The Paradox of Stablecoins in Crypto

The Paradox of Stablecoins in Crypto


2021-03-29 04:00:22

Today, I would like to allow me to write more about Stablecoin. Do not know any readers wondering Why to complicate stablecoins into many types for what? Wasn’t there USDT and USDC already? What is Algorithmic Stablecoin? Then why in the Algorithmic Stablecoin divided into 3 more types are Rebase Model, Seigniorage Model and Fractional-reserve Model again?

Exactly I was like you, I used to wonder a lot and feel this is something not worth paying attention to. However, please take a step back to see the overview.

Algorithmic was born for its reasons, and have you ever questioned, if you want a DAI from MakerDAO then you need collateral like BTC or ETH. So why do central banks (state banks of nations) not need collateral and can still print money forever?

The problem lies in that. Although the article will be long and somewhat confusing, but if you understand it, I believe it will help you to have a whole new perspective on “valuation”.

This article is developed from the perspective of author Ryan Watkins – an analyst at Messari Crypto.

Link my original tweet below for your reference.

Stablecoin and the impact on decentralized financial markets (Defi)

In the past few years, the brothers have witnessed the explosion of decentralized projects. In a very short time, up to now, less than a year, the market capitalization of the DeFi market has increased from $ 700 million to $ 40 billion. An amazing number!

Photo source: Defi Pulse

However, a significant contribution to the success of the Defi market is the contribution of stablecoins. Stablecoin is the bridge that gives users access to financial products on decentralized financial platforms such as MakerDAO, Compound or Aave.

Up to now, the total value of assets locked in the top 4 largest Defi platforms is more than $ 20 billion and that also makes the total value of stablecoins printed from the Defi platforms is greater than ever. This not only affects the market capitalization of Defi but also has a significant impact on the traditional market.

You can learn more about stablecoins as well as an overview of stablecoins here.

Stablecoin Paradox – Is Fiat Stablecoin really stable?

Why are private / commercial banks in Northern Europe allowed to issue currency?

This seems a very new thing to you, so far we have only heard about currency printed and issued by the state, but never issued by private. So today I will introduce a completely new mechanism to you.

In Scotland and Northern Ireland, private banks will be issued the currency, but each note will bear the name of the issuing bank.

If any bank tries to issue the required balance. People would send them back to other banks and be cleared from circulation by the state system. Why is this mechanism efficient and helps to increase labor productivity and production?

Why is a central bank (state) issuing money a thing of inefficiency for the economy?

Normally in order to be able to issue currency, a bank must have collateral that is deposited into it as a guarantee of the value of the printed currency. Any bank that issues a larger amount of currency than the collateral will be punished.

However, that is only true for commercial banks. And central banks – banks that issue currency are outlawed and can print as much as they want.

So once they let the central bank issue money, they seem to be ignoring the laws they create to protect their currency from excessive inflation. So when the currency is over-inflation for a period of time, the currency of the country will no longer receive the trust of the people in the country.

Is Defi truly decentralized?

Defi projects are currently decentralized in the sense of governance, meaning brothers have control of their assets and are not controlled by the financial platforms we participate in.

However, you are forgetting that:

  • Defi works thanks to a lot of contributions from Full-backed Stablecoins such as USDT and USDC.
  • USDT and USDC peg their value in USD terms of traditional markets.
  • USD supply is controlled again, causing inflation by the state.

So are the values ​​of assets on centralized fee platforms truly “decentralized”?

Photo source: Messari

Read more in-depth and specific analysis and comparison about Stablecoins so that you can research, dig deeper and make projects with the series. Defi Lego: Stablecoin.

Conclusion on the “stable” of the Stablecoin

Through three small items that I prove to you, you can see that the currently popular Stablecoin is Full-backed Stablecoin is not really “Stable”. In addition, its value is subject to change and inflation (devaluation) from year to year.

You can check with Vietnamese dong likewise. Last year, you could easily find a popular restaurant for 25,000vnd. However, at the moment, affordable rice is priced at 40,000vnd. Even if you save 25,000vnd at an interest rate of 7% / year against the depreciation, you still cannot buy a part of ordinary rice after maturity.

Resolution and Future of Algorithmic Stablecoin in Defi Market

So what will be a solution for the Defi market to have a real stablecoin without having to peg the value to the USD fiat currency. That is when the Algorithmic Stablecoin comes into play. Algorithmic stablecoin is a stablecoin of decentralized finance and is not anchored by the currency of any country.

Imagine that we will control the real value of the stablecoin by the amount of supply and demand in the market. We will not be controlled by anyone but the stability of the Stablecoin is still preserved due to the voting mechanism of the community.

Photo source: Messari

Classification of Stablecoins

Currently there are many types of stablecoins, each with different advantages and disadvantages. You can see details and compare through the article here.

  • Stablecoins have a low rate of capital use (> 100%) like DAI from MakerDAO, sUSD from Synthetix.
  • Stablecoin has an equilibrium capital utilization rate (= 100%) such as USDT from Tether, USDC from Circle.
  • Stablecoins have an infinity rate of capital use (= 0%) such as ESD from Empty Set Dollar, AMPL from Ampleforth. This type of stablecoin also has another name is Algorithmic Stablecoin, which is also our main character today.
Photo source: Coin98 Insights

The Algorithmic stablecoin projects stand out in the market

Because of the above paradoxes that we have witnessed the birth of the Algorithmic Stablecoin, a stablecoin that is stable based on supply and demand elasticity mechanism and is not anchored by any fiat currency.

Some projects operate on the field of Algorithmic Stablecoin that you should learn: Empty Set Dollar, Ampleforth, Basis Cash, Frax Finance. Each project has some different mechanical characteristics such as Rebase Model, Seigniorage Model or Fractional-reserve Model.

However, if the Algorithmic Stablecoin can exist for a long time, it must be stable and expandable to reach many users. Not easy if the incentives no longer attract enough users.

You can see details from the author’s perspective here.

#Stablecoin #AlgorithmicStablecoin

Writer: Jack Vi


#Paradox #Stablecoins #Crypto

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