Take USDT as an example to look at stablecoins
Overview Overview
first level title
Overview Overview
A fixed-rate currency anchored to the U.S. dollar
first level title
What are stablecoins?
Report text
What are stablecoins?
Stablecoin is a new type of cryptocurrency that can guarantee a stable currency value because it is backed by reserve assets. Stablecoins originated from USDT issued by Tether Limited established by Bitfinex in 2014. Thether Limited wrote in its token white paper: Tethers is a fiat currency-linked digital currency. All Tethers are issued for the first time in the form of tokens on the Bitcoin blockchain through the Omni Layer protocol. Every issued and circulated Tethers They are all pegged to the US dollar one to one, and the corresponding total amount of US dollars is stored in Hong Kong Tether Co., Ltd. (that is, one Tether coin is one US dollar). With Tether Limited's terms of service, holders can redeem/exchange Tethers for their fiat currency equivalent, or for Bitcoin. The price of Tether is always linked to the price of legal tender, and the storage capacity of its linked currency is always greater than or equal to the amount of currency in circulation.
Tether Limited's official website explains how USDT is linked to the issuing currency
Why are stablecoins needed?
As an emerging currency that has only been in development for a few years, it has gained huge attention because stablecoins try to combine the advantages of fiat and digital currencies—namely, the instant processing and payment security of cryptocurrencies, and the stable valuation of fiat currencies. value.
Bitcoin's Achilles' Heel
Although Bitcoin is still the most popular cryptocurrency, its valuation is extremely volatile, which greatly increases its investment attributes, but weakens its monetary attributes. For example, the price of bitcoin rose from about $5,950 in November 2017 to more than $19,700 in December, before falling by about two-thirds to $6,900 in early February. Even bitcoin’s intraday price swings can be wild — in just a few hours, bitcoin moves by more than 10% in either direction.
Bitcoin trend
This short-term volatility makes Bitcoin and other popular cryptocurrencies unsuitable for everyday use by the general public. Essentially, currency should serve as a medium of financial transactions and a store of value, and its value should remain relatively stable over a longer period of time. If the purchasing power of a currency cannot remain relatively stable, then it loses the meaning of the currency itself.
For example, from 2006 to 2008, the worst hyperinflation in human history broke out in Zimbabwe, domestic prices soared, and social problems emerged. The official inflation rate for June 2008 is estimated at over 11,200,000%. By December 2008, the government of Zimbabwe was issuing new 100-trillion notes that were actually only worth $25. Hyperinflation brought the economy to a standstill, scaring away foreign investors, destroying the purchase value of savings and household income, and thus destroying long-term economic growth.
Zimbabwe Inflation Rate
The solution provided by stablecoins
Ideally, cryptocurrencies should maintain their purchasing power and should have as low an inflation rate as possible, enough to encourage consumption rather than savings of tokens. Stablecoins provide a solution to achieve this ideal state.
There are two main reasons why fiat currency prices are stable:their foreign exchange reserves
Since fiat currencies are pegged to underlying assets such as gold or foreign exchange reserves as collateral, their valuations do not fluctuate wildly.
Central Bank Market Behavior
Even in some extreme cases, when the valuation of a fiat currency can fluctuate wildly, the authorities that control the currency step in to manage the supply and demand of the currency in order to maintain price stability.
Most cryptocurrencies lack these two key characteristics — they have no reserves to back up valuations, and no central authority to control prices if necessary.
USDT provides a solution to the first problem: it is linked to the legal currency US dollar, and stipulates a 1:1 exchange rate, and provides asset certificates to ensure that the price of Tether is always linked to the price of legal tender, and it is linked to the storage volume of issued coins It will always be greater than or equal to the amount of currency in circulation, making the price of USDT more stable than Bitcoin. The inflation rate of USDT is also the same as that of the US dollar because it is pegged to the US dollar.
Are stablecoins really stable?
Although it is called a stable currency, is the value and price of the stable currency really stable? This article will conduct a qualitative and quantitative analysis of whether USDT itself is stable from three aspects, namely: the degree of decentralization of USDT, the stability of USDT’s exchange rate, and USDT's anti-inflation.
USDT is not as decentralized as Bitcoin
Regarding the degree of decentralization, Tether Limited, the issuing company of USDT, made it very clear in its white paper: We recognize that our implementation isn't perfectly decentralized since Tether Limited must act as a centralized custodian of reserve assets (albeit tethers in circulation exist as a decentralized digital currency) (We recognize that our application is not fully decentralized as Tether Limited must act as a centralized custodian of reserve assets (although Tether in circulation is a decentralized digital currency) ).
This also means the following risks:
Tether Limited may go bankrupt
Banks Serving Tether Limited May Go Bankrupt
Banks May Freeze Tether Limited Assets
Companies may use reserves for high-risk investment activities
Therefore, from the perspective of decentralization, stablecoins are not stable.
USDT exchange rate stability
First of all, for the convenience of understanding, first introduce the research methods and formulas used in this paper. Because USDT has a 1:1 benchmarking relationship with USD, the offset formula is as follows:
Deviation = Max (Price High - $1.00, $1.00 - Price Low)
Annualized Deviation (adjusted) = Deviation / Close Price
We choose USD/JPY as a control in order to test the risk of excursion in constant exchange rate versus non-constant exchange rate currency pairs.
By comparing the USD/JPY exchange rate between USDT and fiat currency, the annualized average offset point USDT is significantly smaller than USD/JPY. However, due to the large base of USD/JPY, the comparison of the annualized offset after adjustment based on the base shows that the offset of USDT is significantly larger than that of USD/JPY. The adjustment formula is as follows:
In terms of maximum excursion rate, USDT is far greater than USD/JPY, and even in 2017, two years after its release, it still had a maximum excursion rate of 21%.
Although the volatility of USDT has been steadily decreasing year by year, it is still 0.48% higher than USD/JPY in 2019 year-on-year.
The only commendable point of USDT is that the downside risk of USDT is less than that of USD/JPY according to historical data. The maximum retracement since listing is -10.496%, while the five-year maximum retracement of USD/JPY is -20.48%. The formula for calculating the maximum drawdown is as follows:
Maximum Drawdown = ( max ( 1-account value of the day/account maximum value before the current day) * 100%
To sum up, in terms of volatility and offset, under the framework of the stablecoin USDT, the stability of the stablecoin linked to the fiat currency is not as stable as the non-pegged relationship between the fiat currency. Although this test is not representative, such as the exchange rates of non-developed countries with high volatility, one of the purposes of USDT's existence is to stabilize. It can be seen from the test that the stability of USDT is not convincing.
USDT stability test results
USD/JPY Stability Test Results
Correlation with inflation
Because the volatility of USDT is weakly correlated with inflation, the impact of inflation on USDT will not be discussed here.
Pearson correlation coefficient
Although USDT has various risks, it has successfully resolved the doubts of some investors and digital currency users, and provided a strong support for the concept of digital currency like a castle in the air. Therefore, since its listing in 2015, the market value has soared, and the market value has exceeded 4 billion US dollars so far, and the growth rate in 2017 reached 13816%.
market value
market capitalization growth rate
means of storage
means of payment
In the current cryptocurrency ecosystem, the ICO financing process creates the risk of crypto asset price fluctuations. Project parties usually raise a certain amount of ETH to use resources to realize previous commitments. Due to the high fees for converting encrypted assets into fiat currencies, the project's founding team tends to store most of their assets in ETH, but as the price of cryptocurrencies rises, investors will pay an opportunity cost. However, in the bear market, the price of encrypted assets has fallen sharply. In the face of the sharp drop in assets, the founding team still has to meet investors' expectations for IRR. In the long run, stablecoins can help founding teams of ICO projects keep their assets more securely.
means of payment
As a payment tool, stablecoins can effectively eliminate the risk of price fluctuations, providing a better user experience and significant efficiency gains than current banking tools through cryptocurrency transactions. While international bank transfers currently take 3 days, cryptocurrencies allow transactions to be confirmed quickly.
At present, the use of stablecoins is mainly concentrated on Tether (USDT). Tether is the second-ranked cryptocurrency by trading volume, accounting for about 60% of BTC's daily trading volume. Earlier this year, Tether entered the top ten cryptocurrencies by market capitalization and now accounts for 93% of all stablecoin market capitalization. Despite the success of newer stablecoins such as USDC entering exchanges, Tether continues to dominate, accounting for approximately 98% of all stablecoin trading volume.
means of circulation
Derivatives can effectively hedge risk assets. For example, the cost of fuel used by commercial airlines is calculated in gallons per dollar, and general airlines will use Forward Contract to hedge their risk exposure in dollars.
Most of these derivatives are settled in cash, and stablecoins can transfer value through parity. Today, the infrastructure of modern banks such as the CME and CBOE relies heavily on costly intermediaries, such as clearing houses, and the use of currencies to settle contracts. When these complex operations are executed through smart contracts, all settlements in USD assets are required.
For the foreseeable future, these derivatives could be settled on-chain by stabilizing the currency, reducing transaction costs and eliminating the need for a central authority. Under the current financial market framework, these centralized institutions provide trust among market participants.
The imperfections of stablecoins
Although USDT has solved the problem of stabilizing the exchange rate, its currency attributes make it still not escape the trilemma.
The Trilemma, also known as the Trilemma, is a principle in international finance, which means that it is impossible for a country to accomplish the following three at the same time:
Capital mobility
Fixed exchange rate (Exchange rate)
Independent monetary policy (Monetary policy)
What USDT does is to ensure the free entry and exit of capital, and is linked to the US dollar 1:1, completely abandoning the independent monetary policy, so that any decision of the Federal Reserve will affect the value of USDT, which deviates from the original intention of the original digital currency. The lessons of history have proved that violation of the rules of the trilemma will lead to large-scale financial crises.
At the same time, although USDT is pegged to the U.S. dollar, it is not a U.S. dollar after all. For a currency with a circulating market value of only 4 billion U.S. dollars, its holdings are too concentrated. According to data from longhash, 76.95% of USDT transactions are concentrated on one exchange, Binance. The number of active addresses is only 15000-20000, and the chips are highly concentrated.
Conclusion
longhash position analysis
