Blockchain is also facing a departure from the spirit of decentralization

With the continuous development of blockchain technology, many applications born on the blockchain that may subvert traditional industries have begun to emerge, which also makes this market attract huge funds, whether for institutions or individuals, if they want to There is one thing that cannot be avoided when entering the crypto market, and that is centralized stablecoins.

Blockchain is also facing a departure from the spirit of decentralization

The centralized stable currency provides a bridge between the real economy and the blockchain world, is the value mapping of traditional finance in the encrypted world, and provides a stable value carrier. The emergence of centralized stablecoins promotes the development of the blockchain world, but while the scale of centralized stablecoins continues to expand, the blockchain is also facing the opposite of the spirit of “decentralization”.

This article is only for personal analysis and does not constitute any investment opinion. If there is any incorrect content, you are welcome to point out.

By: Spinach Spinach, Undocumented Scholar Satsuma

Table of contents

1. Stablecoins – the value mapping between the off-chain world and the on-chain world

(1) What is a stablecoin?

(2) What is the significance of the existence of stablecoins?

2. Are mainstream stablecoins a continuation of the hegemony of the US dollar?

(1) What is dollar hegemony?

(2) How is the hegemony of the US dollar formed?

(3) How can mainstream stablecoins continue the hegemony of the US dollar?

(4) Why does the United States accept the challenge of issuance rights in the encrypted world while other countries do not?

3. Where should the decentralized stablecoin ecosystem go?

(1) The dilemma of “decentralization”

(2) A grey future

  • Stablecoin is an on-chain encrypted asset anchored to fiat currency. Because of its low volatility, its main function is to serve as a medium of exchange between different volatile encrypted assets and a stable store of value.
  • The significance of centralized stablecoins is that their low volatility can not only be used as a store of value to become a “safe haven” when the market fluctuates, but also can be used as a trading medium to quickly match buyers and sellers on the trading platform. The crypto market provides a secure value carrier to carry larger amounts of money.
  • Decentralized stablecoins cannot act as a stable store of value for centralized stablecoins, and are more like a leverage tool. People obtain decentralized stablecoins by staking assets to improve asset leverage and capital use efficiency, and use the decentralized stablecoins generated by mortgages to repurchase volatile assets or generate interest.
  • The hegemony of the U.S. dollar originated from the strongest comprehensive national strength of the United States since World War II. After the collapse of the Bretton Woods system, the substantive default of the U.S. dollar has quietly shifted from the gold standard to the sovereign credit standard. In the past 50 years, the currency scale index has expanded by more than 100 times, and the human legal currency system seems to have been Completely ruined and heading for a channel where no one knows the ending.
  • The establishment of the Bretton Woods system has played a crucial role in the stable recovery of the world economy. The emergence of US dollar hegemony has also avoided the situation that the currencies of all countries will fall into a vicious competitive devaluation, the global exchange rate fluctuates greatly, and the trade is chaotic. At this stage, the United States played a role as a referee in the global political and economic environment, and provided important public goods for the post-war global economic recovery, which had positive significance.
  • Centralized stablecoins, as a mapping of the US dollar in the real world, are themselves the best bridge for US dollar hegemony to exert influence on the cryptocurrency world. The use of stablecoins by US dollar hegemony can not only directly shake the entire encrypted world, but almost all centralized stablecoin issuers are controlled by the United States, and can freeze and sanction the stablecoins on the chain at will.
  • The reason why the United States chooses to accept the challenge of issuing rights to support the encryption world is because the US dollar as a stable currency can not only use the absolute advantage of US dollar hegemony to harvest, but also can stubborn the status of US dollar hegemony while avoiding the existence of other countries in the encryption world. foundational risk.
  • For decentralized stablecoins, it seems that there are only two paths to take. One is to yield to centralized stablecoins, relying on centralized stablecoins to be a tool to “improve capital efficiency” and constantly find ways to expand the scale to allow more People use it; and the other way is to explore the true “decentralization”, which is the most difficult way.

1. Stablecoins – the value mapping between the off-chain world and the on-chain world

(1) What is a stablecoin?

Stablecoin is an on-chain encrypted asset anchored to fiat currency. Because of its low volatility, its main role is to serve as a medium of exchange between different volatile encrypted assets and a stable store of value. Stablecoins mainly Divided into centralized stablecoins and decentralized stablecoins:

Centralized stablecoins : Cryptographic assets issued on-chain by centralized issuers through off-chain asset guarantees. They often promise that the “digital dollars” (such as USDT, USDC) they issue can be exchanged with real dollars at any time. The real economy enters the value mapping in the blockchain world. Centralized issuers usually hire independent accounting firms or auditors to regularly verify the reserve assets in the escrow account to ensure that the total value of their reserve assets is higher than the “digital dollar” they issue (that is, the company’s debt) .

At present, the largest mainstream centralized stable currency is USDT issued by Tether, but the company has been deeply involved in the controversy of opaque assets for a long time, and has failed to provide a formal audit report for several years until the first half of 2021. Begin publicizing audit reports. In addition, USDC issued by an associate company formed by Circle and exchange Coinbase, and BUSD approved by the New York State Department of Financial Services (NYDFS) and issued by Binance and Paxos in cooperation with Paxos have developed rapidly this year due to more compliance, occupying the same place with USDT. As of August 26, 2022, the market share of USDT (30.8%), USDC (29.5%) and BUSD (18.2%) together has exceeded more than 75% of the entire stablecoin market .

Blockchain is also facing a departure from the spirit of decentralization

Data source: https://dune.com/hagaetc/stablecoins

Decentralized stablecoins: encrypted assets generated by over-collateralized or unsecured cryptographic assets on the chain relying on algorithms. Decentralized stablecoins are not issued by centralized issuers, but are self-executing smart contracts running on the chain. Generation is often governed in the form of a decentralized autonomous organization DAO. Different from centralized stablecoins, the additional issuance of centralized stablecoins means that real money flows into the crypto market and expands the scale of funds, while the additional issuance of decentralized stablecoins does not currently lead to market expansion, which is quite different from that. related to the method of generation.

Over-collateralized stablecoins represented by DAI of MakerDAO are stablecoins generated by over-collateralization of approved on-chain volatile assets to lock liquidity. For example, BTC with a value of 10,000$ is pledged to generate 5,000$ of DAI. Liquidity will not increase, and unsecured stablecoins generated by algorithms are a more unstable way. Terra’s LUNA and UST’s algorithmic stablecoins illustrate this well. The model of LUNA and UST anchoring each other to create value out of thin air has huge flaws and collapsed immediately with liquidity problems. At present, the market share of decentralized stablecoins is still relatively small. Among them, DAI of MakerDAO is the leader in this field. As of August 26, 2022, the market value of DAI is second only to USDT, USDC and BUSD, and the total supply is 6,972,989,621, which is roughly 10% of the total USDT supply.

Blockchain is also facing a departure from the spirit of decentralization

Data source: https://coinmarketcap.com/zh/view/stablecoin/

(2) What is the significance of the existence of stablecoins?

The significance of stable currency is to maintain price stability by anchoring legal currency and encrypted assets, so that there is a stable medium of exchange between different volatile encrypted assets, which greatly improves transaction efficiency and asset security. Although both centralized stablecoins and decentralized stablecoins are stablecoins, they play different roles.

The significance of the existence of centralized stablecoins

Before the advent of stablecoins, if people wanted to buy BTC, they had to find a seller who held BTC. It was very troublesome to directly purchase encrypted assets on the chain with fiat currency. The purchase process may be as follows: the seller provides a collection channel such as a bank account, etc. – Buyer transfers to seller’s collection channel – Buyer provides wallet address – Seller transfers BTC to buyer’s address. This process may take more than ten minutes or even dozens of minutes. If it is an over-the-counter transaction, it may also face the risk of sellers running away, and due to the high volatility of encrypted assets, there may be violent fluctuations within a few minutes. , if there are sharp fluctuations during the transaction between buyers and sellers, the final transaction price may be affected. And for institutions, because the amount of funds of institutions is generally very large, it is extremely difficult to find a counterparty of the corresponding scale and there is a high probability of encountering sellers’ moral hazard.

After the emergence of centralized stablecoins, both institutions and individuals can convert fiat currencies into stablecoins linked to fiat currencies and store them in on-chain wallets. Therefore, the significance of centralized stablecoins lies in that their low volatility can not only be used as a store of value, but also become The “safe haven” when the market fluctuates violently can also be used as a trading medium to quickly match buyers and sellers on the trading platform, which greatly improves the transaction efficiency and provides a safe value carrier for the entire crypto market to carry a larger volume of funds.

Blockchain is also facing a departure from the spirit of decentralization

The significance of the existence of decentralized stablecoins

After the birth of the centralized stable currency, people tried to create a decentralized stable currency, that is, it is completely decentralized, stable in price, high in reliability, universal in use, free from manipulation, and is not subject to a crisis of trust without being issued by any centralized entity. Affected digital currency. MakerDAO’s DAI was born as the first decentralized stablecoin. DAI is minted through an over-collateralization model and has a complex design system to ensure that the price of DAI remains stable pegged to the US dollar. In addition to the decentralized stablecoins in the over-collateralized model, algorithmic stablecoins and some algorithmic stablecoins were born. Although there are more and more patterns of decentralized stablecoins, at present, decentralized stablecoins cannot replace the center The role of stablecoins is even extremely dependent on centralized stablecoins.

Decentralized stablecoins play the same role as centralized stablecoins as a medium of exchange. The premise is that the price stability mechanism needs to ensure that it can be linked to fiat currency, but it cannot replace the center in terms of the most important and core function as a store of value. The status of the stable currency, the centralized stable currency can act as a “safe haven” when the market fluctuates violently because the centralized issuer behind it guarantees its value by collateralizing legal currency, no matter how the market fluctuates. Centralized and stable The price of the currency can still maintain low volatility and can be redeemed into fiat currency, but it is difficult for a decentralized stable currency to remain unaffected when the market fluctuates violently.

There are currently three ways to mint decentralized stablecoins, namely algorithm, over-collateralization and partial algorithmic mortgage. Pure algorithmic stablecoins are not stable and have extremely high risks, while over-collateralization or partial algorithmic mortgages require volatile assets or centralized stablecoins as collateral. If volatile assets are used as collateral, then in When the market fluctuates violently, it will face a great risk of liquidation and cannot be safely used as a store of value; if a centralized stablecoin is used as collateral, then this decentralized stablecoin is more like an exchange The centralized stablecoin of the shell, although the risk of liquidation is very low, will face the risk of protocol control at any time. Once the centralized stablecoin issuer imposes sanctions on the decentralized stablecoin protocol, the centralized stablecoin will be Faced with the risk of returning to zero, how can there be a “decentralized, uncontrolled, untrusted crisis”?

The current decentralized stablecoins are almost difficult to solve the situation of being attached to centralized stablecoins. At present, most of the underlying assets of mainstream decentralized stablecoins such as DAI, FRAX, and MIM are still centralized stablecoins (or Liquidity Tokens derived from centralized stablecoins). If all the collaterals are replaced with volatile assets, the violent fluctuations will lead to the decoupling of the decentralized stablecoin and make the stablecoin no longer stable. Therefore, the current decentralized stablecoin is more like a leverage tool. Decentralizing stable coins to improve asset leverage and capital use efficiency, and repurchase volatile assets or generate interest by using decentralized stable coins generated by mortgages. Decentralized stablecoins still have a long way to go.

If the bridge connecting the decentralized world and the real world before the emergence of centralized stablecoins was a single-plank bridge, which was difficult to walk and could not carry a large amount of capital, then centralized stablecoins were the bridge connecting the two worlds, with smooth roads and It can carry a huge amount of funds, and the decentralized stablecoin is a branch bridge built on the bridge, which provides different roads but is always difficult to escape the influence of the bridge.

Blockchain is also facing a departure from the spirit of decentralization

2. Are stablecoins a continuation of the hegemony of the US dollar?

(1) What is dollar hegemony?

The status quo of hegemony

We have heard of “dollar hegemony” in many places. We know that Americans can exchange goods and services from other countries by printing green paper. Every time they print money, they can transfer inflation to the world and harvest the world. Especially recently, the euro has dropped from the previous 10 yuan to 1€, which is about 1$. The Japanese yen, which has always been a safe-haven currency, has also fallen below a new low in decades, but the reality always seems to be separated by a layer of yarn, making people feel It is difficult to see through the essence of the US dollar hegemony harvest.

To understand this, we need to understand one word – dollar tide

Blockchain is also facing a departure from the spirit of decentralization

At the beginning of the epidemic, the Federal Reserve took the lead in printing money, and central banks around the world followed suit and released water. Most of the world’s stock markets and property market asset prices began to soar, and even made people forget the historic moment when the U.S. stock market was blown three times a few months ago. This is a new high against the backdrop of the hard-hit real economy.

This is the first wave of the dollar tide: during the rising tide, core areas such as Wall Street have obtained a large number of low-interest dollar loans and obtained a huge amount of low-cost funds. What is the first thing they do? Of course, assets such as gold, stocks, real estate, etc. are bought everywhere. Until the prices of all traditional industry assets are too high to be bought, many funds that have nowhere to go will flow into the crypto market. The funds allowed us to witness BTC breaking through a new all-time high of $60,000.

If we observe the market value trend of the entire crypto market, we can find that since the Federal Reserve released water and started printing money in 2020, major centralized stablecoin issuers began to continuously issue more stablecoins, so the market value of the entire crypto market also began to rise until it reached the historical The highest value, which is one of the reasons why this bull market is so critical.

Blockchain is also facing a departure from the spirit of decentralization

Data source: https://www.statista.com/statistics/1255835/stablecoin-market-capitalization/

Blockchain is also facing a departure from the spirit of decentralization

Data source: https://coinmarketcap.com/charts/

This surge is not accidental. Historically, such moments have always occurred periodically, and at that time, low-interest U.S. dollar capital was often high in emerging market assets. For example, in the 1990s, when small Southeast Asian countries such as Thailand took over the transfer of the Japanese industrial chain, the investment bubble blew up. At that time, foreign investment depicted a wonderful growth story, and the emerging markets of small Southeast Asian countries fell into a frenzy. In the double carnival of the stock market and property market, priority admission The players have quietly cashed out, took away the sweetest cream on the cake, and prepared to wave their sleeves and turned away.

If there is a rise, there will be a retreat. The rate cut cannot go on forever, and then there is the second wave: the ebb phase. Contrary to cutting interest rates and releasing water, shrinking the amount of water naturally means raising interest rates. This word is very powerful in the words of the current chairman of the Federal Reserve, Powell, in the past few months. A brief description of how dollar hegemony exploits the dollar tide to harvest in the crypto market will be briefly described.

Blockchain is also facing a departure from the spirit of decentralization

Looking back at the moment in history, it is similar to the time of capital flight to the Asian financial crisis of 1997. The interest rate hike means that the cost of borrowing will rise. No one needs a unified order. Wall Street capital and international hot money who have borrowed huge amounts of money before know that the banquet is coming to an end, and they start to accelerate the sale of assets in the peripheral market to exchange for dollars, or return dollars. Take out loans, or switch to low-risk assets such as U.S. Treasuries. In this process, even the capital of emerging countries will start to sell and short their own assets together. To a certain extent, it can also cause the currency exchange rate of small countries to collapse, so there is an opportunity for Soros to attack the Thai baht and the Hong Kong dollar. Finally, the wealth accumulated by emerging countries for decades was plundered in a short period of time.

Does the story end here? The tides ebb and flow, one round after another. When emerging markets were in chaos, a large number of bankruptcy and assets fell to the bottom, the dollar began to cut interest rates again, Wall Street and international hot money took cheap dollars, and returned to countries to start buying high-quality assets at low prices, such a round of dollar rises. The cycle of falling is called the dollar tide. In the last 10 US dollar interest rate cut and hike cycles in history, 7 of them ended in a recession of the real economy, and the United States was the first to recover after taking a lap, and the 3 times that did not cause a recession were all accompanied by weak emerging markets. harvest. Although the dollar hegemony uses the tide of the dollar to harvest the world like robbers do evil, there is also a positive meaning behind it. Everything has two sides. This has to start from the origin of dollar hegemony.

(2) How is the hegemony of the US dollar formed?

Hegemony begins

Looking back at the history of the last century, there was an economic crisis that swept the world in 1929. The most famous economic crisis in human history began to spread to Europe from the United States, causing countless people to lose their livelihoods and indirectly prompting countries whose economies were about to collapse to launch wars. The transfer of contradictions led to the outbreak of World War II. The two world wars shattered the twilight hegemony of old Europe. After World War II, the whole of Europe, victorious and defeated, became a loser with heavy debts.

On the other hand, the United States, relying on Roosevelt’s New Deal, obtained a breathing space, but Roosevelt’s packaged policies contained many contradictions, and whether it really helped the United States get out of the economic crisis has always been controversial. What is beyond dispute is that the Second World War hardly endangered the United States, and the huge military supply order did make the United States completely out of the quagmire, and the military supply after the event was converted to civilian use, allowing its manufacturing and technological innovation capabilities to continue for decades to come. maintained the advantage.

Bretton Woods era

When the new order after World War II was established, the United States, which was the only country standing on a poker table full of poker, and the largest creditor of European countries, owned 70% of the world’s gold reserves during the gold standard era, was the natural leader in the establishment of the West. The post-war new order speaks volumes. In 1944, the United States established the Bretton Woods system. The US dollar was linked to gold, and the currencies of various countries were linked to the US dollar. The “quasi-gold standard” was implemented. The US dollar officially became the core currency in the global economy, also known as the “US dollar”.

Objectively speaking, the establishment of the Bretton Woods system played a crucial role in the stable recovery of the world economy. If the United States pursued a consistent isolationism at that time, regardless of the affairs outside the American continent, then the weak European countries would most likely fall into vicious competition. Because of weak national strength, printing money has become one of the few options for governments, and printing money is equivalent to exchanging white paper for goods and services from other countries to take advantage of it. At the same time, the depreciation of foreign exchange rates can also make domestic exports more competitive. From the very beginning, I tried to secretly print a little more, and soon it will become too slow to print. All currencies will fall into a vicious competitive devaluation situation, the global exchange rate will fluctuate greatly, and trade will be chaotic. At this stage, the United States played a role as a referee in the global political and economic environment, and provided important public goods for the post-war global economic recovery, which had positive significance.

In the past gold standard era, currency could not be freely issued, and the anchor behind it was gold. However, the Bretton Woods system has its inherent contradictions (the Triffin problem). If countries want to use US dollars and reserve US dollars, they need US dollars first, while Western countries have no gold reserves to exchange enough US dollars. At the same time, the United States, as the most powerful exporter of manufacturing at that time, was overcapacity, and was eagerly waiting for foreign orders to be placed with money to buy its own products. If the U.S. dollars are taken out and lent to other countries, the U.S. dollar circulating in the U.S. will decrease sharply, leading to deflation, and the appreciation of the U.S. dollar will also seriously hurt U.S. exports.

So the only solution is to print more US dollars and release them directly to foreign countries through aid loans (ie, the Marshall Plan), without affecting the circulation of US dollars in the country. The U.S. dollar became the core currency in global trade, stabilized exchange rates for countries after the war, provided stable preconditions for the recovery of the global economy, and also enjoyed the benefits of issuance taxes. When everyone is poor and struggling to rebuild, everyone is at peace. After all, a stable economic environment is more important than being taken advantage of by the United States. This status quo has been maintained for nearly 30 years, and the US dollar has penetrated more and more into all aspects of the global economy, but in the process, the United States has gradually played the game of ten bottles and nine caps, and in the subsequent local wars, it wasted too much. With more wealth, the number of lids begins to decrease.

Post Bretton Woods

The first practical faction to pierce the emperor’s new clothes was Charles de Gaulle of France. He took a warship and carried a large number of US dollars into gold and transported it back to France, and then used gold as collateral to borrow a large number of US dollars from the market and exchanged gold again. After several shipments, by 1971 France had bought back more than 3,000 tons of gold. At the same time, the game of printing money in the United States has reached the level of ten bottles and one cap. The US gold reserves are only 11 billion US dollars, and the US external current liabilities at that time have reached as high as 67.8 billion US dollars.

In August 1971, Nixon announced the closure of the dollar-gold exchange window, essentially unilaterally defaulting on the world. However, as the core currency of world trade for 30 years, the status of the US dollar was not easily replaced, because at that time no currency of any country was capable of challenging the status of the US dollar. After that, the United States found that it only needed to master energy and food, and the status of the dollar would continue to be unbreakable, so the establishment of the dollar-oil system followed, and most of the world’s food giants and seed giants were under the control of US dollar capital.

Where is the anchor?

So the question is, the gold standard is abandoned, what is the anchor of the legal currency of various countries?

The answer is “debt”. For central banks, it is the “sovereign debt” issued by the central bank. In the central bank’s balance sheet, every 1 yuan of fiat base currency issued corresponds to 1 yuan of national debt, and the total amount is Balanced. In theory, this is a very delicate new design of the human currency system. Since the issuance of debt requires interest, it is not free of cost, so the governments of various countries cannot print money indiscriminately like the ancient fiat currency era, which sounds very reasonable. Of course, things will change gradually. If you are the only referee in this game, and if you don’t have a stronger power to pay you any extra price by borrowing the new one, then it will be fun to borrow money for a while, and it will be fun to borrow money all the time.

Blockchain is also facing a departure from the spirit of decentralization

Data source: Center for Financial Stability (CFS), Hopkins University, Federal Reserve, Wind, Orient Securities Wealth Research Center

The red in the picture above is the amount of the Fed’s balance sheet (the amount of liabilities and assets is equal). There is an illusion here that the growth from 1971 to the beginning of 2000 was not obvious. This was actually depressed by the massive money printing in the 2008 financial crisis. That’s it, you will still see an exponential growth curve after slicing the data after 2008. Up to now, the MMT theory (Modern Monetary Theory) has even become popular in American political circles. This theory was originally a crooked leftist in economics in the early years, but it is particularly in line with the thinking of the fiscal authorities. Although its theory cannot be said to be unreasonable, at least it is It can be said that it is nonsense. Basically, it can be understood as: although the US dollar is the world currency, the printing of money is a matter of my country’s internal affairs that no one has the right to interfere. A profound interpretation of what it means: “our currency, their problem”.

In order to cope with the impact of the new crown epidemic in 2020, the total amount of money put into the market by the global Central bank QE exceeds the total amount of all currencies issued by mankind before! So far, after the collapse of the Bretton Woods system, the legal currency system of mankind has been completely broken, and it has sailed to a channel where no one knows the outcome. Let us revisit the mood of Satoshi Nakamoto when he witnessed the subprime mortgage crisis in 2008. How important is a currency that is not controlled by any and will never be issued.

(3) How can mainstream stablecoins continue the hegemony of the US dollar?

At the beginning of Bitcoin’s birth, Satoshi Nakamoto’s expectation was to make Bitcoin a currency that can be circulated in the market. Later, various cryptocurrency and Bitcoin trading pairs were indeed formed in the blockchain world, but unfortunately The idea is to use a currency whose price fluctuates greatly to measure the price of other things, which is really inhumane. Now that the BTC standard is struggling only in the hearts of a few of the most devout hardcore players, the result of market selection is that the size of stablecoin trading pairs has become mainstream.

If the entire encrypted world is regarded as a small emerging country, this country once tried to implement a “gold standard” monetary system with digital gold BTC, and compromised to stablecoins after encountering various difficulties. Stablecoins are actually a product of regulation, but later we found that stablecoins play a huge role in value anchoring and value transfer. Every country can issue stablecoins, but the most important thing about stablecoins is to anchor the US dollar, because the US dollar has the most extensive application scenarios, the most agile and the strongest.

However, trading with stablecoins, especially centralized stablecoins, will lead to the loss of a certain degree of sovereignty. We can understand the centralized stable currency as the “voucher” of the US dollar. USDT, USDC and others have given up independent fiscal policy and cannot adjust their interest rate and supply in the encrypted world by themselves, realizing the free flow of capital with the US dollar. The exchange rate is stable.

Decentralized stablecoins (algorithmic stablecoins) try to achieve the balance of the impossible triangle of Mundell. While maintaining exchange rate stability, it is necessary to maintain the free flow of capital as much as possible. On the basis of these two, Also greedy for independent monetary and fiscal policy. At its peak, LUNA-UST, which performed the feat of Don Quixote and the windmill, went the farthest. At its peak, it forced hundreds of additional issuances by itself at a 20% “base rate” without the permission of the Federal Reserve. The “US dollar” of 100 million was called “encrypted Maotai” by most people for a time. Of course, we all know the story behind it.

Blockchain is also facing a departure from the spirit of decentralization

In fact, as a mapping of the US dollar in the real world, stablecoin itself is the best bridge for US dollar hegemony to exert influence on the world of encrypted assets. Just as the secret of the US dollar tidal plundering emerging economies is “free flow of capital”, the US dollar equivalent is chosen as the market The mainstream of trading, the rise or fall of the US dollar index, the influx or retreat of the US dollar tide, will pass through this bridge and spread to the entire encrypted world, so the use of stablecoins for dollar hegemony can not only directly shake the entire encrypted world, but also almost a large number of The centralized stablecoin issuers are all controlled by the United States, and can freely freeze and control the stablecoins on the chain.

(4) Why does the United States accept the challenge of issuance rights in the encrypted world while other countries do not?

The birth of the blockchain gives everyone the right to issue their own encrypted assets. To a certain extent, it grows wildly in the regulatory gap, creating a lot of chaos. Many countries have adopted corresponding regulatory laws to regulate this new market. Some countries have relatively loose policies, while others are relatively strict. Western countries led by the United States are often more open to this. It stands to reason that corporate entities are allowed to issue tokens such as USDC, or privately issued “dollars” such as UST. It is not the Central bank digital currency officially issued by the United States, but the right to issue it. A challenge to the United States, why would the United States tolerate such a challenge?

First of all, the development of blockchain technology is showing its potential more and more, and more and more people believe that this is the technological revolution of the next generation. The U.S. dollar hegemony not only stops at scouring the world’s wool, but also gathers the world’s largest capital and top talents, retains the best innovation environment, and has always made positive contributions to the scientific research and marketization of new technologies . It is not in its interest to inexplicably show rejection of a forward-delayed technology. It is its consistent style to make the United States the main force of new technologies and continue its technological influence.

Secondly, taking the lead in accepting the encrypted world and encouraging other countries to accept it seems to make the currencies of various countries stand on the same starting line as the US dollar. In fact, the US dollar is a big step ahead. Even if any country issues legal digital currency on the blockchain with official endorsement, It is also impossible to break through the proportion of its legal currency in the real economy. The market will always choose the US dollar with the highest adoption rate in the real economy as the main anchor. The current status quo is that stablecoins are basically pegged to the U.S. dollar, which also enables U.S. dollar hegemony to better function in the crypto world through stablecoins, which is beneficial to the U.S. dollar.

Again, we assume that the United States boycotts the crypto world and does not allow the U.S. dollar to flow into the crypto world, and other fiat currencies may not follow the U.S. dollar’s ​​decision. For example, the euro, which currently occupies the second largest share, turned to strongly support blockchain technology. After a few years, it stepped on the tuyere of a technological explosion. At that time, the status of the US dollar may be subverted.

Therefore, the strategy that is most in line with the interests of the United States is to accept the encrypted world and allow the United States to continue its advantages in this field, rather than rejecting, suppressing, and leaving behind for competitors. Subvert your own mines.

For countries other than the United States, such as European countries and developed economies such as Japan and South Korea, accepting the encrypted world can continue their comparative advantage within the existing economic system; more peripheral economies face difficulties, because once they accept It is equivalent to continuing to endure the one-step advantage of the U.S. dollar and continuing the relatively backward position in the original pattern. At the same time, they will also face greater systemic financial risks due to the opening of capital flow exposure. For example, for countries with foreign exchange controls, their monetary policies have already made trade-offs, giving up the free flow of capital to ensure exchange rate stability and independent finance. Policy, the three cannot be taken into account. To embrace the crypto world is to demand all three, which is contrary to its monetary policy.

3. Where should the decentralized stablecoin ecosystem go?

(1) The dilemma of “decentralization”

Many believers who believe in the “spirit of decentralization” are trying to create a stablecoin derived from the encrypted world itself to get rid of the control of the US dollar hegemony over the encrypted world. We can see many attempts such as algorithmic stablecoins. There are BasisCash which adopts the three-coin model of Share, Bound, and stable currency, the simpler and cruder LUNA-UST dual-coin model, and Ampl, which tries to abandon the US dollar and instead anchor the entire encrypted asset itself. It was once called the Rebase system. Stablecoins, because their technical feature is to automatically return prices to normal by changing market supply and demand after the currency price de-pegged, but in the end these attempts seem to have failed.

The most promising possibility is the over-collateralized stablecoins realized through over-collateralization and liquidation, such as DAI, sUSD, etc. They are also called algorithmic stable coins because they are based on smart contracts and have clear stability rules. After Ray completely discredited algorithmic stablecoins, everyone distinguished them by “over-collateralized stablecoins”. Overcollateralized stablecoins have remained relatively reliable so far because they are always backed by sufficient collateral to back them up.

After Tornado Cash was sanctioned by OFAC, the first sanctions against the protocol in history brought the entire crypto industry into a huge turning point, and the regulation of the crypto industry also entered an unknown territory, which is very important for the protocol of decentralized stablecoins. It is an unprecedented sense of crisis. Once the decentralized stablecoin protocol that relies on centralized stablecoin collateral is sanctioned, it is basically equivalent to declaring the death of the entire project. MakerDAO founder Rune and the core members of the community are aware of this risk and consider starting Promote the decoupling of DAI from centralized stablecoins and use ETH as collateral to prevent the risk of sanctions on MakerDAO.

Blockchain is also facing a departure from the spirit of decentralization

Image source: Twitter

If ETH is used as collateral to generate stable coins, this pure path also has insurmountable difficulties. It is trapped in the fluctuation of the underlying assets for a long time, which can easily lead to de-anchoring and liquidation; the market size is always difficult to grow, and it is not easy to use. Therefore, no mortgage minting, no minting leads to a vicious circle of smaller supply, and the smaller the supply, the harder it is to use.

However, if MakerDAO continues to use centralized stablecoins as collateral for stability, it will always be controlled by the U.S. government behind the centralized stablecoins. If DAI grows to a position that threatens the hegemony of the U.S. dollar, the Federal Reserve can easily If it freezes all its centralized stablecoin assets for reasons such as “not cooperating with supervision”, it completely loses the qualification to compete with the hegemony of the US dollar – although it has never owned it from the beginning.

And before Tornado Cash was sanctioned, the FRAX community launched a proposal to increase the collateral ratio to 100%, which means that minting FRAX will no longer be a certain ratio of centralized stablecoins and governance tokens, but 100% The purpose of the centralized stablecoin mortgage issuance seems to be to improve the underlying credit of FRAX to achieve the effect of scale expansion, allowing more and more users to use FRAX, but at the same time, it also relies more on centralized stablecoins.

Blockchain is also facing a departure from the spirit of decentralization

Source of proposal: https://gov.frax.finance/t/move-collateral-ratio-to-100-institute-credit-ratio/1371

(2) A grey future

For decentralized stablecoins, it seems that there are only two ways to go. One is to surrender to centralized stablecoins and rely on centralized stablecoins to be a tool to “improve capital efficiency” and constantly find ways to expand the scale to attract more people. Use, the project that chooses this path may not care about whether to decentralize, but whether more people can use it to increase the income of the protocol, and the other path is to explore the true “decentralization”, which It is the most difficult road to take, and it is the goal that those true blockchain spiritual believers aspire to. For MakerDAO, which is moving towards “decentralization”, there is a gray future ahead. MakerDAO not only faces protocol sanctions that may occur at any time, but also faces the risk of project collapse due to failure of transformation.

Although the encrypted world seems to be running against the “spirit of decentralization”, it is difficult for us to see the context of technological development at this time, just as it is difficult for people in the era of carriages to imagine the future of cars replacing carriages, such as the users of the old Internet in the PC era always Disregarding the subversion brought by the mobile Internet, the big cows of Web2 big factories will also have various discomforts when they first enter Web3. The charm of this industry is the amazing speed of iteration. From the earliest BTC, to the “blockchain world”, to the “crypto asset world”, and now we call ourselves “Web3”, this is not just an iteration of propaganda terms, the same behind It is also the rapid development of technology. With a huge investment of capital, more and more Buidlers have migrated in from all over the world, and the future situation will inevitably exceed the imagination of all our authorities. Perhaps in a few years, the current predicament will be solved in unexpected ways.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/blockchain-is-also-facing-a-departure-from-the-spirit-of-decentralization/
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