Stablecoin 3.0 report: new historical mission and competitive landscape

Stable currency refers to a general equivalent similar to "currency" that maintains a relatively stable exchange rate with legal tender. Because the exchange ratio between fiat currency and goods and services is relatively stable, the ultimate anchor of stablecoins is goods and services, that is, actual purchasing power.

Stablecoin 1.0: As a "funding channel" and "value preservation medium" for Token investment, it is likely to become a transitional product of a special historical stage

Many stablecoins developed before the end of 2018, the main value is concentrated in the two aspects of "deposit channel" and "value preservation medium". Their starting point is to solve the problem of Token investment. From this point of view, a good "stable currency" not only needs to have a reliable stabilization mechanism to maintain the stability of the "coin price", but also needs to exert influence among the majority of investors and provide convenient purchase channels, especially with Major Token trading platforms have reached cooperation and launched enough stablecoin trading areas and trading pairs.

Fundamentally, the stablecoin in the 1.0 period is a product of a special historical stage born of the contradiction between the rapid development of Token investment demand and the regulatory restrictions on the entry of legal currency. The greater the price fluctuations of various Tokens such as Bitcoin and Ethereum, the more valuable the existence of stablecoins. We have reason to predict that when countries around the world relax the restrictions on "legal currency" transactions, or when mainstream digital currencies such as Bitcoin enter a mature development stage and become "stable", the above two values ​​​​of "stable coins" will cease to exist. Of course, from the current point of view, this may take a long time.

Stablecoin 2.0: an efficient payment and settlement tool in the banking system, essentially a "digital legal currency" that relies on the credit of commercial banks rather than the credit of the government's central bank

At the beginning of 2019, JPMorgan Chase and Japan's Mizuho issued "stable coins" to bring a new wave of investment in blockchain digital assets. But in fact, the stable currency layout of these two world-renowned commercial banks can neither bring new users nor new funds to the world of blockchain digital assets. Because in essence, they just use blockchain technology to do the bank's inherent "deposits", "loans", "remittances" and other business payment tools.

Blockchain technology has great transformative value in the field of payment and settlement, especially the payment and settlement between cross-subjects. The "stable coins" issued by these two banking giants essentially use a convenient and efficient settlement network based on blockchain technology. The more financial institutions and customer groups that join this network, the greater the value of the settlement network. The "coin" here is not called "stable currency", it is better to call it a "bank acceptance bill" recorded on the interbank blockchain alliance chain, or a "digital legal currency" based on the credit of commercial banks rather than the credit of the government's central bank.

However, what needs to be noted here is that if the issuers of financial institutions such as banks comply with the 1:1 full amount of fiat currency deposit collateral for issuance, stablecoins are a settlement tool for them. If the issuing institution does not make sufficient preparations, the stable currency issued by it becomes a financing tool, which involves the issues of "currency creation" and "minting rights".

In recent months, Defi (Decentralized Financial) "decentralized finance" has become one of the most concerned topics in the blockchain industry and even the traditional financial industry. If Bitcoin represents the idea of ​​"decentralized free competition currency", Then behind Defi is the idea of ​​"de-banking crowd financing and self-financing". This will have a huge impact on the business model and organizational structure of the traditional financial industry.

With the further development of infrastructure such as the public chain, a breakthrough in high-performance technical bottlenecks is imminent, and various applications and financial services on the chain are also developing rapidly. Whether it is the consumption behavior of various DAPP goods and services such as "games", "entertainment", "social networking" and "education", or various on-chain finance such as "savings", "loans" and "funds" based on digital assets Behavior requires a value scale and trading medium with stable purchasing power - stable currency.

Although it also has the function of "preserving value", compared with the stable currency in the 1.0 period, the more important value of the stable currency in the new era lies in the construction of a value closed loop in the commercial and financial system. Based on the value closed loop of a public chain infrastructure, stablecoins with sufficient value recognition need to undertake the pricing and payment functions of a large number of goods and services in DApp and various financial services (tokens in DApp perform more governance rights and incentives) functions). Before the basic tokens of the public chain itself have completed sufficient value growth and become stable, a safe and reliable stable currency is crucial to the development of the public chain ecology.

Since 2019, the stable currency application Maker DAO has played a vital role in the ETH ecology, which has greatly promoted the development of the ETH financial ecology, but because it is an independent DApp endogenous stability mechanism, it is safe and reliable Sexuality needs to be further fully verified, which limits its growth rate to a certain extent.

The newly developed major new public chains represented by the exchange public chain are focusing on promoting the development of stable coins in the initial stage of their ecological construction, striving to support the development of their financial and business ecology by providing reliable ecological "currency" .

1. Classification of Stablecoins

According to the different stabilization mechanisms, stablecoins can be divided into two categories, one is asset-backed issuance, which is essentially similar to the gold standard system in the traditional international monetary system - issuing currency through reserve gold; the other is imitating the central bank Supply and demand regulation, in essence, refers to the issuance of currency and the maintenance of currency price stability through the estimation of market currency demand and the dynamic adjustment of supply and demand in the currency lack of anchor system. In addition, in the asset mortgage issuance model, it can be further divided into two categories according to whether the mortgage is "legal currency assets" or "blockchain digital assets".

The first category: fiat asset mortgage issuance model

Such as: USDT, TrueUSD, GUSD, PAX, USDC, USDK, etc., and USD 1:1 mortgage issuance

The second category: Mortgage issuance on the blockchain digital asset chain

Such as: BitUSD, DAI

The third category: imitating the central bank’s supply and demand regulation

• Imitation of the central bank's "bond repurchase" model: Basecoin

• Imitating the central bank's "adjustment of interest rates" model: NuBits

• Imitation of the central bank's "sell foreign exchange to buy local currency" model: Reserve, Terra

2. The main weaknesses of various stablecoins

The core value and main task of stablecoin is to keep the price relatively stable (denominated in fiat currency). Several existing stabilization mechanisms have obvious defects and weaknesses:

• The core risk of the fiat currency mortgage model lies in the credit issue of the issuer company - how to ensure that the issuer reserves sufficient fiat currency and will not issue and run away.

• In the blockchain digital asset mortgage model, the most important factor that will lead to the failure of the stabilization mechanism is the uncontrollability of the price of the mortgage asset itself, which is difficult at the current stage when the blockchain digital asset market is not mature enough avoid.

• Imitating the central bank's "bond repurchase" model and "interest rate adjustment" model, the core challenge is how to prevent investors from long-term bearishness when the price of stable currency falls, and refuse to accept the use of stable currency to buy "bonds" or increase stable currency savings. The essential problem is that the "bonds" and savings "interest" here have no value support in themselves, and have the same vulnerability as the overall stablecoin system.

• The biggest problem in imitating the central bank's "sell foreign exchange to buy local currency" model is that there is not enough "foreign exchange" reserves, that is, the stable currency issuer does not have enough funds to buy back a large amount of stable currency from the secondary market.

3. Historical "stability" performance of various stablecoins

We have made statistics on the historical prices of stablecoins that have been launched in various stablecoin models, including: USDT, TrueUSD, GUSD, PAX, DAI, USDC, BitUSD

Source of currency price statistics: Coinmarketcap

According to the historical price performance of each stablecoin, the stablecoin of the "fiat currency collateral" model has the best stability. Among them, the price deviation (> 3%) of PAX in the past 237 days accounted for 2.95%; Price deviation accounted for 4.52%; USDT’s price deviation accounted for 8.37% in the past 1542 days; USDC’s price deviation accounted for 9.29% in the past 226 days; GUSD’s price deviation accounted for 10.53% in 228 days %.

The stability of the "digital asset mortgage chain issuance" model is obviously poor. DAI has a deviation ratio of 24.58% in the past 511 days; BitUSD has a deviation ratio of 84.73% in 1663 days, basically losing stability.

NuBits, the only one currently online in the "imitation of central bank regulation" model, has collapsed in price, saying goodbye to "stability".

On the whole, the fiat currency mortgage model has the best stability, and with the addition of emerging compliant US dollar stablecoins, its stability will gradually increase, and the credit risk of the issuer is expected to be effectively controlled. In addition, because blockchain digital assets are extremely difficult to quickly get rid of the historical stage defects of "price fluctuation" and "lack of liquidity", and the value recognition of digital assets and the design of regulatory models may need to go through a relatively long period of development, the district It is difficult for the blockchain asset mortgage model and the stable currency imitating the central bank's regulation model to make breakthroughs in the short term.

At least in the next 2-3 years, the fiat-backed stablecoin will still be the main force in the stablecoin market and have the greatest opportunity for development.

After USDT, all kinds of fiat currency-collateralized stablecoins are actively developing in the direction of regulatory compliance and audit transparency. Especially with the recent ferment of Bitfinex’s suspected misappropriation of USDT’s U.S. dollar reserve funds to fill the shortfall, the confidence of digital asset investors in stablecoins has been dealt a huge blow. Achieving security and credibility under regulatory compliance has become the primary problem that stablecoins need to solve.

We have conducted a follow-up and comparative analysis of the current major fiat-backed stablecoins:

From the custody of reserve dollar assets, TUSD and USDK have the highest degree of fund security. All of them are independently managed by PrimeTrust, a well-known American custodian, which is more reliable than other custodians that are not clearly disclosed or small custodians.

From the perspective of bank account audits, except for USDT, which is suspected to have stopped cooperation with audit firms and has not published audit reports for a long time, the bank account audit agencies of several other stablecoins are well-known brands with comparable reliability. Among them, the BPM chosen by GUSD and USDK at the same time is an established firm with a history of more than 30 years. Compared with other comprehensive service agencies with diverse business types, they are relatively more focused on auditing matters.

From the perspective of smart contract audit, USDK’s partners include SlowMist, a well-known domestic security service provider, and Certik, a leading overseas service provider, with relatively outstanding reliability.

From the perspective of the main body, USDC is supported by Circle and Coinbase, the current leading companies in the blockchain industry. These two companies are very leading in the maturity of compliance construction in the United States; A wholly-owned subsidiary, and supported by OK Group, a leading blockchain trading platform and blockchain technology service provider.

Judging from the support of the regulatory authorities, Tether, the issuer of USDT, completed the registration of FiNCEN in November last year after more than 4 years of "streaking"; Financial Crimes Inspection Bureau), or have obtained the bitlicense of NYDFS (New York Department of Financial Services), or have a banking business license, and the compliance of the business entity is equivalent.

*Note: FinCEN is the Financial Crimes Inspection Bureau under the U.S. Department of the Treasury. It is mainly responsible for sorting out, analyzing and restricting the spread of financial crimes, especially drug money laundering. According to the U.S. Bank Secrecy Act (BSA), all money service business MSBs must complete registration with FinCEN. FinCEN stipulates that bitcoin trading sites and bitcoin miners should register as money service companies and comply with anti-money laundering regulations.

The New York Financial Services Agency is the financial regulatory department of New York State. In 2015, New York State issued the Virtual Currency Management Act, requiring all virtual currency companies to apply for a bitlicense from the New York Financial Services Agency. Ripple, Coinbase, Bitpay and other companies have obtained bitlicenses.

On the whole, USDK, which was launched last, has the most adequate preparations for compliance construction. In addition to insufficient disclosure of fund custody information and unclear smart contract code audit service providers, USDC has also performed well in other aspects of compliance and security construction. pretty good.

After the general improvement of compliance and security levels, the diversity of ecological applications will become its core advantage in the next stage of competition for stablecoins. In terms of public chain ecology, especially the construction of financial ecology, during the launch period of USDK, its partners announced plans to develop a decentralized exchange DEX based on OKChain, and announced the establishment of cooperation with the world-renowned asset management platform Caspian, laying a solid foundation Ecological application development foundation. Other stablecoin issuers have not yet made clear plans. Therefore, in terms of application ecological construction, USDK has an outstanding lead compared with other stable coins.

With the accelerated deployment of Stablecoin 3.0, a new round of financial ecological competition on trading platforms has officially begun.