The invention of stablecoins

As mentioned in the abstract, the development of things follows the law. In the development of digital currency, people (or markets) need a stable new digital currency linked to legal currency and physical assets. The realization of virtual assets, stable coins will be born.

From the essence of currency, currency is a common agreement between holders. It can be used as a trading medium, value storage, accounting unit, etc., and its expression can be gold and silver currency, banknotes, electronic money, etc. It is a general equivalent. People have a basically unified consensus and trust in the value of currency. So today, in the various digital currencies on the market, we can see the sharp price fluctuations of short-term zeroing or ten-fold increase, which makes them unsuitable now extensive daily payments and transactions. Therefore, if you want digital currency to realize the three functions of currency "exchange means, accounting unit, value storage" and promote the application of cryptocurrency in daily life, the stability of currency value is very important, which is also the realistic basis for the birth of stable coin. When the value of the currency is stable, applications based on blockchain loans, financial derivatives, and forecasting markets can be realized.

Features of stablecoins

Since cryptocurrency is circulated across countries across the globe, maintaining a stable value, a stable coin needs to meet the following characteristics:
1. Stable price; 2. Scalability; 3. Privacy protection; 4. Weak centralization.

At the same time, the three important characteristics of "Pegging, Collateralization and Redeemability" fully explain the operation mechanism and composition of the stable currency and how its composition ultimately determines its application and usability.

Unchangeable

Protecting a system from interferences guarantees security and safety of the various operations involved. In the functioning of the blockchain technology, the data is divided into various blocks that are interconnected with one another. Blockchain does automatic updates after every 10 minutes to check itself. The continuous checking allows the system to reconcile with the previous stored information. The information checked is referred to as a block. The blocks exist in an interconnected framework thus any change in a single block affects all other blocks. Therefore, a change cannot be implemented in a single block without simultaneously modifying all the blocks at the same instance, to record the changes. Therefore, based on the fact that there always new transactions made, it becomes almost impossible to make changes to any of the existing blocks.

Classifications of stablecoins

The most common, and arguably the simplest, is the stable coin of legal tenders, including Tether (USDT) and TrueUSD (TUSD), and attempts to peg to fiat currencies (for example, US$1). Stabilizing the statutory mortgage is expected to be stable, assuming that the support is legal and regular. They are highly concentrated and must be linked to existing financial institutions and banks. It can be seen that this type of stable currency draws on the "gold standard", that is, the banknote needs to maintain the convertibility with gold, and the country cannot issue silver paper that exceeds the total value of the gold it owns.

The other is a stable coin that decentralizes cryptocurrency mortgages. A prominent example is MakerDAO's DAI. The stabilized currency of the encrypted mortgage attempts to maintain their stability by over-guaranteeing the stable currency with another cryptocurrency (such as Ethereum) and using the trading robot to maintain the desired association.

The third type of stable coin is an unsecured/algorithm. These stable goods do not have explicit support for any potential collateral; instead, their algorithms implement proactive, automated monetary policy (ie, expanding and contracting supplies to keep a stable currency price tied to US$1). These systems can be decentralized; however, if the demand for the entire system drops dramatically, they are still vulnerable to large-scale death spirals. For example, BASIS uses an algorithm to adjust the currency supply, which increases or decreases the currency supply to keep prices and values stable.

Development and opportunities of stablecoins

The development of digital currency asset system

First of all, we can see that in the field of encrypted asset transactions, a large number of stable digital currencies using asset guarantees have been used as a means of exchange. At the time of this writing, Tether is currently the largest stable digital currency with a market capitalization of US$4 billion. Tether's daily trading volume is usually equal to its market value, so even if it does not include chain trading, its annual circulation is between 300-400. More notably, despite the poor trust base, many people are only willing to include Tether in short-term trading settlements rather than holding them for a long time, and Tether has achieved this success. This gives many people a false impression that digital currency is not that important. From the perspective of this article, a trustworthy stability mechanism may not only reduce the risk of our existing major redemption methods, but also have a great chance to function as a value storage tool.

More fundamentally, any important distributed application economy clearly needs a stable digital currency as the basis for development. While speculators may be more interested in the censorship of price fluctuations in distributed applications, such passes are too cumbersome for the average user. People may not value this case because low-level transaction throughput makes the booming distributed application ecosystem seem out of reach, but we should expect this to change. Just as applications that grow with the speed of the Internet are simply not possible in the era of dial-up Internet access, more distributed applications will also be realized as future transaction throughout on the chain increases. application.

In the long run, we firmly believe that decentralized applications will range from day-to-day payments (such as third-party payment platforms) to many areas of important businesses (such as automated compliance and settlement of multi-billion dollar certified financial products). Even if distributed application technology has not yet achieved significant results, the crypto-asset industry has a good reason to take the lead in using financial technology in the chain. In fact, the current main use case for Ethereum is not the transaction fee for smart contracts (currently around $250 million), but crowdfunding (billions of dollars). At the same time, we also noticed that due to the delay of the existing financial remittance settlement system, a large number of enterprises have begun to accept and use Bitcoin and Ethereum as the medium for payment settlement. Although Ethereum has relatively high volatility, couple the use of this digital currency still will bring other inconveniences, but all of the above Ethereum activities are actually going on.

Business globalization

Despite the high degree of globalization in today's world, cross-border transactions are still difficult. The widely used stable digital currency will overcome these difficulties, allowing anyone to trade at any time and place, and the company does not need additional infrastructure to expand the international market and connect with local financial institutions.

Capital agency involvement

US financial institutions such as JPMorgan Chase, Citibank, and Goldman Sachs are actively deploying the digital currency market, making the future digital currency tend to be standardized and mainstream, and gradually moving closer to the mainstream financial market. In February 2019, JP Morgan Chase became the first bank in the US to create and successfully test digital currency. The digital currency JPM Coin was introduced to facilitate real-time payment transfer between institutional accounts; Chicago Mercantile Exchange (CME) and Options Exchange (CBOE) introduced Bitcoin trading services in segments, and US financial institutions including Citigroup and Goldman Sachs are also actively deploying the digital currency market. The digital asset market has gradually become a new financial battleground for financial giants, which will also hope to drive traditional investors to invest in the digital currency market.

The Market Demand for stablecoins

In the first half of 2019, Bitcoin rose by as much as 131.38%, from less than US $3,500 to more than US $10,000, and the "rising ups and downs" attribute was unobstructed. The fluctuation of the digital currency market is so great that the stable price of USDT, DAI, GUSD and other market prices that are stable at around US$1 has become the new favorite of users.

At a time when Bitcoin skyrocketed, a controversial digital currency, USDT (about 70% of bitcoin transactions), almost monopolized the currency trading market.

Research firm Diar pointed out in a report released in June 2019 that the USDT transaction volume of the China cryptocurrency exchange in 2019 exceeded US$100. At present, the total circulation of USDT has reached 4 billion US dollars, and the market circulation accounted for about 80%, and the overall market share has further increased.

At the same time, the various types of “stabilized currency” regulatory systems represented by USDT are not up to standard, financial information is opaque, delayed payment, and over-issue are constantly exposed. It is regarded as the largest time bomb in the entire digital currency field.

It can be seen that stable currency is indispensable in the current digital currency market. It is also an important tool for the traditional digitalization of assets and the application of digital currency to the payment and settlement of traditional commercial economic activities. In the next few years, the market focus will gradually shift to stable coin.