The Wall Street Journal: Why can stable coins stand out in the world of cryptocurrencies?

The cryptocurrency has not yet been mainstreamed, but some markets in the cryptocurrency market have experienced significant growth, which is to stabilize the money market.
Stabilized coins are popular in the digital currency arena because they are not as volatile as other crypto assets like Bitcoin . The price of a stable currency usually anchors stable assets such as the US dollar at a ratio of 1:1, while the US dollar is reserved as its collateral. This means that a buyer who buys a stable currency for $1 can usually redeem $1 through this stable currency at a later time.

According to research firm Chainalysis's tracking of the four major stable currencies, global stable currency trading volume surged in 2018, from $12.5 billion in 2017 to around $82 billion in 2018. Recently, according to research firm The Block, as of April 2019, the amount of stable currency transactions in the past 12 months has more than quadrupled.

Since stabilized coins are designed to maintain a stable price, they have become the main source of liquidity in the cryptocurrency market . Traders and investors use stable currency to buy other cryptocurrencies on exchanges that do not accept fiat currency, and when the price of other crypto assets fluctuates significantly, they use stable currency as a means of storing funds (ie, hedging).

Fans of stable currency believe that stable currency may eventually be used for financial transactions such as loans, remittances, wire transfers and payments, thus achieving a long-term commitment in the field of cryptocurrency, which reduces the cost of such transactions, speeds up transactions, and enables transactions. It has become more convenient.

However, some analysts and investors say that due to the lack of a financial network that can accept and use cryptocurrencies, the actual use of stable currency is far from being used in addition to transactions.

However, for traders and investors, Stabilizing the currency solves a problem that plagues many of the world's major cryptocurrency exchanges, that is, these exchanges have no relationship with banks, which means that investors cannot use dollars in these exchanges, Euro or other government-backed currency to buy the cryptocurrency they want to trade. (Many banks avoid cryptocurrency transactions because of concerns about the risk of money laundering associated with digital currencies.)

Therefore, in order to purchase cryptocurrencies, traders typically use US dollars to buy stable currencies in an exchange that has a relationship with the bank, and then transfer the stable currency to the exchange they want to trade.

Similarly, traders are often unable to convert cryptocurrencies into dollars, so they will first convert the cryptocurrency into a stable currency. Therefore, many exchanges use stable currency as a trading pair rather than in dollars.

Ciaran Murray, a London-based cryptocurrency trader, said: "From a trader's perspective, stabilizing coins is important for bringing liquidity."

According to the data from Chainanalysis, although dozens of stable currency products have been launched or announced in the cryptocurrency market, the most popular one is Tether (USDT), which accounts for 94% of the total stable currency.

USDT

However, Tether is not without controversy.

In April, the New York Attorney General's office accused Hong Kong-based iFiniex inc. of stealing Tether's US dollar reserves to cover up the $850 million in client funds lost on the Bitfinex exchange (iFiniex inc. The parent company behind Tether and Bitfinex). Although Bitfinex has said that the Attorney General's office's documents are full of false accusations and Tether's financial situation is good, some people question whether Tether has enough dollar reserves to support the USDT stable currency in circulation.

Murray said that despite these concerns, the stable currency is still very popular due to the liquidity provided by Tether.

The other two stable currencies are from Paxos Trust Co. and Gemini Trust Co., which were co-founded by the twin brothers Winklevoss brothers. These two stable currencies were established last year with the approval of the New York regulators, the first time in history.

Paxos
GUSD

According to the two companies, this means that the US dollars used to purchase the two stable currencies (PAX & GUSD) are stored by trusts or banks and regularly by the New York Department of Financial Services. Auditing and supervision adds an extra layer of protection.

The other two stable currencies, USD Coin (USDC) and TrueUSD (TUSD), are not regulated, but the companies behind them say that the design of these two stable currencies minimizes risk. Emre Tekisalp, head of the Coinbase at the USD Coin project, said that USD Coin is managed by a consortium of companies including the Coinbase Inc. exchange and Circle Internet Financial Ltd., so no company can control this digital currency. Destiny; TrustToken CEO Jai An said that TrueUSD, created by TrustToken, holds collateral in multiple third-party trust companies, thereby reducing investor risk.

USDC
TUSD

In addition, there are decentralized stable coins in the cryptocurrency market, that is , stable coins that are not controlled by any company but are managed by token holders, similar to the management of open source software.

One type of decentralized stable currency is the DAI issued by MakerDAO, which is used in other use cases where most stable coins do not exist: loans. The user deposits the collateral (currently only ETH can act as collateral) in their system and obtains the loan DAI. These loans are based on smart contracts, a software program based on the Ethereum blockchain that automatically trades without the need for an intermediary.

Dai

Traders use these loans for margin trading and use DAI to buy more ETHs. Its proponents believe that these automatically generated loans can eventually be used for other types of personal and corporate loans, enabling people to obtain loan funds without having to meet the needs of traditional banks.

Complex Labs Inc. is also involved in a cryptocurrency loan business that developed a digital asset-backed lending agreement similar to a money market account (MMA) for stable currency. Traders can deposit their stable currency assets (or other encrypted assets) into the platform and earn interest income; they can also borrow stable coins or other encrypted assets from the Compound platform, but require 150% over-collateralization. The interest rate deposited or lent will fluctuate according to the relationship between supply and demand, and the user can withdraw the funds at any time.

At the same time, San Francisco startup Dharma is able to allow users to lend certain types of stable coins (or Ethereum) at a fixed rate on the platform.

Proponents of Stabilizing Coins believe that the ultimate stable currency can be used in a variety of ways, including establishing payment systems for people in developing countries who do not have access to banking services. However, some analysts say that this may not happen soon.

Larry Cermak, principal analyst at cryptographic research firm The Block, said: "Many countries don't have the infrastructure. Unless you accept it, you can't use (stable currency) to do a lot of things. The only thing you can do is send it to others. – Unless you persuade the merchant to accept it, they are not yet accepted. It will take years."

Author | Tomio Geron

Compile | Jhonny