How will the growing "stable currency" affect our lives?
"Blockchain Industry Observation" Column · Part 6
Picture丨From the Internet
Picture丨From the Internet
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There is a "stable currency storm" taking place. Will this digital currency with stable prices become the next event to disrupt the digital field? Facts have proved that the development of blockchain has the potential to subvert all traditional industries.
Among the many emerging use cases, blockchain technology aims to create a new and improved payment system for the world, which is more secure, transparent, decentralized, fast, and uses cryptocurrencies (various types of digital currency) as its means of exchange.
The value of most cryptocurrencies, especially Bitcoin, fluctuates daily. While digital currencies are designed to facilitate safer transactions, their value has increasingly been compromised by speculation.
Digital asset investors can become millionaires overnight, only to lose most of their wealth just weeks later. Exciting as it may be, it also shows, in a way, the enormous unreliability of bitcoin as a currency for the exchange of goods and services.
At this time, stablecoins have entered the stage of history. Stablecoins are more stable in value than ordinary cryptocurrencies, and their value is linked to other assets such as the US dollar or gold. While enjoying the advantages of cryptocurrency transparency, security, and privacy, it does not have the extreme volatility of most cryptocurrencies. Because of this, the demand for stablecoins is surging. At the end of 2020, the total value of stable currency assets exceeded 20 billion US dollars, with a growth rate of slightly less than 300%.
The original intention of creating a stablecoin is to serve as a simple, stable, scalable, secure and tradable cryptocurrency. After all, most businesses aren't interested in accepting a currency like Bitcoin that could lose value the next day.
The so-called "stablecoin storm" has recently occurred, and at least 200 stablecoins around the world have been released or are under development. Additionally, the New York State Department of Financial Services has approved and regulated two USD-backed stablecoins, Paxos Standard (PAX) and Gemini Dollar (GUSD).
Traditional financial services firms are also eyeing the opportunity, with JPMorgan already experimenting with and launching its own stablecoin. Meanwhile, a recent survey of central banks found that two-thirds of respondents were actively researching the potential impact of stablecoins on financial stability.
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What are stablecoins?
Today, 180 currencies around the world are recognized by the United Nations, including the U.S. dollar, euro, and yen, among others. In the global economy, these currencies are often used to purchase goods and services, and despite inflation, exchange rate fluctuations and other factors, the value of these currencies changes little from day to day. This allows some economies to operate on currencies issued by these central banks.
In other words, you can buy a loaf of bread from your favorite baker for $3.50 today, and it's unlikely that it will drop dramatically to 99 cents tomorrow.
Stablecoins exist in the form of digital currencies designed to mimic traditional, stable currencies. Generally speaking, a stablecoin is a cryptocurrency backed by the value of the underlying asset. The underlying asset varies depending on the stablecoin, which we will discuss in depth later in this article.
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Stablecoins are immune to the extreme price swings of other cryptocurrencies, and in 2010 a programmer bought a pizza for 10,000 bitcoins (about $30), and by 2018 the order was worth 82 million. USD, this is all a result of the drastic change in the price of Bitcoin.
As a result, some businesses are skeptical of digital currencies as an effective means of payment. For example, Microsoft, which began accepting Bitcoin as a form of payment in 2014, temporarily discontinued it in 2018 due to its volatility, and global online gaming platform Steam was forced to do the same. At the same time, companies such as Overstock and Shopify have begun to accept digital currencies, and based on this, the widespread adoption of digital currencies is still far away.
On the one hand, stablecoins have the advantages of cryptocurrencies, such as transparency, security, immutability, digital wallets, fast transactions, low fees, and privacy. On the other hand, it has the guarantee of trust and stability brought by fiat currencies such as the US dollar or the euro.
Initially, early digital currency holders used stablecoins as a hedge against risk in the event of market declines or crashes. As an example, if the price of bitcoin starts to drop rapidly, holders can convert their bitcoins into stablecoins on one platform within minutes, avoiding potentially huge losses.
Without this option, cryptocurrency holders would have to convert their funds back into fiat currency. However, many cryptocurrency exchanges either do not allow the use of fiat currency on the platform, or charge a large fee for conversion to fiat currency.
Stablecoins also show promise in other emerging applications. They can benefit a wide range of industries and individuals who need to make international payments quickly and securely. Benefiting expatriate workers who need to send money home, and large businesses looking for cheaper and more efficient ways to pay suppliers overseas.
In both cases, people don’t have to worry about remitting an investment asset like Bitcoin that can suddenly lose value. In areas with imperfect banking systems and especially unstable economic systems, people can use this form of digital currency for transactions. In theory, this technology is a global currency technology that is not subject to localized laws and conditions.
In the entire financial services ecosystem, stablecoins also have great advantages. By establishing a safe and stable decentralized system, everything from cross-border lending to financial planning may benefit. For example, in the case of decentralized lending, stablecoins can help ensure a reliable environment for P2P without using volatile cryptocurrencies like Bitcoin.
Types of Stablecoins
Types of Stablecoins
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1. Fiat-backed stablecoins
The most common stablecoins are backed or backed by fiat currencies such as the US dollar, euro or British pound.
Fiat-backed stablecoins are usually backed 1:1, meaning that 1 stablecoin is equal to 1 unit of currency (such as the U.S. dollar). So, for every stablecoin in existence, there is theoretically a reserve of real fiat currency held in bank accounts to back it.
When someone wants to exchange a stablecoin for cash, the company that manages the stablecoin will take fiat currency from their reserves and send it to that person's bank account, which will then destroy or take an equivalent amount of the stablecoin out of circulation.
Fiat-collateralized stablecoins are the simplest structure of stablecoins. Its simplicity is of great advantage to anyone without a deep understanding of cryptocurrencies, and this new technology is easily understood and widely adopted.
As long as the economy of the country to which the stablecoin is anchored remains stable, it is guaranteed that a stablecoin with a properly backed fiat currency will not fluctuate significantly in value. This means that even if the entire cryptocurrency economy collapses and the price of Bitcoin drops to $0, it will not affect a fiat-backed stablecoin.
There is also a class of fixed-income stablecoins based on a series of fiat currencies. The most popular stablecoin is Tether (USDT), which is currently the third largest cryptocurrency by market capitalization. And surpassed Bitcoin in terms of daily transaction volume, becoming the most influential cryptocurrency among all digital currencies.
Tether accounts for the majority of the global stablecoin supply and set a new record in January 2021, issuing 2 billion USDT in one week.
However, the cryptocurrency has been besieged by numerous controversies, with some skeptical that Tether issued more USDT than the amount of U.S. dollar reserves actually backing it. The U.S. Department of Justice has launched an investigation into Tether and cryptocurrency exchange Bitfinex, which share the same management team, for possible market manipulation. Also in 2019, the New York Attorney General launched an investigation into the apparent misuse of Tether’s cash reserves.
For this reason, many new fiat-collateralized stablecoins have quietly emerged, trying to take Tether's place.
One such example is USD Coin (USDC), another dollar-pegged stablecoin managed by a consortium of cryptocurrency finance firm Circle and cryptocurrency exchange Coinbase. Every month a report is published proving that it holds actual USD reserves to back the supply of USDC.
USDC is steadily eroding Tether's hold on the stablecoin market share, with Tether dropping below 75% market share for the first time in January 2021, while USDC surpassed 15%.
USDC's reputation for regular audits and asset stability has helped it become a key component of decentralized finance (DeFi), a wide range of decentralized financial services that rely on blockchains and smart contracts. In addition, in December 2020, the payment giant Visa announced that it will cooperate with Circle, the parent company of USDC, to issue corporate credit cards using USDC as the currency in circulation, further enhancing the international status of USDC.
The New York State Department of Financial Services has approved and regulated two stablecoins backed by the U.S. dollar, further evidence that the stablecoin storm has begun. PAX and GUSD became the world's first regulated cryptocurrencies in September 2018.
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2. Commodity-backed stablecoins
Commodity-collateralized stablecoins are backed by other kinds of fungible assets, such as precious metals. The most common collateral commodity is gold, but there are also stablecoins backed by oil, real estate, and various precious metals.
Holding a commodity-backed stablecoin essentially holds a tangible asset with real value, which most cryptocurrencies do not have. These commodities even have the potential to appreciate in value over time, increasing the incentive for people to hold and use these stablecoins.
Through commodity-collateralized stablecoins, anyone in the world can invest in the commodities it anchors, ranging from precious metals such as gold to real estate in Switzerland. Typically, investment opportunities in these assets are reserved for the wealthy, but commodity-collateralized stablecoins open up new investment possibilities for ordinary individuals around the world.
For example, Digix Gold (DGX) is an ERC20 token (Token) built on Ethereum backed by physical gold, where 1 DGX represents 1 gram of gold.
The gold is stored in a vault in Singapore and is audited every 3 months to ensure its transparency. The creators of DGX claim they have "democratized access to gold." DGX holders can even redeem physical gold bars - they just have to go to a vault in Singapore.
Another example is that the endorsement of Tiberius Coin (TCX) is not a commodity, but a combination of 7 precious metals commonly used in technology hardware. TCX will appreciate as these metals are increasingly used to make technologies such as solar panels and electric vehicles.
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3. Cryptocurrency-based stablecoins
There are also stablecoins that are based on other cryptocurrencies.
This makes cryptocurrency-based stablecoins more decentralized than fiat-based stablecoins because everything happens on the blockchain.
To reduce the risk from price volatility, these stablecoins are often over-collateralized so that they can absorb price fluctuations in the collateral.
For example, to get $500 worth of stablecoins, you need to deposit $1,000 worth of Ethereum (ETH). In this case, the stablecoin is now 200% collateralized and can withstand a 25% price drop. This would still mean $500 worth of stablecoins collateralized by $750 worth of ETH.
If the price of the anchored digital currency drops low enough, the stablecoin is automatically liquidated.
Cryptocurrency-based stablecoins are decentralized, with no single entity controlling your funds, making the process trustless, secure and fully transparent. In addition, they often anchor multiple digital currencies to spread risk. They enjoy more liquidity, which means they can be converted quickly and cheaply into the digital assets they back.
Cryptocurrency-based stablecoins are the most complex form of stablecoins, which means they haven’t gained enough traction just as they continue to work out their problems.
The most popular and most promising digital currency-based stablecoin to succeed is Dai. Dai was created by MakerDAO and its face value is pegged to the U.S. dollar, but it is actually pegged to Ethereum (ETH) locked in a smart contract.
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4. Unsecured stablecoins
Stablecoins without collateral are not pegged to anything, which seems paradoxical considering what a stablecoin is. The dollar used to be backed by gold, but that ended decades ago. And because people believe in the value of the dollar, the dollar remains stable. The same idea applies to uncollateralized stablecoins.
This type of stablecoin uses an algorithm to control the stablecoin supply, a model known as "seigniorage shares."
As demand increases, new stablecoins are created to lower prices back to normal levels. If the price of the stablecoin is too low, then the stablecoin in the market will be bought back to reduce the circulating supply. Theoretically, the prices of these stablecoins will remain stable due to market supply and demand drivers. This is the most decentralized and independent form of stablecoin as it is not collateralized by any other assets.
However, unsecured stablecoins need to continue to grow to be successful, and once they crash, there is no collateral to cash out the stablecoins and everyone loses money.
An early and popular example of an unsecured stablecoin is Basis, an app designed to algorithmically adjust supply to keep prices stable. Despite securing over $100 million in funding in its initial offering (ICO), the program was forced to close in 2018 due to regulatory constraints.
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real application
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1. Currency in circulation in daily use
Stablecoins can be used in mainstream commerce like any other currency and have the added benefit of being a digital currency with additional legal backing and security.
As many digital currency proponents have dreamed of, we can finally pull out our smartphones and use digital wallets to pay for our morning coffee with cryptocurrencies. Stablecoins are also particularly beneficial for overseas payments, as they do not require any conversions to different fiat currencies. In India, one can receive USD-pegged stablecoins without exchanging them for rupees and losing a large fee.
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2. Simplify recurring payments and P2P payments
Stablecoins also allow for the use of smart contracts that can be enforced over time.
A smart contract is a self-executing contract that exists on a blockchain network and does not require any third party or central authority to execute it. These automated transactions are traceable, transparent and irreversible. It's ideal for paying salaries, loans, rent and deposits.
Employers can set up a smart contract to automatically distribute stablecoins to employees at the end of each month. This is especially beneficial for businesses with employees around the world, as it reduces high fees and a process similar to transferring fiat currency from a bank account in New York to a bank account in China. With stablecoins, this process may only take a few minutes and require a small transaction fee.
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3. Affordable and fast remittances for expatriate workers
Stablecoins also have the potential to transform the lives of millions of families in developing countries. In today's world, expatriate workers must go through businesses like Western Union to get money to their family or friends. This is a very slow and expensive process, and families end up losing a large portion of their money due to high fees.
Cryptocurrencies offer a solution to this problem with fast transactions and low fees. But the problem is that cryptocurrencies like Bitcoin can lose 20% of their value in one day. Stablecoins offer a better alternative. Workers and their families around the world can use digital wallets to trade stablecoins from around the world with low fees and little price volatility.
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4. Prevent the collapse of the local currency and resist market fluctuations
If a fiat currency depreciates, local residents can protect their assets from further depreciation by quickly exchanging the devalued currency for a stablecoin pegged to the euro, or even gold, before losing more of their savings.
Take, for example, the hyperinflation currently going on in Venezuela. Inflation is hovering around 6,500%, according to the International Monetary Fund. At the same time, as of October 2020, the price of basic food items has increased by nearly 1,800% year-on-year. Most Venezuelans can no longer afford food as their savings become increasingly worthless and lose value every day.
Freed from local capital controls, stablecoins could provide a viable solution for people going through this type of crisis, allowing them to quickly convert their depreciating currency into a stable currency that protects their assets from further depreciation Impact.
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5. Improved cryptocurrency trading methods
Due to strict regulations, very few cryptocurrency exchanges currently support the circulation of fiat currencies. However, exchanges can bypass this problem by using stablecoins. Transactions can be made simply by using USD-pegged stablecoins instead of actual dollars.
This will go a long way towards overall cryptocurrency adoption in transactions, it will make the process of joining and acquiring cryptocurrencies easier for newcomers to the space, and it will allow them to consider continuing to use dollars or euros instead of ever-fluctuating bits currency value.
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While stablecoins have many advantages, they also have their limitations.
Tether is a good example. Fiat-backed stablecoin systems are centralized, meaning they are run by a single entity. This requires trust that the entity is actually using real fiat currency as a reserve for stablecoins. To address this trust issue, institutions offering stablecoins should offer regular audits from third parties to ensure transparency, which will help ensure they are trustworthy and help maintain their reputation.
Fiat-pegged stablecoins are also subject to all the regulations of fiat currencies, which hurts the efficiency of the exchange process and the potential effectiveness of digital assets. For example, Facebook’s Libra currency promises to be backed by a basket of global fiat currencies, broadening the currency’s appeal and utility. However, it has had so many regulatory shocks that the project's management has abandoned its goal of diversifying its currency, distanced itself from Facebook, and reinvented itself entirely.
Stablecoins can be less liquid than regular cryptocurrencies due to stricter regulation. This is especially true for commodity-backed stablecoins. For example, if you want to get your hands on real gold bars, it can take months and an expensive trip.
In addition, the anchored assets still have the risk of value collapse. Think about Black Wednesday in the UK, or the ruble crisis in Russia in 1998. If such an event happened to fiat currencies, it would be disastrous for stablecoins.
Stablecoins based on cryptocurrencies also have problems that need to be faced. They are more susceptible to price instability than other cryptocurrencies, fiat currencies or commodity-backed stablecoins.
Cryptocurrency-based stablecoins are tied to the health of a particular cryptocurrency or a combination of cryptocurrencies, meaning that if the underlying cryptocurrency takes a tumble, the stablecoin will eventually do the same. Once the price plummets, they will be automatically liquidated as their anchored digital assets and will no longer be stable.
Another disadvantage of cryptocurrency-based stablecoins is that they are difficult to understand and are the most complex form of stablecoins, which introduce a higher risk of error.
postscript
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While it is impossible to predict what the future holds in the ever-changing blockchain world, there is no doubt that stablecoins can help the entire cryptocurrency space go mainstream.
Numerous financial services firms, from JPMorgan to payments network Visa, have embraced stablecoin technology through partnerships or in-house development. In addition, regulatory agencies such as the U.S. Office of the Comptroller of the Currency (OCC) have also made relevant progress in stablecoin technology. functions.
Each stablecoin has its own unique advantages and disadvantages, and none is perfect. However, by enabling universal use of local currencies, simplifying payments and remittances, and enabling emerging financial applications, the value and stability that stablecoins can provide to businesses and individuals around the world could be disruptive.
The original report comes from CB Insights, an emerging technology insight platform that provides clear information on emerging technologies and new business strategies. The Chinese version is compiled and organized by the Chain Market team, and the English copyright belongs to the original author. Please contact the editor for Chinese reprint.
The original report comes from CB Insights, an emerging technology insight platform that provides clear information on emerging technologies and new business strategies. The Chinese version is compiled and organized by the Chain Market team, and the English copyright belongs to the original author. Please contact the editor for Chinese reprint.
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