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The Facebook giant has entered the stablecoin, and the stablecoin is making a comeback. Recently, Facebook decided to launch Project Libra, a global payment blockchain project, and released the official website and white paper of the project on June 18, 2019. The global payment function is mainly composed of a package of low-volatility assets. Implemented as a stable currency for reserves (such as credit-worthy fiat currencies, government bonds, etc.).

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The business ecology of the Libra project

Specifically, Libra, a new project launched by Facebook, aims to create a truly world-class financial system infrastructure, and the stablecoin it contains will use a series of low-volatility assets as reserves (such as credit-worthy legal tender, government bonds, etc.). Although the project will not immediately have a substantial and direct impact on the world's financial and encrypted digital currency markets, once successful, it will trigger the following revolutionary significance:

1. For the first time, provide a borderless, stable and simple means of payment and smart contract platform for billions of people around the world;

2. The first international new financial system cooperation framework and organization based on encrypted digital currency initiated by a world-class Internet giant;

4. Start the first shot of Internet giants all over the world embracing encrypted digital currency and marching into "block chain +".

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Binance founder Changpeng Zhao comments on the Libra project

Obviously, the Libra project demonstrates Facebook's determination and vision to actively embrace encrypted digital currency assets and enter the blockchain. The reason is that for the Internet giant Facebook, which started as an Internet social software, its product matrix (including Facebook, WhatsApp, Instagram and Messenger) achieved 2.7 billion monthly active users (MAU) and 2.1 billion daily active users in 2019 (DAU), of which Facebook alone has a user scale of 2.38 billion MAU and 1.56 billion DAU. For the Internet social software giant whose number of users has expanded to the whole world, how to fully tap the value hidden in billions of users will become the key to the group's next revenue growth. However, since Facebook's users are distributed in various countries and regions around the world, its user payment behavior is cut off by the financial systems of each country, making it difficult to effectively activate user consumption. In this sense, the blockchain-based stable currency scheme will be able to bypass the financial payment systems of countries around the world, thereby activating users' desire for cross-border payment and releasing users' consumption potential. The following will systematically introduce and analyze stablecoins.

According to the definition of Wikipedia, "stable currency" refers to "a type of encrypted digital currency whose price maintains the smallest fluctuation relative to the price of a certain or a package of assets", that is, the reference of stable currency comes from outside the world of encrypted digital assets , project the price stability of assets in the legal currency world to the world of encrypted digital assets through a certain mechanism. Typical references include RMB, US dollar or gold.

Before talking about stablecoins, we need to briefly introduce the connection and difference between the encrypted digital currency world and the fiat currency world. This will help us understand why stablecoins are important. Generally speaking, the encrypted digital currency world refers to: the economic aggregate of goods and services priced based on various encrypted digital currencies (currently mainly composed of a series of blockchain-based on-chain assets and peripheral services), and The legal currency world is the economic aggregate of goods and services built on the legal currency pricing system. The goods and services in the objective world are real and exist objectively, and the main difference between the encrypted digital currency world and the fiat currency world is essentially just the two faces of the objective world with different economic systems. The two are parallel worlds, but they are still inextricably linked. The legal currency economic system has a long history. For example, the US dollar-based economic system has a history of more than 200 years, while the encrypted digital currency represented by Bitcoin was born only ten years ago. Up to now, encrypted digital currency is still regarded as a A commodity or collectible, rather than a currency with actual purchasing power.

At present, the acquisition of encrypted digital currency is mainly through the trading market, rather than through the exchange of goods or services. The process of acquiring encrypted digital currency must involve the transfer process of legal currency assets to encrypted digital currency assets. However, the biggest drawback of this transaction model is that digital currency assets are on-chain assets, which are global without borders, and asset transfers are open and transparent. Affected by geographical location, national policies and other factors, it is not easy to track assets openly and transparently. In addition, the price of encrypted digital currency fluctuates greatly, and relatively stable risk hedging tools are just needed. In summary, the encrypted digital currency world needs a blockchain-based issuance that facilitates borderless transfer transactions, but at the same time maintains relatively stable prices for on-chain assets. This is the initial demand for stablecoins.

It may be difficult for people living in the legal currency world to understand the significance of stablecoins in the encrypted digital currency world, just as it is difficult for people living on the ground to truly appreciate the discomfort of astronauts in space after losing gravity.

In the early stages of development, the advantages of stablecoins over fiat currencies were not obvious. Because they required an additional payment link between stablecoins and fiat currencies, which increased the transaction process, they had not been widely promoted and applied. Subsequently, with the gradual globalization of the digital currency trading market in the world, some major countries (such as China) closed the encrypted digital currency exchanges based on legal currency, and after prohibiting direct transactions between legal currency and encrypted digital currency, as legal currency in encrypted digital currency Stablecoins, the shadows and alternatives of the currency world, are all the rage.

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Global Stablecoin Layout

• So far, there are mainly three different types of stablecoin design schemes in the entire encrypted digital currency world:

Algorithmic Central Bank Stablecoin

• The basic principle of this type of stablecoin is: after obtaining the real demand for stablecoins in the market through the oracle machine, and then adjusting the currency supply and demand algorithm to issue or recover currency, so as to always ensure that the supply of stablecoins meets the real demand of the market. The advantage of this method is that it can achieve complete decentralization, but the disadvantage is that it is difficult to have an algorithm that can accurately estimate the real demand for stablecoins in the market, and this demand is dynamic, and the balance of supply and demand needs to be adjusted at any time, while the algorithmic central bank It is difficult for stablecoins to quickly and efficiently recover or destroy currency during inflation. So far, there are no cases of algorithmic stablecoins landing.

Collateralized stable currency based on digital currency assets on the chain

• This type of stablecoin mainly locks mainstream digital assets (such as BTC, ETH or other tokenized assets) in smart contracts, and generates stablecoins anchored with fiat currency in a high mortgage rate method to ensure the supply of stablecoins. A typical representative is MakerDAO, which mortgages ETH on the chain through a high mortgage rate to lend out the stablecoin DAI anchored 1:1 with the US dollar.

Collateralized stablecoins based on off-chain assets

Such stablecoins are generally entrusted by a centralized issuer to a third-party organization for assets (such as legal currency assets and gold, etc.) and after strict audits, issue stablecoins anchored to the value of legal currency, such as USDT, PAX, TUSD, USDC, GUSD, etc., as well as DGX anchored to gold. The essence of this type of stablecoin is the IOU (financial claim) issued by the issuer. The main difference between similar products lies in compliance, security and asset transparency (taking compliance as an example, the compliance of TUSD and USDC The path is MoneyTransmitter, while GUSD and PAX are Trust Company). However, stablecoins issued based on physical assets (such as gold) have not been widely promoted. The reason is that although physical assets have a stronger value consensus, it is difficult to guarantee price stability. requirements.

In fact, in addition to the above types of collateralized stablecoins based on off-chain assets, there is also a real stablecoin issued by the central bank. From the point of view of the issuer, this is no longer a stable currency, but the real legal currency itself, that is, the central bank digital currency, is issued through the blockchain. The central bank's digital currency refers to the legal currency issued by the national central bank and based on the blockchain. It has all the characteristics of a stable currency, and there is no weak link in the credit of the issuer. This kind of central bank digital currency will be included in the central bank's unified planning and management like banknotes and electronic currency.

Among the above three stablecoin solutions, the stablecoin based on the algorithm of the central bank does not have an effective algorithm to predict market demand, so it is more in the conceptual design stage and has not been really implemented; the collateralized stablecoin based on off-chain assets The currency scheme has been widely promoted due to its simple operation and strong achievability. For example, the market share of USDT issued by Tether is as high as 84% ​​(real-time data from coingecko.com on June 10, 2019). However, it is criticized for its characteristics of asset audit transparency, centralized issuer, and fragile credit endorsement. The ultimate form of this type of stable currency is the central bank digital currency endorsed by national credit; therefore, based on assets on the chain Mortgage-type stable currency is given high hopes by blockchain believers. It can not only ensure the relative stability of currency prices, but also effectively avoid the shortcomings of centralization. However, there are unavoidable risks in the mortgage-type stable currency based on on-chain assets, for example, the risk of liquidation caused by the high volatility of on-chain assets used for mortgage. Since the entire encrypted digital currency market share is still small, less than a quarter of Amazon's market value, the ability to resist malicious financial short-selling is limited. Therefore, in extreme cases, assets on the chain (such as ETH) used for mortgages may experience a period of undershoot 50% or more black swan events. In this extreme black swan event, the stablecoin model based on on-chain asset collateral will be instantly liquidated due to lack of time to replenish the collateral, triggering a sell-off of stablecoins. Whether such a stablecoin mechanism can respond to extreme events in a timely, accurate and effective manner remains to be verified.

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Schematic diagram of the comparison between the market value of encrypted digital currency and the mainstream physical assets in the world (data source: howmuch.net)

Although the ultimate pursuit of stable currency is to realize an absolutely stable stable currency system, the essence of currency is to measure service or value, and the amount of value is the product of people's thinking. In economic activities, even for the same object (such as service or commodity), there will always be dynamic differences in the cognition of its value under different consumer and market supply and demand conditions, and this difference will be reflected in the price. Prices fluctuate, so, in fact, there can be no absolute measure of value like a physical unit. In this sense, what stablecoins should actually pursue is the minimum fluctuation relative to reference objects (such as fiat currency, gold, or abstract purchasing power, etc.), rather than the minimum fluctuation of value in an absolute sense.