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Produced by Wayne | Vernacular Blockchain (ID: hellobtc)
Many people have clearly seen that blockchain technology will enter the mainstream market. Blockchain assets and cryptocurrencies may disrupt many industries, but there are still some factors that hinder mainstream adoption, such as the following factors:
1. Volatility: highly speculative market and extreme price changes;
2. Supervision: including gray areas and uncertain government positions that have not yet been explained, which makes it difficult for companies to establish legal and credible solutions;
3. Scalable : the block chain technology has reached the world's most efficient, so that there is uncertainty with the center's ability to compete solutions;
4. user experience: owning and using encryption currency for most people is laborious, using the block chain services It is also challenging.
Among them, it is the most difficult to solve the problem of volatility, so what method can be adopted to solve these problems?
01Why are stablecoins produced?
Since cryptocurrencies are affected by huge fluctuations, they are not ideal as a medium of exchange and unit of account.
In fact, if the value of digital currency drops sharply the next day, then no merchant will be able to accept digital currency because people have no consensus on how much it might be worth or how much it will be worth.
Only when volatility is reduced, the wider population may accept crypto assets.
There are many reasons for volatility, changing public perceptions, emerging markets, static monetary policies and unregulated markets. In order to solve the problem of volatility, stablecoins came into being.
A stable currency is an encrypted asset that maintains a stable value for a target price. It is designed for any decentralized application, and it needs a low volatility threshold to survive on the blockchain.
So in which application areas do we need to reduce volatility?
Remittances, payment of wages and rents or any other recurring payments, loans and forecasting markets, trade and wealth management, express volatility through fiat currency, achieve easier visibility and adopt realizing arbitrage opportunities.
In other words, anyone who wants to benefit from the advantages of blockchain technology without losing the guarantee provided by fiat currencies needs stablecoins.
02 stable currency which type?
Stablecoins can be divided into three main types, namely stablecoins secured by legal currency, stablecoins secured by cryptocurrency, and stablecoins without low staking .
1. Stable currency secured by legal currency. The most typical case is the USDT issued by Tether, whose Chinese name is TEDA Coin.
Every Tether issued and circulated is pegged to the U.S. dollar one-to-one, and the corresponding total U.S. dollar amount is stored in Hong Kong Tether Co., Ltd. When the U.S. dollar is the unit of measurement, there is no risk of fluctuation in the value of the collateral.
The limitation of this kind of stable currency lies in the cost of guarantee and collateral for centralization, opacity, no storage of funds or redemption of tokens.
For example, the market has never stopped questioning USDT's transparency and lack of supervision: Are the dollar reserves sufficient? Whether the issuance of air currency causes bubbles and so on.
In the face of doubt, Tether has always claimed that it has sufficient reserves, but so far it has not disclosed its own reserve account audit data.
2. Stable currency with cryptocurrency as collateral. In this model, the collateral supporting a stable currency is itself a decentralized encrypted asset. This method allows users to create stable currencies by locking up collateral that exceeds the total amount of stable currencies.
The collateral for a stable currency is usually an unstable encrypted asset, such as ETH. If the value of this asset drops too fast, then the stable currency does not have enough collateral.
Therefore, most projects that use this model require excess collateral in stable currencies to prevent sharp price fluctuations. Its limitation lies in the fluctuation of the collateral, there is almost no resistance to the black swan event, and excess collateral is required.
3. Stable coins without low stakes: seigniorage shares/decentralized banks/algorithm stability mechanism. As a (partially) decentralized bank and adopt a flexible supply mechanism.
Usually involves some secured positions, algorithmic rules and complex stability mechanisms. It uses algorithms to expand and contract prices to stabilize the supply of money, just like the central bank did with fiat currencies.
In this model, after the initial distribution of some stable currency tokens, they are directly linked to assets such as the US dollar. As the total demand for stablecoins increases or decreases, the currency supply will automatically change.
Its limitation is that stability is usually maintained by a centralized mechanism, monetary policy is still complex, unclear, unproven, and incentives may be insufficient.
03 summary
Stablecoin is called the "Holy Grail" of cryptocurrency. It can greatly reduce the threshold for entering the crypto market. Many different projects use various methods to issue stablecoins or are under development, but as of now, there is no clear best one. practice.
Other solutions from the traditional world, such as insurance or financial products, may provide other paths. More specifically, for stablecoins, derivatives are the biggest competitors in the list of cryptocurrency hedging solutions.
Do you have any questions about stablecoins?Welcome to share your views in the message area.
This article is a reissue of an old article with slight adjustments to the
original link: What are these stablecoins such as USDT and Libra? What is the role and significance?
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