On August 9, the USDC of 38 wallet addresses was frozen, in response to the US Treasury Department’s ban on Tornado Cash, the Centre company behind USDC. Frozen cards that occur in the real world will affect the encryption market, and the impact of freezing on the chain will only be greater. The impact of the freezing of USDC is far more than USDC. Will USDT and BUSD not be frozen?
Thinking after USDC is frozen: When will the decentralized stablecoin come?
Author: Beichen丨Chain Teahouse
Original: “USDC is frozen, what kind of stable currency do we need? 》
Stablecoins are once again the focus of the crypto world.
The USDC of 38 wallet addresses was frozen the day before yesterday, in response to the US Treasury Department’s ban on Tornado Cash, the Centre company behind USDC.
Frozen cards that occur in the real world will affect the encryption market, and the impact of freezing on the chain will only be greater. The impact of the freezing of USDC is far more than USDC. Will USDT and BUSD not be frozen?
Thinking that Aave and Curve decided to launch their own stablecoins not long ago, it may have heralded a dramatic change in the stablecoin market.
However, their stablecoins have no value to discuss, and are not fundamentally different from MakerDAO’s DAI . While you can definitely spot the differences in detail and then pretend to be surprised to say “major innovation!” “stablecoin 5.0”, what really deserves attention is that the two separate events of Aave and Curve reflect a trend in the DeFi space ——DeFi protocol really has to become a protocol, not a product.
The launch of AAVE and Curve’s own stablecoins is an attempt to readjust their ecological niches – becoming a protocol cluster between products and public chains.
Of course, this article will not discuss the trend of “DeFi protocols returning to protocols”, but will discuss why DeFi protocols choose to cut in from stablecoins, which requires discussing stablecoins themselves.
Collateralized Stablecoin
Looking back at the iteration of stablecoins, it seems that it is just a re-read of old news, but we may be able to sort out a clearer trend in the process of re-reading, rather than just follow it as a hot spot.
Bitcoin was born in 2009 to replace legal currency and act as a general equivalent, but the asset properties of Bitcoin are much higher than the currency properties, at least for a long time in the future, and the cryptocurrency after Bitcoin is even more so. in this way.
The financial market must have low-volatility assets to act as currency, so there is a stable currency anchored to fiat currency. You must know that even for fiat currency, there will be customized services for large-value transactions to hedge against exchange rate fluctuations, not to mention cryptocurrencies that fluctuate by 20% at every turn.
Stablecoins have the openness and efficiency of cryptocurrencies (relative to banks) and the stability of fiat currencies (relative to cryptocurrencies). Although it is ironic that some people criticize the adoption of fiat-pegged cryptocurrencies in the crypto world, before the birth of true super-sovereign currencies, the financial system of the crypto world is really inseparable from it.
In 2013, the first stable currency BitUSD was born, and the creator was BM who later created EOS. BitUSD is anchored to the US dollar and requires at least 2 times the amount of cryptocurrency to be collateralized. MakerDAO, created in 2017, followed the principle of BitUSD to create DAI.
Their collateral is cryptocurrencies, and they are cryptocurrencies themselves, and are only settled with reference to USD, so more or less they mint has nothing to do with USD.
In 2014, Tether issued USDT, allowing stablecoins to be truly widely adopted by the crypto market. The principle of USDT is simpler. Tether deposits 1 USD in the bank and issues 1 USDT. All USDT is supported by real USD. USDT is essentially an IOU issued by Tether, and its value depends on whether Tether is trustworthy or not. Works fine so far.
Therefore, USDT, which has a first-mover advantage and has no faults, is the most widely used. Today, many stable coins have emerged, and it still occupies 45% of the market share. In addition, USDC occupies 37% and BUSD occupies 12% (issued in 2019). ), they are all a principle. But the aforementioned overcollateralized cryptocurrency DAI also accounted for a 4% share.
The above stablecoins are all minted based on collateral, but because cryptocurrencies are volatile, they are over-collateralized, while USD/USD has no volatility, so they are collateralized 1:1.
In general, crypto collateral is capital inefficient, but its decentralization offsets some of the capital inefficiency, and there are economic incentives to earn interest and leverage (reinvestment). The capital efficiency of USD collateral is high, but the less transparent custodian has potential risks (such as the freezing of USDC involved in money laundering in user wallets that just happened in the past two days).
Why are algorithmic stablecoins doomed to collapse?
The imagination of stablecoins seems to have come to an end here, but algorithmic stablecoins give a solution in another way – no collateral, and let supply and demand adjust the price.
Stablecoin is a kind of cryptocurrency, its role is to act as a settlement tool between cryptocurrencies, but the currency unit of this settlement tool is anchored to the unit of fiat currency.
So why do you need collateral? Collateral can indeed guarantee the absolute intrinsic value of stablecoins, but it is not necessary… As long as stablecoins can be 1:1 anchored to fiat currencies, they can act as settlement tools. You see in the real world medium-term notes, money orders, checks and even credit cards also act as settlement tools, and they don’t necessarily have absolute intrinsic value, but they don’t affect usage.
Therefore, as long as the stablecoin ensures the balance between supply and demand, the price will remain stable, so the algorithm stablecoin was born.
All algorithmic stablecoins are dual-token models, one is a stablecoin, which attempts to anchor the US dollar, and the other project token, which can be forcibly exchanged for stablecoins at the exchange rate of “1 stablecoin = 1 USD.
When the price of the stablecoin is higher than the US dollar, it stimulates arbitrageurs to mint more stablecoins to stabilize the price, and when it is lower than the US dollar, it stimulates the arbitrageurs to sell more stablecoins to buy project tokens.
Of course, the details of stable coins with different algorithms will be different. Some project tokens can be exchanged instantly, while others have a set deadline, but the basic principles are the same.
Algorithmic stablecoins are logically like perpetual motion machines. Because there is room for arbitrage, they can continue. Because they can continue, there is always room for arbitrage…
But this perpetual motion machine has a premise, that is, the project token itself must have room for appreciation, so that someone is willing to hold it, otherwise no one will pay for arbitrage behavior. The basis for the appreciation of project tokens is the need to issue additional stablecoins (as long as stablecoins are issued indefinitely, limited project tokens will rise indefinitely).
But stablecoins cannot be issued indefinitely, because even if this algorithmic stablecoin occupies the entire stablecoin market, or even the market of all currencies in the world, it will eventually reach its limit and the project token will lose room for growth, and then what will happen?
Holders will sell the project tokens, or directly mint them as stablecoins to avoid safety, which will increase the supply of stablecoins and cause the price of stablecoins to fall, and then arbitrageurs will buy stablecoins less than $1 but at $1 The price of the project is converted into project tokens, and then sold to make a profit, which further reduces the price of the project tokens… A death spiral is formed.
The above situation has been staged in every algorithmic stablecoin project, but it happened much faster than assumed, because this mechanism relies on the market’s confidence in the project’s tokens, and there are too many uncontrollable factors in early projects. Far from reaching the market limit, the project limit has been reached.
Stablecoins start again
The current algorithmic stablecoin mechanism determines that when it reaches the market limit, it will collapse instantly, but the idea is definitely worth learning from – as long as the stablecoin can be 1:1 anchored to the fiat currency, it can be used as a settlement tool, then its supply is guaranteed. balance with the demand.
It’s an ambitious genius design that points to an exciting possibility – a truly decentralized super-sovereign currency.
Note that the stability of the stable currency at this stage lies in the fact that the fiat currency is anchored, and the fiat currency is only relatively stable (otherwise there would be a foreign exchange market). The most common instability of the fiat currency is the collection of seigniorage in the form of inflation. Therefore, some people will choose to hold gold or Bitcoin as a safe haven. They are both high-quality assets, but they are not qualified currencies. Because money is an abstract representation of the value produced, while gold or bitcoin are finite and can’t keep up with productivity growth, it creates inequity – early savers do nothing, but wealth grows along with it.
Of course, farther, back to the real stablecoin.
As I have repeatedly emphasized, the stable currency that anchors the legal currency is not a currency, but a settlement tool. It is necessary to ensure that the exchange rate between it and the legal currency is 1:1. Make trade-offs between various dimensions such as efficiency and risk to meet different needs.
USDT, USDC, BUSD and other centralized institutions issued stablecoins with USD as collateral can meet the current demand, but it cannot meet the needs of the future, especially in terms of anti-risk ability, so it is destined to be eliminated. Although DAI, a stable currency with cryptocurrency as collateral, has low capital efficiency, it achieves decentralization and becomes the infrastructure of permissionless DeFi, but its low capital efficiency caused by over-collateralization is destined not to become mainstream. Stablecoins.
There are two possibilities in the future stablecoin market. One is the emergence of a brand-new algorithmic stablecoin, but the possibility is extremely low, and the other is the emergence of many stablecoins with cryptocurrencies as collateral. The market doesn’t need much currency, but the market welcomes more and more products.
AAVE and Curve are trying to launch their own stable currency products. Yes, it is a settlement tool product, not a currency. We will also see more DeFi protocols issue more and more complex stablecoins (possibly a mix of two stablecoins), thereby completely changing the landscape of the stablecoin market.
As for super-sovereign currencies created with algorithmic stablecoins, we can continue to observe the attempts of the group after Libra .
Diem