Okex, Upbit, and investment institutions Polychain Capital, FBG Capital, etc.
Risk:
1. Market risks still exist. When the market continues to decline and the stability mechanism of Terra collapses and the price plummets, the system will borrow Luna coins from the fund pool to repurchase and destroy Terra. In order to maintain the reserve of the fund pool, the transaction fee will be increased. If the market is not optimistic about Terra at this time, it will not accept the increase in the service fee. The reserve pool will be consumed quickly, and it will cause Luna holders to panic sell Luna, resulting in death spiral. The project side has also taken this risk into consideration. After this phenomenon occurs, it will introduce external fiat currency reserves to save the collapsing economic system.
2. Risk of weak centralization. In the design of Terra’s governance mechanism, there are two decisions made through voting on the chain. One is the early stage of the project. Due to the fragility of the network, the foundation will direct new currencies into a legal currency fund pool to prevent hacking Swan and other issues; the other is that when the supply of Terra is low, the newly added currency will determine its destination and use through voting, and there will be a risk of 51% control.
Evaluation: Terra aims to establish a payment system in the blockchain world and gradually upgrade it to a financial service platform in the blockchain world. Its innovation lies in its decentralization, complete reserves, and anchoring real transaction scenarios effective integration. Unlike most stablecoin projects, Terra's development path appears to be more solid. Terra does not limit this system to the blockchain world. It first finds real business scenarios as a value support point, and then cultivates user habits. After having a solid user base and then turning to the blockchain world, it will carry huge traffic, which will provide great convenience for its expansion of payment scenarios after Terra. Of course, Terra also has risks such as insufficient market expectations and weak centralization. Its current plan is only a beautiful vision, and we still need to look forward to the actual development and implementation of the project party.
5. The development trend of stable currency
l Supervision will be more stringent, and projects need to be compliant. As a bridge for the transition from legal currency to cryptocurrency, from the perspective of tracking capital flow, anti-money laundering, and anti-fraud, stablecoins are bound to receive the government's attention. When supervision becomes stricter , the compliance of the project party must be paid special attention to.
l The popularization of stablecoins in the commercial society will attract more financial institutions and traditional capital to enter the cryptocurrency market, and the cryptocurrency market ecology will become richer and more diversified.
l In the long run, governments of various countries will issue cryptocurrencies based on their own currency systems. Before that, it will be the window period for the stable currency of the project party.
l The market size will continue to expand, and more stablecoin projects will emerge. The market has begun to discover the value of stablecoins. With the expansion of the blockchain industry, the market for stablecoins will also grow, and the current design mechanism of stablecoins is still in the exploratory stage, which will attract a large number of projects to enter. Who will Stand out and remain unknowable.
