Centralized stable currency and breakout of decentralized stable currency

Guide: Stabilizing coins as a bridge for users to intervene in encrypted assets plays an important intermediary role at least in the short term. However, as the mainstream centralized stable currency, the voice of doubt has been constant in recent years. The decentralized stable currency has risen rapidly in this environment. Although the overall scale is still small, it will eventually become a weapon to break the "black box."


According to a recent court filing filed by the Office of the Attorney General of New York, Bitfinex used Tether's designated funds as support for its USDT stable currency to pay more than $850 million in losses. While each USDT should support the US dollar in a 1:1 ratio, the court documents questioned whether Bitfinex's solvency and more than 30% of the circulating USDT are now unsecured. The submitted documents claim that both Tether and Bitfinex deceive investors and manipulate the price of the crypto-asset market by circulating stable currencies that are not actually collateralized by the corresponding currency.

The new document also revealed a series of sounds that continue to be suspected around Tether. Tether currently has more than $2.8 billion in circulation, making it one of the top ten encryption assets and has become a key tool for trading and speculation in the encryption market. But since 2017, analysts in the market have been questioning Tether's claim that it is entirely supported by the same share of dollars held by banks. In March 2019, Tether changed the terms of service, describing Tethers as a hybrid-backed stable currency for access to fiat and other assets, and this appears to be a response to the events described in the late 2018 report.

Tether did not respond immediately to most of the distributions. For example, research has claimed that unprinted Tether's "printing" actually led to the 2017 encryption market bubble. However, these documents do provide compelling evidence that Bitfinex and Tether are currently leading the way while concealing problems with their commercial operations.


The oligopoly effect of the stable currency market is still obvious, and the new entrant share is not easy to eat.

The stable currency was originally created to allow intraday traders, that is, investors who earned income by trading encrypted assets on a daily or hourly basis, and stored the value of the deposited funds or accumulated wealth in a trading platform where the currency could not be settled.

Large trading platforms such as Binance currently do not allow customers to use bank transfers or any other form of legal tender on their trading platforms. Although it is gradually incorporating French currency transactions into their platforms in planning, it is still very useful as a hedging tool for profitable types during times when prices of crypto assets such as Bitcoin, Ethereum and Litecoin fluctuate significantly. .

In addition, there are some large international trading platforms that allow users to store legal currency (Bitfinex) on their platform. In this trading platform, the main benefit of having a stable currency is to reduce the losses caused by the bid-ask spread in the illiquid market.

The competition between stable currencies has spawned specialized indicator tracking service providers. For example, Stablecoinswar not only provides real-time data on its price, market value, daily trading volume and total trading volume. It also has a “currency velocity” indicator that reflects the speed of circulation of each stable currency. The platform currently lists 8 stable currencies: Tether, Paxos, Trueusd (TUSD), USD coin (USDC), DAI, Gemini dollar (GUSD), SUSD and BITUSD.

Comparison of market data for various stable currencies, data source: Stablecoinswar

According to Stablecoinswar, at the time of writing, Tether's value is less than $1, and DAI and SUSD are affected by recent fluctuations.

But Tether is still the largest stable currency by market value, close to $2.83 billion, which is more than 78% of the total stable currency market. The USDC ranked second, accounting for 8.17% of the market value. In terms of market turnover, more than 58% of Paxos are Tether (more than 359.66%) and the second fastest stable currency.

So in a short period of time, centralized or counter-money stabilized currency operated and fully controlled by private companies that issue them and receive traditional bank deposits remains the most popular stable currency design in the global encryption market.

But Tether Limited, the private company that issued the Tether Token (USDT), has been scrutinized by mainstream media and professional crypto asset researchers, many of whom believe that their company's bank account may not have enough funds to sustain the dollar and Tether 1 : 1 ratio.

At the same time, while many of Tether's concentrated competitors claim to be fully audited, private issuers such as Circle USD, as specified in their Terms of Service, will not provide services to users from any restricted areas listed in the US Export Administration Regulations. (According to US regulations, Circle and other US private stable currency issuers, as registered US companies, are not allowed to trade with the United States for trade embargoes including Cuba, North Korea, Sudan, and Syria).

But while it's easy to see centralized stable currency issuers like Circle to help prevent money laundering and terrorist financing by blacklisting addresses they think are suspicious financial activities, it's hard to ethically prove that Circle decided to ban all Citizens of the country use their financial services.

At the same time, the stable currency issuance system for decentralized operations has developed rapidly over the years, and its transparency, operability and diversified profitability will make it a strong competitor to existing stable currency operators.


The decentralized stable currency model still needs to be explored, and the existing system has obvious advantages and disadvantages.

2.1 Debt Mortgage Position (CDP)

In a currency system based on a mortgage debt position (CDP), the user deposits the collateral into a smart contract and then obtains a certain amount of stable currency equal to the value of the deposited collateral. CDP-based stable economies effectively issue their respective stable currencies through their users' collateral in a manner similar to how commercial banks lend to national legal tenders through partial reserve banks.

Unlike traditional bank loans, because speculative assets such as Ethereum and Bitcoin may depreciate quickly at any point in time, most CDP loans are backed by a stable inventory of volatile reserves that are fully or over-collateralized. In addition, hacking incidents on crypto asset trading platforms, government bans on cryptographic assets, and other unexpected or unexplained events can significantly reduce the value of collateral assets that support crypto-traders' debt-backed positions.

Users of CDP loans are calculated on a daily or hourly rate and are calculated at the annual interest rate. The interest paid by CDP holders is often referred to as the “stability fee”.

Most current CDP currency systems are built on the Ethereum blockchain, which is the variety of assets that users can deposit on: including standard Ethereum passes, such as ERC-20 and ERC-721 (non-replaceable tokens) ). Most CDP currency systems are multi-collateral smart contracts that accept any pass or pass-through assets created on the blockchain they construct.

  • MakerDAO based on CDP economy

MakerDAO is the most prominent example of a CDP-based monetary system that uses two local encryption assets: Maker (MKR), a volatility pass that represents ownership shares and governance power, and a dollar-linked stable currency Dai .

Like most CDP-based currency systems, MakerDAO requires its users to over-collateralize their debt positions. The average MakerDAO excess mortgage debt ratio is 150%. Once the current collateral-to-debt ratio is lower than the collateral clearing ratio, MakerDAO's smart contract will be liquidated, ie all collateral deposited by Dai or MKR will be sold at Dai's price.

MakerDAO has two iterations. In the current system, Ether collects and packages collateral through its smart contracts to make it compatible with Ethereum's ERC-20 metrics and then aggregates them into PETH. The first version of MakerDAO also accepts only one crypto asset as collateral (ETH). After the second iteration, ETH will be accepted and a number of encrypted asset passes will be based on the Ethereum blockchain.

  • MakerDAO price stability mechanism

When the price of Dai is less than $1, the MakerDAO Smart Contract will sell the deposited collateral to purchase Dai to return the price of Dai to $1. When MakerDAO's CDP is collateralized, its smart contract uses the newly minted MKR token to purchase Dai instead of relying entirely on the collateral sold to raise the price of Dai to $1.

When the price of Dai rises above $1, the MakerDAO smart contract will sell the new Dai in exchange for MKR, so that the price of Dai will fall back to $1. When CDP is in a mortgage and Dai's value is less than $1, increasing the supply of MKR tokens reduces the value of MKR, allowing MakerDAO to "punish" MKR holders for bad governance decisions.

  • MakerDAO's stable cost

MakerDAO charges a stable fee to its users each time the user returns the loaned Dai. Stabilizing costs are used to burn MKR to reduce its supply, thereby increasing its value over the long term. In other words, the stabilizing fee is the total value of MKR, which is destroyed as a payment after the borrower returns its borrowed Dai to receive its deposited collateral. On the other hand, the fine is the part returned during the CDP closure used in the smart contract for MakerDAO to purchase and burn MKR. The borrower pays a stabilization fee to MKR when closing the CDP position, and pays a fine to the part of Dai who can exchange the deposit collateral when the mortgage debt ratio reaches the penalty point.

In addition to the stability fee (interest cost) of all issued loans can only be paid through MKR, when the mortgage rate of its users is not only lower than the standard threshold ratio / liquidation ratio of 150%, but also lower than the minimum mortgage debt threshold of 135% At the time, MakerDAO charges a clearing penalty to its borrower. The purpose is that when the value of the deposit collateral is rapidly depreciated, the penalty rate encourages the borrower to repay the loan as soon as possible.

For example, Ether CDP has a mortgage debt ratio of 150%, a liquidation ratio of 140%, and a fine of 110%. In this case, the borrower deposits $150 worth of Ethereum to borrow Dai, which is worth $100. If the value of the deposited collateral falls to $140, then MakerDAO's smart contract will sell the collateral for Dai or MKR until the loan is fully paid. If the price of the Ethereum continues to fall until the value of the deposited collateral depreciates to $110, MakerDAO will punish the borrower at a rate of, for example, 10%, such as deducting a portion of the returned collateral when returning Dai, in payment stability and After the fine is paid, the borrower will receive any remaining collateral.

  • Dai Savings Rate

MakerDAO's founding team recently introduced an additional price stabilization mechanism called Dai Storage Rate (DSR), in which Dai holders can get an annual interest rate of about 3% to increase the demand for Dai in the market. .

In addition, DSR will be incorporated into MakerDAO's price stabilization system so that it does not have an inflationary impact on the current total Dai at any given time. DSR interest is funded by the income generated by the MKR holder's stabilization fee set on the CDP. For example, if the stabilization fee is 3%, the MKR holder may set the DSR to 2% to ensure that Dai is always over-collateralized.

MKR holders also have some additional governance tools to manage the DSR mechanism, such as the rate policy controller Oracle, which can modify the DSR for a predefined period of time:

  • If the price of Dai is less than $1, then Oracle will increase the DSR to increase the demand for Dai and reduce the demand for CDP, in order to increase the price of Dai to peg the exchange rate by reducing the liquidity of Dai.
  • Conversely, if the price of Dai rises above $1, then Oracle will reduce the DSR to reduce the demand for Dai and increase the demand for CDP to increase the supply of Dai.

The DSR mechanism will work with a balancing mechanism for stabilizing costs to increase or decrease stability fees based on whether Dai's price increases or decreases. The responsiveness of the stabilizing cost will in turn be determined by the sensitivity parameters set by the MKR holder. The stable cost balance mechanism will also replace the target interest rate feedback mechanism in MakerDAO's multiple mortgage versions.

MakerDAO maximizes the effectiveness of its price stabilization policy by simultaneously deploying DSR and stabilizing costs. The DSR and the stabilizing cost move in the same direction, which means that when the price of Dai falls, the value of the stability fee and the DSR will increase; when the price of Dai rises, the parameters of both stabilization mechanisms will decrease.

  • The weakness of the CDP-based monetary system

Currently, CDP-based economies are less efficient and create diminishing returns in every round of leveraged leverage.

For example, when the mortgage debt ratio is 150%, the borrower can deposit $150 worth of Ethereum at $100 and then use 100 Dai to purchase $66 worth of Ethereum. At this point the borrower will have an Ethereum value of $166. He can then deposit $66 worth of Ethereum with a $44 Dai and continue to increase the size of the leverage position at a rapid rate of decline.

How MakerDAO's collateral-to-debt ratio produces declining leverage, data source: Abacus Protocol

As a result, MakerDAO's current design not only makes traders more profitable from decentralized leverage, but also makes it more difficult for them to profit from arbitrage opportunities because the price of any financial asset changes periodically across different trading platforms.

Like all other financial assets, Dai's trading price will vary from transaction to trading platform at any time. For example, if Dai is worth $1 on Bitfinex and $1.01 on Kucoin, then the arbitrageur can try to buy Dai from Bitfinex and sell Dai on Kucoin, but if they can return them before the price change of the Ethereum Dai, they only earn profits in the price difference. And when they close their CDP, the price difference between Dai's trading platforms may have disappeared, in which case, or the price of the ether may have dropped, causing them to suffer some losses.

MakerDAO's 150% mortgage rate forces arbitrageurs to generate a 33% capital cost when opening CDP, ie a $1.5-dollar Ethernet will only receive a $1 value for Dai. In other words, they must pay a 33% capital cost each time they deposit $1 worth of Ethereum at a price of $0.66.

The 33% capital cost in the CDP is why arbitrageurs cannot profit from arbitrage without closing the CDP. If the arbitrageur wants to make a profit without repaying its CDP, the price difference between the trading platforms must be greater than 50%, but this is a very unlikely situation; or the price of Dai must rise by more than 50%, This is also unlikely to happen.

Therefore, CDP's stable currency has fewer arbitrage opportunities than Tether or other centralized stabilization currency with a 100% mortgage ratio. Stabilized coins with a 1:1 collateral ratio are more scalable in the market because they always produce equal supply growth as market demand grows:

2.2 Self-collateralized stable currency

Unlike CDP-based economies, self-collateralized stable currency economies only allow their borrowers to use their respective smart contracts or encrypted assets created by blockchains as collateral for their debt positions. When a user deposits collateral based on their smart contract or blockchain, the self-collateralized economy uses the debt position to borrow the stable currency.

  • Bitshares' self-mortgage economy

Bitshares was an early blockchain project that enabled crypto-investors to create asset-linked assets (stable coins) by purchasing a certain number of Bitshares (native assets). The amount of stable coins generated is equal to the value of the deposited collateral.

  • Bitshares Smart Coins

Bitshares users have created a variety of market-linked assets, sometimes referred to as Smart Coins. The various Coins that Bitshares has developed over the past few years include: BitUSD, BitCNY, BitEUR and BitGold.

Bitshares does not charge users for interest on debts below the collateral and debt mortgage thresholds in the form of a stable clearing fee, nor does it charge a fine for their users to hold less collateral and non-minimum collateral-to-debt ratios. Like most CDP and self-mortgage economies, Bitshare's has a minimum mortgage debt ratio (175%) pre-determined by its economic managers, making Bitshares collateral less efficient.

For example, to create 100 BitUSDs, users need Bitshares worth $175 as collateral. Users with a mortgage debt ratio below 175% will liquidate their Bitshares in a mandatory settlement, which is confiscated by the Bitshares blockchain and sold to Bitshares holders with a larger mortgage debt ratio.

  • Self-mortgage stable currency weakness

Like Bitshares, most stable currencies with self-mortgage-stable currency economies tend to be less efficient than CDP's mortgages. For example, Synthetix's default minimum mortgage debt ratio is 500%, but can be changed by Synth holders.

A less unfavorable problem that plagues self-mortgage stabilized coins is the unexpected panic selling caused by leverage. Since leveraged positions in proprietary mortgage coins are only supported by unstable crypto assets generated by their respective economies, users with the largest leveraged positions are more likely to panic sell when the value of these collateral assets declines.

In the self-collateralized monetary system, the probability of a decline in the price of collateral assets is greater than the probability of a decline in the value of collateral assets in a multi-collateral CDP. Traders with leveraged positions may be keenly aware of this fact and may make them self-mortgage The decline in collateral prices in the economy is very sensitive. On the other hand, the self-mortgage economy can only support a single mortgage asset in nature, because its currency system is designed to increase the value of its respective mortgage assets.

But it is worth noting that regardless of how the monetary system is designed, leveraged positions can undermine the stability of any stable currency economy. The current general problem is that the higher the mortgage rate of the stable currency, the lower the effectiveness of the collateral, and the less likely the holder of the leveraged position tries to reduce the loss as quickly as possible, resulting in a panic selling .

Therefore, the unstable effects of a stable position in the monetary system can explain why self-collateralized stable currencies tend to have the lowest collateral effective capital economy.

2.3. Mortgage redemption stable currency

In much the same way as CDP-based stable coins or deposits in collateral, the currency system using the collateral redemption strategy generates stable coins when users deposit collateral into their collateral pool. But unlike CDP-based economies (users need to redeem all their collateral at once), the collateral redemption-based system allows its users to redeem their individual units of collateral at any point in time without paying stability or Fine fee.

For example, a user in a fortune redemption system can deposit $500 worth of Ethereum and $500 worth of Bitcoin for 1000 Stabilized Coins, and then return the 5 collaterals from the Smart collateral pool after returning 5 Stabilized Coins A $3 worth of Ethereum and a $2 bitcoin are available, and these stable coins are destroyed in order to maintain the desired collateral-to-debt ratio. In addition, unlike self-collateralized stable currencies (such as Bitshares), collateralized stable currency allows its users to store encrypted assets from different blockchains.

The automatic mortgage-based monetary system also allows its borrowers to redeem their debt collateral through a single unit. The collateral redemption currency system also differentiates itself from CDP- and self-collateralized economies, providing its borrowers with incentives to seek profitable profits to deposit collateral in the event that their collateral assets are insufficient. Rather than punish its borrowers by liquidation.

  • Reserve Protocol's collateral redemption currency system

Reserve Protocol's is the first stable currency to implement a mortgage redemption currency system. Like most stable currency designs, Reserve Protocol's is also built on the Ethereum blockchain and will use only two local encryption passes: Reserve Reserve and Reserve shares.

Reserve Protocol's keeps the collateral-to-debt ratio at 1:1, which means that the amount of Reserve stable currency in circulation is always equal to the amount of collateral in Reserve's collateral smart contract.

  • Reserve Protocol's price stability mechanism

When Reserve's price is below its $1 peg price, $0.95 speculators can redeem their Reserve for $1 and earn $0.05 from each Reserve.

They will then continue to purchase Reserve until the Reserve price rebounds to $1, and they will no longer be able to profit from the price difference between the Reserve Stabilizer and the collateral that supports it. As long as the reserve price is less than $1, the agreement will destroy the Reserve Pass to reduce its supply, thereby raising its price to $1.

When the Reserve price is above its $1 peg, such as $1.05, the Reserve Protocol will sell the new Reserve shares as collateral to maintain a 1:1 collateral-to-debt ratio in the system.

If the value of the mortgaged asset in the system falls to 95% of the nominal value of the outstanding reserve stable currency (the total value of Reserve in circulation), the Reserve Protocol will start the price even if the reserved token price is exactly $1. Range adjustment.

If the value of the collateral in the system drops and the price of the Reserve is less than $1, the agreement will use the newly minted Reserve Shares as collateral.

In addition, if the Reserve price drops to $0.95 and the value of all mortgage assets (including Reserve Shares) declines, the agreement will create a price range of $0.05, with $1 for each $1 reserve to be redeemed for a value of 0.95. The collateral of the US dollar, while each Reserve will be sold at a collateral price of $1.05. In other words, the borrower can only exchange $9.05 worth of asset collateral with a $1 value of Reserve, and they must deposit $1.05 in collateral to get a Reserve.

Reserve has an adjustable transfer fee, which will initially be set to 0, but can be changed by Reserve Shares holders. Reserves charged through the transfer fee are a source of income for Reserve Shares holders.

  • Reserve Protocol collateral maintenance mechanism

To prevent short-term price fluctuations, the Reserve Protocol sometimes obtains excess collateral by selling new Reserve Shares. When the creators of the Reserve Protocol believe that Reserve is stable enough, they will allow the Reserve Protocol to return excess collateral to the holders of Reserve Shares to maintain a 1:1 mortgage ratio for the collateral pool.

  • Disadvantages of Reserve Protocol

First, when the Reserve Protocol launches the new Reserve Shares for the first time, it will determine whether the insurance is in a mortgage or over-collateralized state. This initial design mechanism will cause the overall system to have an inflation effect, which may reduce Reserve Shares in the short term. Price, depending on whether the value of the mortgaged asset appreciates.

But when the agreement matures to Reserve Shares holders and believes that the system no longer needs overcollateralization, the new Reserve Shares will no longer be cast to keep the mortgage debt ratio greater than 100% and will no longer be affected by monetary inflation.

In addition, if the Reserve Stabilizer does not attract a large number of investors to purchase Reserve Shares, the holder of Reserve Shares can only make money when the excess collateral is returned to the account. Unlike MakerDAO holders, it is reasonable to expect that the value of MKR will rise as CDP demand rises.

Therefore, if the large-scale adoption of Reserve has no network effect and common growth direction with its project Shares, then the holders of these certificates will have to rely on the appreciation of mortgage assets as the sole source of income for their investment assets.

At the same time, the transaction costs of Reserve Protocal overlap with the cost of the Ethereum. When users use the agreement, they need to pay both the cost of Gas and the cost of Shares, which poses a great obstacle to the applicability of large-scale users.

But in the long run, the upgrade of Ethereum's Constantinople, including the EIP86 proposal involved, will make it easier for Reserve's team to write smart contracts that represent Reserve users paying Ethereum's Gas charges.

Finally, Reserve Protocal does not have the same savings rate as MakerDAO's DSR, even in the eyes of a citizen who has experienced high inflation, it still has less attractive storage value.

Overall, the risk of stable currency supported by collateral is lower than that of non-collateral-backed stable currency. But no matter how they design their own monetary system, start-ups that decentralize stable currencies may have to choose between the utility of regional currencies and the effective stability of global currencies. In the long run, this depends on a variety of stable currencies. Total demand.

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