Perhaps, you have seen the news in the media that the central bank is researching fiat digital currency , and perhaps you have often heard the word ” stablecoin “.
So, what is a stablecoin? Is it the same thing as legal digital currency and electronic currency issued by the central bank? Today, let’s talk about stablecoins.
What is a stablecoin?
Stablecoin, as the name suggests, is a cryptocurrency that maintains a stable exchange ratio with a certain target.
In the blockchain circle, the stablecoin you hear the most is USDT (Tether). Let’s take USDT as an example. It is a token Tether USD (hereinafter referred to as USDT) launched by Tether and anchored to the US dollar. 1 USDT = 1 US dollar. Users can use USDT to exchange 1:1 with US dollars at any time.
In addition to USDT, the stablecoins anchored to the US dollar include TUSD, GUSD, BitUSD, etc. Of course, there are also stablecoins anchored to other currencies, such as BitCNY, which is anchored 1:1 with RMB.
You may ask, is the money transferred by WeChat and Alipay considered a stable currency? After all, they are also anchored 1:1 with the RMB.
In fact, the money in mobile phones and Alipay can only be called electronic currency, not stable currency. If the central bank issues a legal digital currency in the future and anchors it to the current RMB, this legal digital currency can be called a stable currency.
That is to say, stablecoins are not only the electronicization of money, but also a programmable cryptocurrency, which is a currency category only after the birth of blockchain technology.
How do stablecoins remain “stable”?
Currency exchange rates between countries in the world have always fluctuated, so how does stable currency maintain a “stable exchange ratio?
For the USDT mentioned above, Tether promises to strictly abide by the 1:1 reserve guarantee, that is, for every USDT token issued, its bank account will have a fund guarantee of 1 USD. Users can check funds on the Tether platform to ensure that transparency. This is to maintain “stability” through “fiat currency collateral”.
The second stablecoin relies on “digital asset collateral”. A typical example is BitCNY, you can mortgage BTS coins to the system, and the system will give you BitCNY. Since the price of digital assets will fluctuate, if the price of BTS falls sharply, the total value of the BTS coins you mortgaged to the system falls close to the total value of BitCNY loaned to you by the system, and if you do not increase the amount of BTS coins mortgaged, the system will force Sell ​​your mortgaged BTS coins and repay the system to your BitCNY. This is similar to a bank mortgage in life. When the value of the house mortgaged to the bank drops and you have no ability to increase the collateral, the bank takes the house and sells it to fill the loan to you.
The third stablecoin relies on algorithms to ensure stability. A typical example is Basis, which, like the Fed, adjusts the supply of Basis to stabilize the 1:1 exchange ratio with the US dollar. However, the Basis project is currently discontinued.
The role and pitfalls of stablecoins
You may be wondering why WeChat and Alipay are so convenient to create stablecoins?
Indeed, in daily life, stablecoins do not have many uses, and transfers are not as convenient as WeChat and Alipay.
But in the field of cryptocurrencies, stablecoins have many uses and are a bridge between the real world and the encrypted world. The price of cryptocurrencies fluctuates greatly, and the stable currency acts as a value scale function. In the process of falling market prices, it also has the function of hedging.
Of course, current stablecoins are not perfect either.
Stablecoins “collateralized by fiat currency”, such as the USDT mentioned above, are often questioned by privately issuing additional USDT for profit because they are issued by Tether.
Stable coins with “digital asset mortgage”, such as BitCNY mentioned above, because the price of BTS currency fluctuates greatly, when the price drops sharply and the fast capital becomes insolvent, the BTS currency mortgaged by many investors will be forced by the system below the market price Selling caused the price to fall further and a series of liquidation events occurred.
Stablecoins that rely on “algorithms to maintain stability” have been criticized even more.
Epilogue
At present, many countries in the world have begun to study national digital currencies, and Venezuela has even launched its own national digital currency, the petro. In terms of digital currency research, my country’s central bank is at the forefront of the world.
National digital currency, also known as legal digital currency, is a kind of stable currency.