What are stablecoins?
Stablecoins are a fixed price Cryptocurrencies, the market value of Stablecoins is often tied to the price of a fixed asset, such as USD. The currency must be global, volatile and independent of any central bank.
Stablecoins will usually fix their prices in USD (1 Stablecoin = 1USD) or some other strong legal currencies such as EUR, JPY, CNY, HKUS ... or some consumer price index.
Essential characteristics of a Stablecoin:
- Price must be stable
- High security
See more : Stable Coin: Things you need to know
There are 3 types of Stablecoins that are appearing on the Crypto market
Type 1: Fiat - Collateralized
If you want to build a Stablecoin, then you should start with this type. This is a simple and traditional type of Stablecoin, merely creating a Cryptocurrencies in the "I give you 1 Crypto, you give me 1 USD and you can convert this Crypto into USD any you want".
You will deposit this amount of USD into a bank account and issue Stablecoin at the ratio of 1: 1 corresponding to the Dollar. When users want to convert their Stablecoin into USD, you destroy their Stablecoin and return the USD. This stablecoin will certainly trade at $ 1 - it's more like a digital representation of the USD than a fixed asset worth entering the USD. However, it will also increase and decrease. and forge security in the bank, printing hundreds of millions of USDT, ...
Back to StableCoin, This is the simplest form of Stabelcoin. But when using this type of Stablecoin, it requires us to trust a storage center and this center must be worthy of trust. If you want to gain more trust, you have to hire an auditor to test this center, and this will cost a lot of money.
Stablecoins are costly and need trust but it is a form of Stablecoin that has the power of price. Stablecoins of this type will stand up to any fluctuations in the Crypto market, because all of them are guaranteed by the amount of fiat money being stored and even if the Crypto market collapses, this Stablecoin is immune. . This is the only feature that only this type of Stablecoin has.
This model of money-backed guarantee must be strictly regulated and bound by old forms of payment. If you want to convert Stablecoins into fiat currency, you have to go through identity checks, send confirmation emails, etc. a slow and expensive process.
- 100% fixed price
- Avoid hacking risks, because secure assets don't exist on Blockchain
- Centralized - needs trust in a storage center (there will be risks of theft, moral hazard)
- The conversion process is slow and costly
- An audit is needed to ensure transparency
This is the nature of USDTether that we are using, but USDT is still controversial when there is much information that Tether does not have enough Fiat (legal) money to ensure the amount of USDT they broadcast. onions. Another Stablecoin, TUSD (TrueUSD) is also trying to do the same things as USDT but with a more transparent way. Digix Gold also has a similar model, the only difference being collateral is gold instead of USD.
Type 2: Stablecoins mortgaged by Crypto
If you do not want to involve traditional payment methods, this type of Stablecoin will be a reasonable choice. If we only reinvent money, why do we need government-backed banks and currencies?
If we do not use fiat money, then we can remove the focus at Stablecoin. This is a completely natural idea: we still do like Fiat-collateralized stablecoin but instead of USD, we use a type of Cryptocurrencies as collateral. When done in this way, everything happens on the Blockchain, without the need for the presence of legal money, a bank or a storage center.
However, the price of Crypto fluctuates continuously, which means that the value of our collateral will fluctuate, so how does Stablecoin mortgaged by Crypto keep its value? There is only one way to solve this: mortgage more.
The mortgage process goes like this: you deposit 200 ETH and get 100 Stablecoins worth 1 $. The amount of Stablecoins you receive has a 200% mortgage ($ 200 in exchange for $ 100). Even if the price of Ether is reduced by 25%, your Stablecoin is still mortgaged by the amount of Ether worth $ 150, so each Stablecoin remains the same price of $ 1. If you wish to liquidate, the system will return $ 100 in Ether to the owner of the Stablecoin number and the remaining $ 50 will be refunded to the original sender.
Stablecoins like this may not sound very attractive when we have to take up $ 200 mortgage just to get back $ 100. However, this type of Stablecoin has two advantages worth choosing: First, you can pay interest to the issuer (the system of miners). Additionally, you can use Stablecoins to leverage yourself. The sender who locked $ 2 Ether will get back $ 200 Stablecoin, if the sender uses $ 100 to continue buying Ether they will own a total asset of $ 100 guaranteed by $ 300 mortgage. If Ether price doubles, they will have a profit of $ 200 instead of $ 300 when holding Ether.
When the price of the collateral drops too low, Stalecoin will be liquidated. All processes will be done by Blockchain, completely automated and decentralized.
- Stablecoins can be converted to collateral Crypto assets quickly and cost-effectively
- Very transparent
- Can be used as leverage
- Stablecoin will be automatically liquidated when the mortgage price drops beyond the allowed level
- Price fluctuations are higher than Fiat mortgages
- Tied to the "health" of a cryptocurrency
- Ineffective in using capital
- The most complex of the 3 categories
The first stablecoin to use this form was BitUSD (mortgaged by BitShare), built by Dan Larimer in 2013. However, MakerDAO's DAI is more popular and is considered the most promising Crypto- Collateralized Stablecoin , mortgage by Ether.
Vitalik Buterin made an interesting proposal for this model using CDOs as collateral to issue Stablecoins.
- What is STO (Security Token Offering)? Differences Between STO and ICO
- What is Industry 4.0? How is blockchain in this 4.0 revolution?
Type 3: Stablecoins do not need collateral
As you dive deeper into the Crypto world, you will eventually ask the question "is there any guarantee that we have to have collateral to get started?" After all, is Stablecoin a game as well? Dealers only need to trust that the coins are traded at $ 1. The US has once abandoned the gold standard and no longer uses any collateral for the dollar. A stable currency like the USD does not need collateral so can Stablecoin do the same model?
This may sound good, but how can we ensure that it stays fixed?
Seinorage Shares - a model invented by Robert Sams in 2014, based on a simple idea. What happens if we turn Smart Contract into a central bank? The monetary policy set forth in this Smart Contract has only one task: issue a currency that will be traded at $ 1.
Okay, but how can we guarantee the value of that money when making transactions? The order is down, we just issue and control the money supply.
Imagine an example like this: Let's say this Stablecoin is trading at $ 2. In this case, the price of money becomes too high or in other words, the supply is too low. To deal with this situation, Smart Contract will increase the number of Stablecoins launched to the market by producing more and auctioning on the open market, increasing the supply until the price returns to $ 1. In this case, Smart Contract will receive profit from the issuance of money. Historically, when a government issued more money, the income from this activity was called the Seignorage (people can learn about Seignorage. here )
But when this currency is traded at prices as low as $ 0,5, for example, we cannot recover the amount of Stablecoin in circulation, so how do we reduce the money supply? There is only one way to solve this problem: buying Stablecoins on the market to reduce supply. But what if Seigniorage is not enough to buy the required amount of Stablecoins. In this case, Seignorage Shares will solve: instead of using Seigniorage, I will issue shares that allow buyers to enjoy Seigniorage in the future. The next time I issue money and acquire Seigniorage, the shareholders will get a share.
In other words, if the Smart Contract does not have enough money to buy back the required amount of Stablecoins on the market and because I anticipate that the demand for this Stablecoin will increase in the future and the Smart Contract will have many deliveries. I had to do more to meet this demand, so I decided to purchase Future Seigniorage to receive future profits. This will help reduce the money supply and Stablecoin's price at $ 1. This is the main idea of Seignorage Shares and also the idea of Stablecoin without collateral.
If you think Seigniorage Shares sounds crazy, it's normal for a lot of people. Many individuals criticize that this model is similar to the multi-level pyramid model. Stablecoins are backed by the release of the promise of future growth. This growth is only guaranteed if there are more people participating in this model in the future. If this model does not grow, it cannot sustain the price.
Seiniorage Shares are able to withstand the downward pressure for a period of time, but if the selling pressure extends to a point where traders lose confidence that the number of shares they buy will bring profit in the future. hybrid, this will continue to drive prices down and trigger panic among the community.
The scariest part of this system is hard to analyze. How much will the system withstand? How long will the system withstand? Will there be "sharks" or will some insiders fend off slumps?
Stablecoins without collateral are very vulnerable to market fluctuations, in which case the market plummets. Stablecoins need an initial liquidity support until it reaches a balance. In the end, the existence of Stablecoins without collateral is determined by the beliefs of traders, if they believe the system will exist, that belief will be spread and guaranteed for the existence of the system.
Stablecoins without collaterals are the most ambitious designs. It is a very interesting design, if this idea succeeds, it will change the world completely, but if it fails it is even more catastrophic.
- There is no need of collateral
- Decentralized and independent
- Requiring steady growth
- The most vulnerable when the market declines
- It is difficult to analyze the security of the system
Stablecoins are the holy grail of Cryptocurrencies
Bitcoin and Ethereum are the 2 most popular cryptocurrencies right now, but their prices fluctuate daily. The volatility of Cryptocurrencies may be good for both investors and speculators, but in the long run it will hinder the world's adoption of this new currency.
Businesses and customers don't want to trade in to get the benefits Cryptocurrencies bring; fast and convenient money transfer; because the risks associated with price fluctuations are too great. Workers cannot receive the amount in Cryptocurrencies when the amount they receive today loses 10–20% of the value the next day. Each person's risk appetite is different, besides speculative individuals there are always those who want to store value, they want a tool to store value without being controlled or exited from the system. banking system, monetary control or economic crisis. At present, Bitcoin and Ethereum ask to withdraw.
The idea of stablecoins has been around for a long time, many cryptocurrencies currently have not found a connection between creativity and acceptance, the main reason comes from price stability. Therefore, building a Stablecoin is considered as a holy grail that helps to neutralize and clear the blocked congestion of the Cryptocurrencies ecosystem.
The price of Stablecoins
The truth is, we can't just decide on a valuable asset at a certain price without following the principle of supply and demand, but Stablecoin is like that. Stablecoins claim to be a self-valuing asset by itself rather than a valuable asset determined by supply and demand.
This is in stark contrast to what we know about the market.
Currently, many countries have fixed exchange rates, but there are many countries that have switched from fixed exchange rates to floating exchange rates. Why is that? Many central banks of nations find it inflexible and difficult to maintain a fixed exchange rate. History taught us, the Mexican Peso crisis of 1994, the Russian ruble 1998 or the Black Wednesday was the day when George Soros defeated the British bank.
Stablecoins fixation is similar to fixing a fiat currency. It requires a lot of effort from the issuer, a financial capacity strong enough to withstand speculative attacks, a team of experienced financial experts to deal with the incident will happening at any time, making the system work smoothly. For a volatile market like Cryptocurrencies, this problem is more difficult than ever.
In short, an ideal Stablecoin should be able to withstand the constant volatility of the Crypto market, not costly to maintain, easy to track fixed parameters, and should be transparent to traders and arbitrageur (arbitrage traders). Only when Stablecoins can solve these problems will the world receive Crypto soon.
Is StableCoin A New Trend In 2019?
Up to now, a lot of Stable Coins have appeared, typically as: USDT (Tether), USDC (USD Coin), PAX (Paxos Standard Token), DAI (DAI), TUSD (True USD), HUSD, GUSD (Gemini Dollars) ... And there will be many more Stable Coins coming soon. Facing a trend of liquidity in the cryptocurrency market and the issue of transparent information about USD account guarantees in banks, the launch of new StableCoin coins with high reputation, clear guarantee, ... is essential. is designed to help the market increase stability and liquidity and will be the driving force for the market to thrive in the future.
So, how will Stable Coin affect Vietnam market?
Like the competition in the ride-hailing market, with Grab alone, Grab will monopolize,… and do whatever it wants. But when Go-Viet, Uber, FastGo, etc. appear, the market will have a healthy competition, users will enjoy more promotions and more reasonable prices. And in crypto, too, Blogtienao believes that when more stablecoins appear, investors will first have more options, in addition to making their investments easier to liquidate. The clear transparency from the co-reputations will protect investors from negative impacts, fud news from the market (for example, FUD is Tether sued, bankrupt, no bank guarantee , fake bank guarantee, ... makes the whole system vibrate at 6 magnitude wobble ... Investors sell off USDT at a cheap price ...)
Blogtienao gave clear concepts and analysis of StableCoin to help readers better understand the importance and meaning of StableCoin in the cryptocurrency market as well as analyze how StableCoin will affect the market. Vietnam electronic money school, Thank you for reading this lengthy article, and to encourage us, please share and rate 5 stars if you find it good, we would like to thank you very much!
Source: Money Virtual Blog