Pan Chao: A New Perspective of Stablecoin Classification

Editor's Note: This article comes fromMoneyness Institute (ID: moneyness), Author: Chao Pan, Head of MakerDAO China, released with authorization.

Moneyness Institute (ID: moneyness)

"There are three types of stablecoins: fiat-collateralized, digital-asset-collateralized, and unsecured algorithmic." This classification has become a popular perspective for analyzing stablecoins.

Classification by collateral type is simple and easy to understand, but there are limitations and biases.

This paper provides a perspective on the classification of stablecoins based on the stability mechanism. From the perspective of stability mechanism, stable coins can be roughly divided into two types: cloned currency vs. pegged currency

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• clone coin

• Clone coins, as the name suggests, are direct "cut and paste" of fiat currencies. By reserving the same amount of underlying legal currency or assets, tokens with equal face value are issued to circulate freely based on the blockchain. The biggest use of this stablecoin is to allow users who do not have access to fiat accounts or trade specific assets to gain the same exposure.

• The essence of the cloned stablecoin is a strict fixed exchange rate system, which requires the issuer to fulfill the traditional currency board system [1]:

• The issuer maintains unlimited acceptance of stable currency and underlying assets at any time

• The issuer must maintain a reserve of more than 100%

• The balance sheet does not involve any assets other than the corresponding legal currency

If there are other assets on the balance sheet, they need to be frozen and cannot be traded

The issuer only makes money by absorbing deposit interest

The issuer does not have any monetary policy space

No monetary policy is the best policy for clone coins. In order to prevent speculation and runs, the way to stabilize the value of the clone currency is to strictly reserve 100% of the underlying assets and ensure convertibility. When the user deposits the underlying assets, a 1:1 token will be issued. When a user redeems assets, the corresponding 1:1 tokens will withdraw from circulation. The issuer is not allowed to have discretion, or to say that there is room for over-issued operations.

• In this mode, compliance is the biggest premise and advantage. USDC and Paxos' PAX USD and its recently launched PAX Gold are at the "Top of the Pyramid" with custodial qualification and US Federal deposit insurance. In contrast, the USD stablecoins launched by TUSD, Digix Gold and several Chinese exchanges need to rely on other trust company partners and commercial insurance.

• Take USDC as an example:

• In contrast, USDT is an exception. Although USDT is often classified with other fiat currency stablecoins, it does not follow the rules of the currency board system:

• Tether does not guarantee instant acceptance

• USDT is only 74% reserve

Tether's balance sheet includes other assets like BitcoinFrom this perspective, USDT does not belong to the category of fixed stable currency, but an anchor currency. Discretionary power has injected flexible liquidity into USDT, but at the same time it has also planted huge tail risks. Derived reading:。

Anchor currency

"About USDT, most people are wrong"

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Anchor currency

The anchor currency is to maintain the balance of the stable currency relative to the anchor currency through internal monetary policies, such as loan facility interest rates, "central bank" bills, etc. The anchor currency does not mean perfect stability of 1:1 all the time, but short-term fluctuations in a small range are allowed.

There are generally two ways to realize the anchor currency: the asset mortgage model on the chain and the minting share model. The difference between the two mainly lies in whether there are mortgage assets and redemption mechanisms.

The representative of the on-chain asset mortgage model is MakerDAO’s Dai, whose mechanism is similar to an open repurchase agreement (Repurchase Agreement), or understood as an automated, distributed custody pawnshop on the blockchain. The advantage of this model is that it does not need to rely on traditional banks and custodians, is open to the public (permissionless), and retains the independence of currency reserves, issuance, and policy adjustments.

Users holding qualified collateral can pledge corresponding assets and issue debts (Dai) that are less than the net asset value. When assets need to be retrieved, the debt and interest are repaid, the collateral is unlocked, and the corresponding part of Dai is withdrawn from circulation.

Additional collateral can be added to the issuer's balance sheet and must remain overcollateralized.

Due to the over-collateralization, the asset-backed stablecoin on the chain can guarantee that users can redeem assets at a fixed value of 1:1 under potentially unfavorable conditions, such as the global settlement of the Dai system. The redeemability of global liquidation is the basic support of Dai's stability mechanism.

The issuer has the tools to influence the price of the stable currency through the interest rate of the loan facility. When the price of a stablecoin is consistently above $1, it means that the demand is greater than the supply. The loan interest rate can be reduced to encourage the generation of stable coins. When the price of a stablecoin is always below $1, it means that the supply is greater than the demand, and there are too many stablecoins circulating in the market. Loan interest rates can be increased to slow down the generation of stablecoins, and prompt those who lend stablecoins to purchase stablecoins from the market to repay debts and withdraw from market circulation.

In addition, MKR is also introduced into the Dai system to function as deposit insurance. Carrying out capital adequacy in the case of insolvency will not be repeated here.The combination of stablecoins and "bonds" in the coinage share model is essentially a tradable equity instrument rather than a financial liability. In other words, the issuer does not guarantee that stablecoins can be redeemed 1:1 for assets or currencies of fixed value. Correspondingly, the stable currency issued by the issuer to the "bond" holders is essentially a futures without reserve assets, and does not have the economic substance of cash flow. Any unsecured, non-redeemable algorithmic stablecoin will inevitably collapse due to speculation or runs. Further reading:。

summary

"Algorithmic Stablecoin" Is a False Proposition"

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