The holy grail of cryptocurrencies in the stablecoin series

Editor's Note: This article comes fromConflux Chinese Community (ID: Conflux-Chain)Editor's Note: This article comes from

Conflux Chinese Community (ID: Conflux-Chain)

Conflux Chinese Community (ID: Conflux-Chain)

, Author: Peng Han Robin, reproduced by Odaily with authorization.

In this series, I will discuss with you a very special currency in digital currency - stable currency, which is called the holy grail in the cryptocurrency world. In a sense, stable currency is a connection between "virtual" and "real" bridge.

In the ten-year history of digital currency development, stablecoins have undergone several major innovations and developments. Combining the rule of man, the rule of law, and the rule of "smart contracts", they have developed into a very wonderful value coin.

Most of the mainstream digital currencies represented by Bitcoin are compatible with investment and some weak functions in the market. Since most currencies such as Bitcoin and Ethereum have unstable OTC markets in the trading market, in the early closed and chaotic market Among them, we urgently need to find a currency that anchors legal currency to buy Bitcoin, Ethereum, etc.

An ideal cryptocurrency should have the following characteristics:

• stability

• Scalable

• decentralized

• stability

Scalable

decentralized

privacy

Among them, stability is the most critical.

Stablecoins are generally pegged to the U.S. dollar (so a stablecoin trades at $1), but sometimes stablecoins are pegged to other major currencies or the Consumer Price Index.

Of course, we cannot conclude that an asset should be valued according to a certain price. Bitcoin and others are priced based on the relationship between supply and demand. In the words of Preston Byrne: A stablecoin is an asset whose price is determined by itself, not an asset whose price is determined by supply and demand.

Regarding the design of stable coins, there have been many attempts. Below, I will introduce three types of digital currencies.

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Stablecoin Design

1. Fiat-collateralized Coin/legal asset collateral currency

This is a centralized mortgage model, where a certain amount of legal currency is deposited as collateral, and the currency is issued in accordance with the legal currency 1:1.

Although this method of issuing stablecoins is simple and straightforward, the problem is that this is a centralized mortgage model, so a central party (custodian) is required to guarantee the issuance and redemption capabilities of stablecoins, and regular audits are required to ensure Stable Coins are indeed fully collateralized.

A typical example of this approach is Tether’s USDT, whose price is anchored at $1, and Tether deposits $1 in the bank for every USDT issued. (Sounds pretty safe, if Tether really has so many dollars deposited)

Before the collapse of the Bretton Woods system, the U.S. government also promised to exchange gold at $35 an ounce, until Charles de Gaulle asked for the gold to be shipped back to France from the Federal Reserve's coffers. So if this is the case in the United States, does Tether, which has no national power as a guarantee, have absolute credibility to guarantee its acceptance?

There are rumors that Tether has controlled the price of Bitcoin through the unauthorized issuance or contraction of USDT in several peaks and troughs of Bitcoin in the currency world. It can be called the biggest vampire in the blockchain world. Is this true?

If you are also interested, please leave a message, and I will explore the inside story of USDT with you in the next few issues.

2. Ctypto-collateralized Coins/encrypted asset mortgage coins

This is a decentralized mortgage model.

This stablecoin works much like a fiat currency, except that instead of a real-world asset, the collateral is another cryptocurrency.

A typical example is MakerDAO's Dai.

At the current stage (the so-called Single Collateral Dai), Dai is issued with Ether (ETH) as collateral. The basic idea is that you deposit a sum of ETH in the Dai system, and the system will issue a corresponding amount of Dai worth USD to you.

To maintain stability, these currencies are often over-collateralized. That means $200 worth of ETH needs to be deposited in return for $100 worth of stablecoins. In this case, even if the price of the underlying asset depreciates by 20%, the stablecoin can still maintain price stability, because there is still $160 worth of ETH collateral backing the value of the stablecoin (when the depreciation is approaching 50%, the smart contract will be closed) The forced liquidation operation will be initiated, you return the Dai and get the ETH back).

However, stablecoins can also collapse in the event of a black swan event in which the underlying asset becomes worthless. In this case, the risk of loss for stablecoin owners is even magnified due to over-collateralization. That's why some experts strongly condemn the practice.

In addition, there is another problem that is difficult to solve, that is deflation."In the era of metal currency, the economic crisis that the government often faces is not inflation, but deflation caused by the speed of metal mining lagging behind the speed of commodity production.

"Light goods and heavy money" seems to increase the purchasing power of currency. However, once the expectation of currency appreciation is generated, the currency in circulation in the market will be further reduced due to hoarding, until the commercial activities of the entire society return to the original principle of bartering. stage.

In a modern society with highly developed productive forces, anyone wishing to become a medium of commodity exchange

Currency", the problem that must be solved is: to ensure a stable supply when the demand for money arises, and to avoid deflation.

Choosing mortgage as a stablecoin generation mechanism actually limits its use in limited specific scenarios, such as the base currency of an exchange, and does not have the possibility of expanding to more scenarios, especially for non-coin Crowd usage scenarios.

3. Non-collateralized Coins

Seigniorage Share mode.

• The basic logic of this method is that the supply of this currency is elastic. When the supply exceeds the demand, less currency will be issued, and when the supply exceeds the demand, more currency will be issued, so as to achieve the purpose of controlling its price. This method is difficult to achieve in real life, but it can still be achieved in a scenario where an algorithm is used to control the circulation.

• A typical example is Basecoin, which is based on the "quantity theory of money" and uses "Base bonds" and "Base shares" to adjust the supply of stable coins so that Basecoin matches the anchored target price.

To sum up, Basecoin will issue three kinds of tokens: the first is a stablecoin whose target is stable at $1, Basis. The second type is bonds used to stabilize the Basis price, Bond tokens, and the third type is equity tokens with a constant total amount that can receive dividends, Share tokens.

When the price of Basis is higher than $1, the system will issue additional Basis to equity owners, reducing the price of Basis.

When the price of Basis falls below $1, the system will issue bonds to repurchase Basis at a discount in an attempt to increase the price of Basis.

The previous one is tentatively established. For example, Basis is fired to 1.2 US dollars, and then double the amount of Basis is issued to investors, which can naturally push the price of Basis down.

But when the price of Basis is lower than 1 USD, the mechanism of the system is to issue a bond that is exchanged for future Basis. In fact, this is not a bond, but a long future on Basis. That is to say, only when people believe that Basis will return to 1 dollar will they exchange their Basis for future Basis. Moreover, the purchase mechanism of Basis bonds is to buy first and pay first instead of paying proportionally, which means that those who buy bonds first will spare no effort to promote others to buy.

Once the funds are broken and confidence is lost, Basis will enter a death cycle. Since there is no asset or any credit endorsement, no one believes in Basis and no one buys bonds. Basis is prone to runs to zero.

Basecoin, like central banks around the world, relies on the same economic principle - the quantity theory of money to seek price stability.

Central banks use tools such as "open market operations" and "reserve policies" to implement their policies:

Expanding the money supply: If the central bank sees the price of money falling, it can tighten the money supply to bring the price of money back up.

This model, at least in theory, has the possibility of creating an ideal stable currency, and it is also the most difficult to realize. The Federal Reserve stood up excitedly from the wheelchair, "You have done what the old man wants to do, and I can't even issue national debt. , can only buy and sell treasury bonds.”

l  BTS（BitShares）

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existing stablecoins

About the current attempts at stablecoins.

To put it simply, BitShares is a product with wallet, ledger, exchange, currency system, community and all in one.

l  USDT

The bts we trade on the exchange is a token running in the BitShares system. In addition, Dan also invented BitsUSD, which is the first trust-free (compared to the ripple network) and an electronic currency anchored with legal tender.

Just as today's banking system uses collateral to borrow and mint US dollars, BitShares can also use collateral to mint BitUSD (bit dollars).

Unlike traditional banks that use real estate as collateral to lend USD, BitShares will use BTS (shares) as collateral to lend BitUSD. If the value of the collateral drops compared to the value of BitUSD, BitShares will automatically sell part of the mortgaged BTS to make up for the shortfall (forced liquidation), and return the remaining BTS to the pledger.

Tether is a currency issued 1:1 with legal tender, that is, USDT is equal to 1 US dollar.

l  DAI

A tether platform is considered fully supported if the tethers in circulation are less than or equal to the fiat currency owned by the platform.

Advantages: establish a direct connection between fiat currency and stablecoin

Cons: Centralization, need to trust the center, audit issues

To put it simply, Maker is a political system. Maker's token and smart contract are used to ensure democratic decision-making. Dai Coin is a currency issuance system determined by them.

The basic idea is that you deposit a sum of ETH in the Dai system, and the system will issue a corresponding amount of Dai worth USD to you.

l  Havven

At present, Dai is still in the stage of Single Collateral Dai, which means that its collateral can only be ETH. Their development direction this year is to become multiple collateral Dai, which means that they can support more than one type of CDP.

Advantages: The first encrypted asset mortgage currency, with first-mover advantage; relying on ETH (on the blockchain, with transparency)

Disadvantages: complex; small amount, not yet verified

Its stability comes from a system that includes two coins.

One is called Nomins, which is a stable coin that is used in daily exchanges, and the other reserve currency is called Havvens.

l  Basecoin

Every transaction made with Nomin is charged, and the fee goes to the company and is distributed to the holders of Havvens as their reward for maintaining the stability of the platform.

Advantages: decentralization; fast currency circulation; business-oriented team

Cons: not verified

By using "Base bonds" and "Base shares" to adjust the supply of stable coins, Basecoin matches the anchored target price.

l  TrueUSD

When the price of the currency is lower than $1, the currency is recovered by issuing bonds to reduce the supply of the currency. When the price of the coin is above $1, the opposite action is taken.

Advantages: Relying on the famous fund, the developer of the Ivy League

l  Sagacoin

Cons: Requires confidence in the protocol

But true USD is legally protected and transparently audited. TrueCoin has worked with Cooley and Arnold & Porter to develop the legal framework for collateralizing cryptocurrencies and has a growing network of fiduciary, compliance and banking partners.

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future outlook

Only time will tell if we will see a mainstream stablecoin.

Lack of price stability is the main reason preventing cryptocurrencies from replacing most forms of fiat money.

The successful implementation of stablecoins could be a major catalyst for innovation in the crypto ecosystem. However, the outstanding problem is that no single team has been able to develop a generally accepted stablecoin that does not compromise privacy, security, or decentralization.