DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

Stable currency is a product of the development of the cryptocurrency market, and is widely used in exchange trading pairs and DeFi markets, acting as a ” fiat currency”. In the early stage of the development of the cryptocurrency market (2011-2015), investors mainly operated on the centralized exchange (CEX) or OTC market through bitcoin and legal currency trading pairs. With the increasingly stringent supervision of exchanges in various countries, the demand for stablecoins that anchor the value of legal currency has gradually emerged. More importantly, cryptocurrency is an asset based on a blockchain account. If its priced transaction pair is also a currency based on a blockchain account, then the integration and interoperability between ledgers will become possible. In other words, cryptocurrency assets such as Bitcoin are not interoperable with fiat currency accounts, and smart contracts cannot operate on fiat currency accounts, which is not conducive to the scalability of the network. In addition, due to the high volatility of cryptocurrency cannot satisfy the three characteristics of currency: stable price storage, pricing unit, and trading medium, it is difficult for users to retain or withdraw their investment in the crypto world, which has stimulated the demand for stable currency with volatility. To some extent, stablecoins act as “fiat currencies” in the cryptocurrency market.

Stable currency attempts to transfer the value of legal currency to the account symbol on the chain. There are currently three ways to achieve this credit transfer:

1. Fiat-anchored stablecoins issued by centralized institutions. As the simplest stable currency model, through a centralized node (institution) to fully reserve assets (or collateral custody to a third party), the fiat currency 1:1 is mapped to the chain, that is, the centralized institution acts as Credit endorsement;

2. Mortgage stable currency based on blockchain smart contract. The model of using cryptocurrency to mortgage smart contracts, that is, decentralized cryptocurrency mortgage stable currency, realizes credit transmission through the mode of over-collateralization through smart contracts. The difference between this model and the former is that it does not rely on centralized institutions. CEDIT;

3. Under the advancing demand for fully decentralized stablecoins from native users of decentralized finance, various types of tokens that maintain price stability through algorithms have emerged one after another, but the field is still in the very early stage, and many project models have appeared. Departure from the anchor price level.

Judging from the current data, the relationship between the US dollar stable currency and the Fed’s expansion is not obvious. In fact, the overall market size of the US dollar stable currency is not large, so it may be limited by the impact of macro monetary policy. There is a view in the market that the current stablecoins are mainly US dollar stablecoins, and US dollar liquidity spillovers have boosted the growth of stablecoin issuance. To this end, we examine the relationship between the scale of stable currency issuance and the Fed’s balance sheet. As shown in the figure, it can be clearly seen that there is basically no correlation between the growth of the Fed’s balance sheet and the growth of the stable currency market. Therefore, the issuance scale of stablecoins (mainly USD stablecoins) is often related to the scale of the cryptocurrency market. With the rapid growth of crypto assets such as Bitcoin, the scale of stablecoins will increase significantly.

As countries continue to deepen the supervision of the cryptocurrency market, stablecoins bear the brunt and are bound to be the first to be subject to perhaps the most stringent supervision. It cannot be ruled out that the central banks of some countries directly control the issuance of stablecoins and synthetic assets and market interest rates. The integration of stable currency and the real economic world is a general trend, and stable currency is an important bridge to communicate the wealth of the two worlds. The integration of the cryptocurrency market and the real world is a major trend in the development of the industry. At present, the DeFi market is still at the stage of asset conversion between virtual worlds, but it may eventually penetrate into traditional finance and the real economy. The mapping of stablecoins and other assets (such as synthetic assets such as stock certificates) will serve as a bridge between the real world and the world of cryptocurrency.

Risk warning: The blockchain business model is not as expected; the uncertainty of regulatory policies.

 

Core point of view

1.1 The core views and content of this article

As a product of a specific stage in the development of the cryptocurrency market, what is its historical mission?

How did stablecoins develop? What is its role in the cryptocurrency market? How to achieve the anchoring of the stable currency value with the legal currency? What are the regulatory challenges?

We will use this report to explain the issues that are of greater concern to the above-mentioned markets. At the same time, I will also answer the following questions: What is the relationship between the US dollar stable currency and the US macro environment (the Fed’s expansion of the balance sheet)? Is it the product of the dollar’s liquidity spillover? In the future, at the regulatory level, apart from risks, what opportunities will stablecoins have? How to see the role of stable currency as a bridge between traditional world wealth and the cryptocurrency market?

This report, starting from the most concerned issues of the market, expounds the risks and opportunities of stablecoins from different perspectives.

The “fiat currency” of the cryptocurrency market: stable currency-came into being

The so-called stable currency refers to the encrypted currency that anchors various legal currencies (or a basket of currencies) in the real market. Intuitively, stable currency is the real-world legal currency value mapped to the account number on the blockchain ( That is, cryptocurrency), so stable currency is also a synthetic asset, and its advantage is that it can be deeply integrated with cryptocurrency projects (such as DeFi) at the infrastructure level. It should be noted that there are many ways to transfer the real-world legal currency value to the encrypted currency symbol in the blockchain account. For example, a company uses asset mortgage/reserve to issue stable currency (similar to the central bank model), which is more innovative The sex is based on a decentralized protocol issuance. In short, the strength of value transmission between the two accounts of fiat currency and stable currency is often shown in the market-that is, the exchange rate price stability, issuance scale and market recognition of stable currency.

Stablecoins will definitely stimulate gaming in terms of regulatory standards and market demand. The shape and positioning of stablecoins in the future are likely to be different from the current situation. What is its historical mission?

2.1 Stable coins are the product of the development of the cryptocurrency market

In the early stage of the development of the cryptocurrency market (2011-2015), investors mainly operated on the centralized exchange (CEX) or OTC market through bitcoin and legal currency trading pairs. With the increasingly stringent supervision of exchanges in various countries, the difficulty of trading encrypted assets and fiat currencies is increasing, and currencies usually fluctuate in the same direction. Only currency transactions cannot meet the demand, and the demand for stable currencies that anchor the value of fiat currencies is gradually emerging. More importantly, cryptocurrency is an asset based on a blockchain account. If its priced transaction pair is also a currency based on a blockchain account, then the integration and interoperability between ledgers will become possible. In other words, cryptocurrency assets such as Bitcoin are not interoperable with fiat currency accounts, and smart contracts cannot operate on fiat currency accounts, which is not conducive to the scalability of the network. Readers can imagine that the DeFi lending or DEX market certainly cannot accept legal currency (asset) mortgages or exchanges. Therefore, based on the needs of integration and interoperability, the market needs all assets to be expressed as numbers of blockchain accounts on the chain. In addition, due to the high volatility of cryptocurrency cannot satisfy the three characteristics of currency: stable price storage, pricing unit, and trading medium, it is difficult for users to retain or withdraw their investment in the crypto world, which has stimulated the demand for stable currency with volatility.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

Stable coins have received widespread attention since the emergence of the cryptocurrency field. Their value anchoring mainstream legal currencies makes it easier for investors to operate in the cryptocurrency market. After all, cryptocurrency blockchain accounts are separated from traditional financial accounts. . However, like other types of cryptocurrencies, stablecoins have been questioned for their legitimacy since their inception. Due to its value-anchored legal currency characteristics, regulators in the traditional world are very important to the characterization of stable currencies. At the same time, unlike other cryptocurrencies, stablecoins naturally assume the function of linking the encrypted world and the traditional world, and are an important bridge between the two financial ecosystems. This report will analyze the status of stablecoins in the current market and future development directions from policies, macro factors, and the specific models and underlying assets of different stable projects.

Tether USD (USDT) is the first stable currency to be issued. In July 2014, Tether launched RealCoin and changed its name to USDT in November, with 1 USDT anchored to 1 U.S. dollar. USDT began trading on the exchange in February 2015. It was the first stablecoin listed on the exchange that year. Since then, it has gradually become the most widely used stablecoin in the market with the largest trading volume. It is mainly used for cryptocurrency spot and futures trading pairs. . USDT is the first stablecoin backed by U.S. dollar assets. The company claims that each token is backed by 1 U.S. dollar assets, but in fact, Tether’s balance sheet has not been reliably audited. The stablecoin projects issued in 2015-2017 include BitUSD, NuBits, BitBay, and Steem.

After the second half of 2017, as mainstream cryptocurrency trading platforms have launched USDT trading pairs (spot and contract), stablecoins have been favored by the cryptocurrency market. In order to solve the problem of USDT’s reliance on the credit of centralized institutions, MakerDAO issued a decentralized, multi-asset mortgage stablecoin DAI based on smart contracts in 2017. The encrypted assets managed by smart contracts behind it are over-collateralized and rely on smart contract systems. To achieve the stability of the exchange rate between its price and the U.S. dollar, allowing users to cast without permission. Since 2018, among the cryptocurrency-collateralized stablecoins based on smart contracts, DAI has been the number one issuance scale, and currently ranks 22nd in total market value.

After 2018, stable currencies issued by centralized institutions represented by USD Coin (USDC), TrueUSD (TUSD), Gemini Dollar (GUSD), and Paxos will appear. United States Dollar Coin (USDC) is a stable coin launched by Coinbase Exchange and Circle, which is characterized by compliance and transparency. As soon as Q3 of 2018 was launched, it quickly became one of the most influential tokens anchored to fiat currencies. USDC currently has a total market value of 27.2 billion U.S. dollars, ranking 8th.

From 2019 to 2020, some exchange institutions have also begun to issue stablecoins anchored at 1:1 with the U.S. dollar, mainly Binance USD (BUSD), Hot USD (HUSD), and TerraUSD (UST). The total market value is currently in the top 100. The total market value of BUSD ranks 10th. These stable currency issuance models are similar to USDT, and the core is still dependent on the credit of the exchange.

Since 2019, with the development of DeFi projects, stablecoins have been widely used in DeFi systems (lending market, decentralized exchange market), in order to pursue more decentralization and integration with DeFi infrastructure, based on smart contracts Algorithms to adjust the stability of the currency value algorithm stablecoins have been launched one after another. The first is Ampleforth (AMPL) released in 2019, which is still the largest and simplest protocol in existence. More evolved algorithmic stablecoins include Basis Cash (BAC), Frax and other algorithmic stablecoins. However, at present, the market value of algorithmic stablecoins is relatively small, and there are no large-scale issuance and stable operation of algorithmic stablecoins, and the exchange rate of some algorithmic stablecoins and the US dollar is at a serious discount.

In short, although the cryptocurrency industry pursues sufficient decentralization, the stablecoin market (mainly USD stablecoins) is still dominated by stablecoins issued based on central agency mortgage/reserve assets such as USDT and USDC, occupying an absolute monopoly. .

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

At present, the main use of stablecoins is in the cryptocurrency market, because the mainstream pricing method in the cryptocurrency market is to value stablecoins. With the bull market in the cryptocurrency market in the past year, the issuance scale of stablecoins (mainly USD stablecoins) has increased rapidly, with the issuance scale exceeding 100 billion U.S. dollars, up from tens of billions a year ago. Since 2021, the overall market value of the stablecoin tokens has increased significantly. Among them, Tether’s USDT has the most significant increase in its market value from 10 billion at the end of 2020 to more than 60 billion U.S. dollars in July 2021.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

On September 4, 2017, seven Chinese ministries and commissions jointly issued an announcement, clarifying that ICO is an illegal public financing activity, and strengthening the management of the token trading platform. Due to market regulatory concerns on fiat currency trading pairs, the USDT trading pair has risen. Since then, USDT has maintained its monopoly as the pioneer and leader of stable currency. At present, the stable currency market is mainly monopolized by USDT, USDC, and BUSD, of which USDT has a market share of 61%.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

2.2 Stablecoins-the “equivalent” of the bull market

To some extent, stablecoins act as the “general equivalent” of the cryptocurrency market. The most important trading pair in the cryptocurrency market is the stable currency trading pair. Therefore, stable currency acts as a “fiat currency” in terms of trading tools and value circulation. Mainstream exchanges (including DEX decentralized exchanges), Bitcoin spot and futures trading pairs are mainly based on stable currencies such as USDT, especially futures contracts with larger trading volumes, and mainstream exchanges forward contracts (using USD stablecoins) Futures contracts for margin) are almost all USDT trading pairs.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

In the DeFi lending market, stable currency assets such as USDT are also commonly used lending assets. Because they are similar to deposits and savings, their principal is relatively safe, and they are favored by users with a lower risk appetite. For example, the AAVE project, which ranks No. 1 in DeFi lock-up assets, in its lending market, the top four market-scale projects are all US dollar stable currency loans (six of the top ten projects are US dollar stable currency loans).

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

Whether in the trading market or the DeFi lending market, stablecoins are somewhat similar to currencies or bills issued by private institutions. Due to the characteristics of the blockchain infrastructure, stablecoins have the potential to be different from traditional financial markets in terms of clearing speed, integration and scalability. For example, stablecoins can quickly and seamlessly switch between DeFi projects (such as exchanges, lending markets, leveraged products, etc.), and only need a few clicks on mobile phones and other terminals (usually a few minutes will definitely solve the problem), and Fiat currency cannot flow so quickly in the traditional financial market.

2.3 Three modes of stable currency credit transfer

Stable currency attempts to transfer the value of legal currency to the account symbol on the chain. There are currently three ways to achieve this credit transfer:

1. Fiat-anchored stablecoins issued by centralized institutions. As the simplest stable currency model, through a centralized node (institution) to fully reserve assets (or collateral custody to a third party), the fiat currency 1:1 is mapped to the chain, that is, the centralized institution acts as Credit endorsement. However, due to its centralized nature, full reserves have always been in doubt, and the pressure on supervision cannot be ignored.

2. Mortgage stable currency based on blockchain smart contract. The model of using cryptocurrency to mortgage smart contracts, that is, decentralized cryptocurrency mortgage stable currency, realizes credit transmission through the mode of over-collateralization through smart contracts. The difference between this model and the former is that it does not rely on centralized institutions. CEDIT. The largest and most typical is DAI. However, for now, more than 60% of DAI’s underlying assets are fiat-anchored stablecoins issued by centralized institutions, and its degree of centralization is still high.

3. Under the advancing demand for fully decentralized stablecoins from native users of decentralized finance, various types of tokens that maintain price stability through algorithms have emerged one after another, but the field is still in the very early stage, and many project models have appeared. Departure from the anchor price level.

For stablecoins, there are currently three main models that compete with each other and divide up market share. Fiat-anchored products were first launched by Tether in 2014 and have the longest history of development. The model is simple in logic, easy to understand and operate, and is the most reasonable choice in the early development stage of the stablecoin field. Decentralized collateralized stablecoins were first launched by MakerDAO in 2017, and later changed to use multiple cryptocurrency collateral in 19 years and were widely used by decentralized native users. The cryptocurrency mortgage-based stable currency model is also easier to understand. Over-collateralization is used to ensure the stable anchoring of the underlying currency. We will explain in more depth below. As for algorithmic stablecoins, although teams have already started to develop projects in the subdivision track, they have not been widely accepted by users. For the current algorithmic stablecoin, this subdivision track is still in an extremely early stage.

Fiat currency anchoring class (USDT , USDC , BUSD , DGX )

At present, fiat-anchored stablecoins occupy a major share of the market. The main mode is to deposit stable valued mortgage assets under the chain, including gold, single currency/multi-currency legal currency or mixed mortgages, and issue them on the chain at the same time Equivalent stablecoin tokens. Through a one-to-one mortgage custody, this model ensures that users can immediately exchange back equivalent collateral (ie U.S. dollars) through centralized nodes during periods of market instability, ensuring the stability of the token price. But in the same way, this model also relies heavily on the safe custody of the collateral, which involves many details such as the compliance of the project party, the compliance of the custodian, and the liquidity of the collateral. The recent sudden increase in USDC’s market share is leading the competitor USDT in terms of compliance. Below we will explain the USDT business model in detail.

USDT (Tether USD) was originally called RealCoin when the project was established in 2014, the parent company is iFinex, and its anchored asset is US dollars, and the exchange rate is 1 USDT = 1 USD. The earlier project approval time also gave the project a full first-mover advantage. At present, USDT is the largest stablecoin token in circulation on the market, occupying 61% of the entire stablecoin market. There are nearly 62.5 billion USDT on the market. Circulation. At the same time, Tether is also released on multiple mainnets, including Omni, Ethereum, TRON, EOS, Liquid, Algorand, SLP, and Solana. Tether’s most market concern is the investigation by the State of New York and the US Department of Justice. Although it was settled at the beginning of this year, problems such as opacity in its asset audit still exist. In addition to acting as an important trading pair in centralized exchanges, the development of the DeFi market has also spawned a large number of user demands in the past year or so, which has enabled the rapid growth of USDT circulation. In the past year, the total market circulation of USDT has increased. 6 times as much.

Investors’ biggest concern about Tether comes from the ability to redeem. History has seen several runs caused by questioning its cash reserves, once the exchange rate of USDT against the U.S. dollar fell to 0.5. Then, what is the underlying asset of Tether?

The bottom layer of Tether  is more like a leveraged money market fund. If we look at the underlying collateral assets in detail, we can find that its collateral is not 100% composed of US dollars as we thought. As shown in the table below, 65.39% of Tether’s actual assets are commercial paper. Since there is no reliable and transparent audit report, there are many questions about this part of the assets. There is a perception in the market that this part of the commercial bills is likely to be a loan from the counterparty institution of Tether, that is, the counterparty institution only paid part of the cash to Tether, and the remaining part was replaced by commercial paper, while Tether paid the counterparty institution 100 % Of USDT for its investment in the chain (equivalent to part of the reserve). If this is the case, it can also be understood that Tether has helped the institutional counterparty to increase leverage in disguise, and this also makes Tether more like a leveraged money market fund. In fact, Tether’s real dollar cash reserves only accounted for 3.87% of all assets, so the above analysis is not impossible. From the perspective of overall asset liquidity, the proportion of short-term liquid assets in Tether’s overall balance sheet is not high, which may be a potential hazard for users.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

According to Tether’s terms, its real counterparty is not retail investors, but institutions. This also means that when the market loses confidence in Tether, only institutions can redeem transactions with Tether, and retail investors can only redeem USD collateralized assets through user-to-user transactions on the open market. When there is no liquidity in the market, retail investors are likely to encounter situations where they cannot find a counterparty who wants to buy USDT. For centralized stablecoin issuers like Tether, its compliance and information transparency are crucial. Due to the inertia of the market, USDT is still the largest stable currency at present, and it has expanded on a large scale during the past bull market.

Decentralized, cryptocurrency collateralized stablecoin (DAI ).

The emergence of decentralized, encrypted currency mortgage stablecoins is mainly to solve the problems of high degree of centralization of legal currency anchored stablecoins and low asset transparency. Specifically, the main underlying principle is to control cryptocurrency assets through smart contracts (to achieve decentralization and transparency), and to use over-collateralization to help stablecoins achieve asset price support. For this type of stable currency, due to its decentralized nature, mechanism and transparency of underlying assets, it has withstood multiple rounds of bull and bear tests and is widely accepted by the market for trading scenarios in a decentralized world. Below, we will explain in detail the working principle of DAI issued by MakerDAO.

DAI is a multi-cryptocurrency asset collateralized stablecoin launched by MakerDAO, which is anchored 1:1 with the U.S. dollar. At present, the circulation of DAI is about 5 billion U.S. dollars. For DAI, the core of its project is a Collateralized Debt Positions, which is used to store users’ mortgage assets. After the user has stored the collateral in a certain excess ratio, the smart contract will allow the user to generate and withdraw DAI. After this step of operation, the user’s stored assets will be locked and turned into a debt, until the user repays DAI plus a small amount of interest before the mortgage asset can be redeemed (it can be understood as a loan contract). It should be noted here that all DAI minting relies on over-collateralization, which also means that the user’s debt will always be greater than the value of the DAI minted by the user. Similar to equity pledge, if the collateral price fluctuates sharply and touches the liquidation warning line, the contract will automatically trigger the liquidation process. At the same time, the over-collateralization rate of the DAI mortgage debt warehouse can also be adjusted through the MakerDAO community to adjust the loan interest rate in time when the price fluctuates to ensure the stability of the price. All of this is managed by smart contracts, achieving decentralization and transparency.

DAI itself is not a currency with a fixed exchange rate, so it cannot be directly linked to the value of the US dollar. Therefore, the stability of the value of DAI is achieved through a set of target price change rate feedback mechanism (TRFM). The most important part of the mechanism is the DAI deposit interest rate (DSR). All DAI holders can automatically obtain savings income by locking DAI into the DSR contract, and the contract does not set any requirements on the amount of deposit and the deposit time. Users can immediately Deposit and withdraw. When the price of DAI deviates from the target price, MKR holders can vote to change the DSR to maintain price stability. For example, when the price of DAI exceeds $1, DSR can be reduced to reduce the demand for DAI, and then the value of DAI can be lowered to the target price of $1. Conversely, when the price of DAI is lower than US$1, DSR can be increased to increase the income of DAI holders to increase demand, thereby increasing the market price of DAI to the target price of US$1.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

Algorithmic stablecoins (Ampleforth , BAC , UST , FEI ): The prerequisite for success is the liquidity pool as a “collateralized asset”.

Algorithmic stablecoins adjust the price stability of fiat currencies by algorithms, that is to say, with the aid of algorithms, the exchange rate between stablecoins and fiat currencies is close to 1 through various market arbitrage mechanisms , which is similar to the stability mechanism of DAI The purpose of the algorithmic stable currency is to solve the problem of the centralization of legal currency mortgage stable currency and the low utilization rate of mortgage stable currency funds. But at present, there has not been a successful or stable project on this track so far. In fact, more than 90% of the stablecoin market is stablecoins issued by centralized institutions based on reserve (collateralized) assets.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

Take the algorithmic stable currency BASIS as an example to introduce. There are three types of tokens in the Basis protocol: BAC (abbreviation for Basis Cash), BAS (abbreviation for Basis Share), and BAB (abbreviation for Basis Bond). Among them, the target price of BAC is $1; the main function of BAS and BAB is to pull the price of BAC back to $1. Holding BAS can get newly issued stablecoin rewards, which is equivalent to enjoying seigniorage; BAB has the opportunity to obtain premium income. Specifically, when the Basis Cash transaction price is less than $1, users can enjoy a certain discount to purchase Basis Bond. Users purchase Basis Bond (BAB) and destroy Basis Cash (BAC) at the same time, thereby reducing the supply of BAC and reducing the price of BAC. Pull back one dollar. When the price of Basis Cash rises to more than $1, users who hold Basis Bond can directly redeem Basis Cash at a 1:1 exchange rate. When Basis Cash is redeemed by the user, Basis Bond will be destroyed. Basis Bond has no interest expense and no expiration or expiration time. This kind of market regulation mechanism of algorithmic stable currency guarantees the credit of its minted currency, and it is also easier to achieve “currency” stability.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

But the core of the problem does not lie in whether the algorithm is excellent. The more important thing is that the reality is that algorithmic stablecoins like Basis need a pool of funds with sufficient liquidity. This is the market basis for the operation of the algorithmic arbitrage mechanism-in other words, No matter how sophisticated the algorithm mechanism is, if there are not enough users and funds to flow in this market, the arbitrage mechanism will not achieve satisfactory results at all. In this sense, a certain size of fund pool is the basis for the success of algorithmic stablecoins. Therefore, algorithmic stablecoin projects must rely on a reliable and fairly liquid DeFi mining pool in order to have any hope of success. A liquidity pool is equivalent to a credit endorsement for algorithmic stablecoins. In this sense, the so-called algorithmic stablecoins still need liquidity as credit endorsement, or directly speaking, the liquidity pool as “collateral.”

At the level of credit transmission, stablecoins must first have “collateral” and then a price stabilization mechanism. It is not difficult to understand that Basic’s stable currency (BAC) exchange rate price has been “underwater” for a long time without the support of a strong capital pool.

The rise of stablecoins has no obvious relationship with the Fed’s balance sheet

3.1 Is the rise of stablecoins really related to dollar liquidity spillovers?

We can see that since 2021, the overall market value of the stablecoin tokens has increased significantly. Among them, Tether’s USDT has the most significant increase in its market value from 10 billion at the end of 2020 to more than 60 billion U.S. dollars in July 2021.

There is a view in the market that the current stablecoins are mainly US dollar stablecoins, and US dollar liquidity spillovers have boosted the growth of stablecoin issuance. To this end, we examine the relationship between the scale of stable currency issuance and the Fed’s balance sheet. As shown in the figure, it can be clearly seen that there is basically no correlation between the growth of the Fed’s balance sheet and the growth of the stable currency market.

Judging from the overall US dollar stablecoin market (here we select the top ten stablecoin projects by market capitalization) and the chart of the total balance sheet of the Federal Reserve, the overall market value of US dollar stablecoins is not significantly related to the Federal Reserve’s quantitative easing policy during the COVID-19 pandemic. . We can see that the Fed’s balance sheet expanded significantly at the beginning of the epidemic (March 2020). On the other hand, in the stable currency market, its overall market value has not changed significantly in the first half of 2020. We can see that with the bull market in the cryptocurrency market since 2021, the overall market value of the stablecoin tokens has increased significantly. Among them, Tether’s USDT has the most significant increase in its market value from 10 billion at the end of 2020 to more than 60 billion U.S. dollars in July 2021.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

Therefore, the issuance scale of stablecoins (mainly USD stablecoins) is often related to the scale of the cryptocurrency market. With the rapid growth of crypto assets such as Bitcoin, the scale of stablecoins will increase significantly. Judging from the current data, the relationship between the US dollar stable currency and the Fed’s expansion is not obvious. In fact, the overall market size of the US dollar stable currency is not large, so it may be limited by the impact of macro monetary policy.

The regulatory problems faced by stablecoins, their development prospects, and their relationship with CBDC

4.1 Regulatory risks of stablecoins

Stablecoins serve as part of the “fiat currency” function in the cryptocurrency market. In this sense, the world’s concerns about stability are inseparable from the regulatory concerns of the cryptocurrency market. The latter is the basis of the former. As countries continue to deepen the supervision of the cryptocurrency market, stablecoins bear the brunt and are bound to be the first to be subject to perhaps the most stringent supervision.

At present, all countries in the world have inconsistent policies for cryptocurrencies and stablecoins, and most countries do not have relevant policies for stablecoins. For the United States, due to its federal system, financial regulatory agencies and various states have different understandings and regulatory policy orientations for stablecoins, and the jurisdictions of its subordinate institutions also involve overlapping. In this regard, we will roughly summarize the policy opinions of major US government agencies and the federal government on stablecoins. It should be noted that since stablecoins are still relatively new financial products, most US institutions still maintain a cautious attitude towards this, and many of their policy opinions have not been implemented.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

For other major countries in the world, we will summarize the general policy direction and policy implementation of the governments of each country below:

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

It can be seen from the USDT issuance scale in Figure 3 that since May this year, China and other countries have further tightened the supervision of cryptocurrencies. The new issuance of USDT has almost stagnated, while USDC has continued to grow steadily. In February of this year, the New York Attorney General’s Office terminated its review of Bitfinex Exchange and Tether (the reason for the review was misappropriation of funds and other illegal activities ) and reached a settlement. Tether clearly stated that it does not serve customers in New York State (in fact, some other states) There are also certain obstacles), and in fact Asia is also an important market. On the contrary, USDC has always used compliance as its industry label. Its issuers Circle and Coinbase are both well-known companies in the industry for compliance. Among them, Circle is the first company in the world to obtain a New York State BitLicense license, and it has since been awarded to the United Kingdom. It has a payment license with the European Union, and Coinbase is the cryptocurrency exchange with the most regulatory licenses in the world.

It can be seen that regulation has a huge impact on the issuance of USD stablecoins, and compliance is an important prerequisite for centralized institutions to issue stablecoins. US Secretary of the Treasury Janet L. Yellen (Janet L. Yellen) convened the Presidential Financial Markets Working Group (PWG) on July 19, local time, to discuss issues related to stablecoins. In addition to the Secretary of the Treasury, PWG members also include the chairman of the Federal Reserve System Board of Governors, the chairman of the Securities and Exchange Commission, and the acting chairman of the Commodity Futures Trading Commission.

Yellen said that bringing together regulators will allow regulators to assess the potential benefits of stablecoins, while reducing the risks they may pose to users, the market, or the financial system. Given the rapid growth of digital assets, various agencies cooperate to monitor the industry. And it is very important to make any recommendations for the new authorities. In the future, the supervision of stablecoins and synthetic assets will give birth to a new regulatory mechanism. Obviously, the existing division of functions of the regulatory authorities cannot well adapt to the supervision of stablecoins.

The fate of “currency” issued by private institutions or decentralized agreements?

Private (institutional) currency issuance has many supporters in the decentralized community, but we also need to see historical experience: private currency (notes) is a product of a specific historical period. Modern countries, especially electronic bookkeeping, are popular. Since then, almost all countries’ currency issuance rights have been dominated by central banks. Decentralized ledgers have a certain degree of censorship resistance. Therefore, to a certain extent, there will be a stable currency market based on decentralized agreements. But for traditional wealth management institutions with larger wealth, if mainstream funds want to enter the cryptocurrency market, they must go through compliant and regulated channels-otherwise it will be difficult to explain to investors, and moral hazard cannot be avoided (after all Private key management is implemented by specific individuals).

The biggest problem with stablecoins is the conflict with the current monetary policy. Obviously, stablecoins act as a ” fiat currency” in the cryptocurrency market , which violates the current monetary policies of various countries to some extent (at the same time, there is also the possibility of violating other financial regulatory policies, such as securities, futures, etc., and even taxation policies. ), this is also a common problem faced by cryptocurrency assets. But for now, stablecoins are a general trend with the rapid growth of the cryptocurrency market. Therefore, for a period of time in the future, the conflict between stablecoins and supervision will become the general environment for the development of the industry. The final result, we believe, will be the evolution and iteration of regulation, which will promote the further integration of the cryptocurrency market and the traditional financial market.

Therefore, we believe that the most typical regulatory direction in the future is that central banks will incorporate stablecoins into the monetary regulatory system, and future monetary policies may include stablecoin policies. The prerequisite for all this is to first clarify the regulatory positioning of stablecoins- prohibiting their use, accepting them as currencies, or treating them as new financial products are all potential choices, depending on the different market conditions of each country.

4.2 The development prospects of stablecoins and the relationship with CBDC

It is foreseeable that, as an important infrastructure in the future, blockchain will accelerate its integration with existing financial accounts . In March of this year, payment giant Visa announced that it will allow users to use the cryptocurrency stable currency USDC for payment and settlement. Visa stated that it will cooperate with the virtual currency platform Crypto to establish an experimental project in Ethereum. Crypto.com will send USDC stablecoins to an account hosted by the crypto bank Anchorage in the name of Visa through Ethereum, and Crypto.com will issue “support The “cryptocurrency” Visa card allows users to use the digital currency in their Crypto.com wallet. The cooperation directly opens up payment channels for digital currencies. In the past, digital currency payments needed to be converted into equivalent legal currency for clearing. After the transaction day, Visa will deposit the legal currency in the bank account, but the cooperation between Visa and Crypto.com will eliminate this link and directly use and support the storage of digital currency. . Both companies said they expect to establish partnerships with more similar channels during the year. Over the past period of time, we have seen more and more overseas listed companies and traditional financial institutions carry out cryptocurrency related businesses, and the circulation of cryptocurrency has always been the focus of the giants. It is foreseeable that in the future, more financial institutions will participate in the development of cryptocurrency-related businesses and embrace the new wave of blockchain cryptocurrency finance. The accelerated integration of blockchain accounts and traditional financial accounts has formed a trend, which will promote the further upgrade of financial infrastructure.

In the “DeFi New Finance (2): Excess Mortgage and Asset Mapping” report, we pointed out that the integration of stablecoins with the real economic world is a general trend, and stablecoins are an important bridge to communicate the wealth of the two worlds. The integration of the cryptocurrency market and the real world is a major trend in the development of the industry. At present, the DeFi market is still at the stage of asset conversion between virtual worlds, but it may eventually penetrate into traditional finance and the real economy. The emergence of Token will be the existence form of assets. Bitcoin, as the core value anchor of the cryptocurrency market, supports the cryptocurrency market, while stablecoins and other asset mappings (such as stock certificates and other synthetic assets) will serve as a connection between the real world and encryption. The bridge of the currency world.

The rise of US dollar stablecoins such as USDT and USDC is similar to putting the US dollar in the crypto world, and the crypto world has no borders, and the underlying clearing and settlement platform based on the blockchain has become the basis of its circulation. In the future, stablecoins may become an important part of the real social currency system. Real-world interest rates will have an impact on the cryptocurrency market. In turn, the assets in the cryptocurrency market will counteract real-world financial assets through various synthetic assets. In the future, a stock, fund, derivatives and even other assets are expected to express their value in the form of Token. Investors will not be limited to traditional financial market investment methods. An asset is likely to exist in the form of a Token account (coin). Just as the U.S. dollar exists in the cryptocurrency market in the form of USDT, USDC and other U.S. dollar stablecoins, traditional stocks can be mapped to stock tokens (stock certificates) in the cryptocurrency market, and the pricing power depends largely on the transaction. Mass.

DeFi New Finance: Yesterday, Today and Tomorrow of Stable Coins

It can be said like this:

1. In the traditional world, the central bank (government) supports the credit of the entire economic market, and fiat currency is an important currency tool and a means of economic conditions;

2. In the cryptocurrency world, Bitcoin has established the credit of various cryptocurrencies, that is, Bitcoin is the core value foundation of the cryptocurrency market;

3. Synthetic assets, especially stable coins (stable coins are also a kind of synthetic assets) serve as a bridge between the two parallel worlds. In the future, they will accelerate their integration and influence each other. The link between the two worlds lies in stable coins and synthetic assets. Assets, similarly, we expect this will also be the focus of the next stage of global supervision;

4. Future supervision does not rule out that some central banks directly control the issuance of stablecoins and synthetic assets and market interest rates.

At present, with the advancement of central bank digital currency (CBDC) research and development in many countries, stablecoins will face opportunities and challenges. In terms of challenges, the underlying infrastructure of CBDC does not rule out the adoption of blockchain technology to further penetrate the cryptocurrency market. This forms a direct competition with stablecoins. Moreover, CBDC’s compliance advantages are unmatched by stablecoins. Of course, if CBDC wants to deeply integrate with the existing cryptocurrency system, especially the DeFi market, it will inevitably encounter certain difficulties in terms of underlying open source, integration, and scalability. After all, DeFi and various current stablecoins are naturally integrated in terms of underlying infrastructure and product design. Therefore, considering the application potential of stablecoins in the cryptocurrency market, it is not ruled out that stablecoins will be included in the CBDC regulatory system. If so, stablecoins will face better development opportunities. At this level, as mentioned above, stablecoins (including other synthetic assets) move towards compliance, acting as a bridge and a bridge between traditional market wealth in and out of the cryptocurrency market.

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/defi-new-finance-yesterday-today-and-tomorrow-of-stable-coins/
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