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Read all kinds of stablecoins in one article: full analysis of USDT, DAI, FEI, Basis Cash, ESD visualization



Is decentralized stable currency a false proposition? It is too early to draw conclusions now. Over the past year, the circulation of stablecoins has exploded. However, very little is known about how these stablecoins actually work. For some reason, stablecoin creators are obsessed with making these designs seem elusively complex. Almost every white paper gets bogged down in equations and newly invented jargon, as if their authors are trying to convince you: trust me, you're not smart enough to understand this. But I don't agree with that. In my opinion, the underlying design of all stablecoins is very simple. I'm going to show you a visual to understand how all stablecoins work. We can imagine each stablecoin protocol as a bank. They each hold assets and owe debts; they all try to capture value in some way and distribute that value to "equity" holders. Pictured above is a full reserve bank (also known as a 100% reserve bank). On the left is its real assets, which are the physical dollar reserves it holds; on the right is its liabilities (called "digital dollars"), which are claims on reserve assets. In a full-reserve bank, every liability is pegged 1:1 to an asset in the reserve. If the holder of the digital dollar requests cash back, the holder will receive the physical dollar and the corresponding digital liability will be destroyed. This is how Tether, USDC, BUSD, and every other fiat-backed stablecoin works. After Ankr was hacked, an address exchanged 10BNB for more than 15 million BUSD with the help of a loophole: According to news on December 2, after the Web3 infrastructure provider Ankr was hacked, 10 trillion aBNBc tokens were issued, and a user (0xaab2 ... dfc3) Mortgage 10BNB for more than 180,000 aBNBc, and mortgage aBNBc on the lending platform helio to lend more than 16 million stable coins Hay, and then exchange Hay for more than 15 million Busd, Hay liquidity pool was emptied, Currently on hold. [2022/12/2 21:17:56] The equity of the bank belongs to the shareholders (investors of the bank), who make money from the fees charged by the bank. In the case of Tether, the owners of Tether Corporation are shareholders, whose profits come from Tether's minting and redemption fees. Every liability of a full-reserve bank should remain tightly pegged to the dollar, since it can always be exchanged for $1 of reserves. As long as banks ensure convertibility, arbitrageurs have no trouble maintaining their exchange rates. The above model of a full reserve bank can help us understand the difference between encrypted banks. Let me start with a question, how do you create a crypto-full-reserve bank with a stable dollar as its liability? Since cryptocurrencies are just redefining money, the first thing you need to do is to exchange your dollar assets for crypto assets. But cryptocurrencies are volatile, so if your liabilities are in dollars, 1:1 backing won't work. If the value of cryptocurrencies falls, banks will run out of collateral. Therefore, you need to "over-collateralize", that is, increase the value of the collateral to give you a cushion when the cryptocurrency falls. This is basically how MakerDAO works. Palazzo Versace, a luxury hotel in Dubai, allows guests to pay with cryptocurrencies: News on September 13, Palazzo Versace, a luxury hotel in Dubai, recently stated that starting from September 7, it will allow guests to use Bitcoin, Ethereum and Binance Coin ( BNB ) to settle their respective hotel bills. Binance, the world's largest cryptocurrency exchange, is reportedly the "cryptocurrency infrastructure provider" for the luxury hotel. In addition to allowing guests to use cryptocurrencies to pay for dining, lodging, and spa experiences, the hotel will also allow guests to use cryptocurrencies to purchase gift certificates and items on its e-commerce platform and flower shop. [2022/9/13 13:26:46] The current exchange rate of the stablecoin DAI is basically stable. Because reserve assets are significantly greater than total liabilities (DAI), this ensures the safety of the entire system. I won’t go into details about other details about MakerDAO. Interested readers can click to read this article "What is MakerDAO?" ". Now let's look at Synthetix. Synthetix took a different approach: instead of holding a diversified basket of crypto assets, Synthetix issued its sUSD stablecoin against a bunch of its own SNX tokens. This SNX is also an "equity token", in other words, the only asset Synthetix allows as a deposit is its own equity. Due to the high volatility of SNX, Synthetix requires a 600% overcollateralization of every sUSD in circulation. The exchange rate of sUSD is also currently stable. Both MakerDAO and Synthetix are similar to traditional fully-reserved banks, except that they are both overcollateralized because their collateral assets are cryptocurrencies. In a way, their peg is secure because the stablecoin can be converted to its underlying asset through a redemption mechanism. And, both have designed an interest rate system with the ideal price (1 dollar) as the target. The price of Bitcoin is close to the price of mainstream mining machines such as Ant T17 and Avalon 1146 Pro: According to news on June 18, according to F2pool data, as Bitcoin falls below $20,000, according to the electricity fee of 0.4 yuan/kWh and based on According to the current mining difficulty calculation, most mining machines including Whatsminer M21 and Avalon 1066 Pro have reached the shutdown price. In addition, mining machines such as Antminer T17 (off currency price of $18,953.05), Avalon 1146 Pro (off currency price of $17,919.25), T17+ (off currency price of $17,337.73) and other mining machines are currently close to the shutdown currency price. [2022/6/18 4:37:06] There is also a stable currency, often referred to as an "algorithmic central bank". Algorithmic central bank stablecoins cannot be redeemed at all, and there are no depositors (depositors) in the traditional sense. This makes them less like traditional banks and more like central banks. (Note: Central banks tend to use methods other than callability to maintain price stability). Each algorithmic central bank works slightly differently. To analyze an algorithmic central bank, we try to understand how it behaves and functions in two important situations: when the stablecoin is above the peg, and when the stablecoin is below the peg. Structurally, the simplest algorithmic central bank is probably Fei. Fei got a lot of attention when it launched recently, but it broke the hook as soon as it went live. Simply put, Fei can use the relationship between supply and demand to push the price to stabilize around the anchor target. Regarding the working principle of Fei, as shown in the following diagram: Currently, the hook of FEI has been broken. The three major U.S. stock indexes closed mixed, with the S&P 500 up 0.52%: The market showed that the three major U.S. stock indexes closed mixed, with the Nasdaq up 1.58%, the S&P 500 up 0.52%, and the Dow down 0.06%. [2022/2/5 9:32:07] Note that Fei is not over-collateralized and most of its assets are in cryptocurrencies. This means that in a black swan event, Fei's assets could be significantly lower than its liabilities, making it impossible to guarantee the exchange rate peg. Although the animation above gives you a more intuitive feeling, the real mechanism of Fei is actually quite complicated. Fei uses Uniswap for all trading activity and employs a technique called "reweighting" for the actual trading. It also uses "direct incentives" (actually a type of capital control). But the net effect is the same: the protocol participates in the open market, pushing the actual price towards the pegged price. Another central bank with a similar algorithm is the Celo Protocol, which has produced a stablecoin called Celo Dollar (cUSD). Celo Dollar uses CELO as its reserve collateral (the native token of the Celo blockchain), along with a diversified portfolio of other cryptocurrencies. Like FEI, Celo also uses products like Uniswap to continuously buy and sell Celo Dollars on the market. Celo initially has a large reserve of assets, and the purpose of the reserve is to always maintain an overcollateralization. If Celo's assets fall below 200% of its liabilities, the system attempts to regain the asset reserve by charging transaction fees for CELO transfers. Therefore, the main difference between Celo and Fei (besides its transaction mechanism) is the assets it holds and the rules around staking. UENC has completed the client update of version 1.6.3 and is expected to release version 1.6.4 by the end of October: According to official news, the laboratory has decided to advance the optimization of the verification pool algorithm and double-spend check, and it is expected to advance the version 1.6.4 to the end of October Release, the other expected goals of 1.6.4 that have been formulated will continue to be tested internally and will be incorporated into subsequent version releases. The UENC main network will enter a stable state of high concurrency, and the success rate of transactions on the chain will also be greatly improved. [2021/10/18 20:37:40] Celo Dollar's pegged exchange rate is currently stable. Another algorithmic stablecoin is Terra’s UST, whose collateral is Luna (the native token of the Terra blockchain). Like FEI and Celo, the Terra protocol acts as a market maker for stablecoins; if the stablecoin system runs out of assets, it restocks it by increasing the LUNA supply. The UST peg is currently stable. FEI, Celo, and Terra do not allow redemptions. Instead, they create their own currency on the open market (that is, they are willing to buy and sell for the difference). On the surface, this might seem quite different from callability, but it's actually a closer continuation. Economically, a credible commitment to a market maker is the same as allowing minting and redemption. Imagine a stablecoin, backed by ETH, call it a STBL token. The protocol is always willing to make an ETH/STBL pair in the market, meaning the protocol is willing to sell 1 STBL for $1.01 ETH and buy 1 STBL for $0.99 ETH. If STBL is below the peg rate, it will keep trading STBL until its ETH is used up. If the STBL were to use minting and redeeming instead, it would potentially allow anyone to mint 1 STBL for $1.01 ETH and redeem 1 STBL for $0.99 ETH. If STBL falls below the peg rate, it will continue to redeem ETH with STBL until its ETH is exhausted. The end result of the above two methods are the same. In a traditional central bank, being a market maker rather than allowing redemptions gives the central bank more discretion. But algorithmic market making is different because smart contracts can make firm, self-executing commitments. From this perspective, market makers and callables are two paths to the same goal: providing liquidity and securing the pegged exchange rate. Now, we have a "central bank" style stablecoin. But there is also a fancy algorithmic stablecoin: Seigniorage Shares (seigniorage stablecoin). (Note: Seigniorage Shares was proposed by the cryptocurrency economist Robert Sams in 2014, and has not yet been fully realized. In the Seigniorage shares model, the stablecoin token itself and the tokens that accumulate value and debt financing are two independent tokens coins.) The most classic example of a "Seigniorage Shares" stablecoin is Basis Cash. It also became the quintessential algorithmic stablecoin from which many other designs were derived later. The following is a video introduction of how Basis Cash works, and you can also click to read the article. The Basis Cash peg has currently failed. You can think of Basis Cash working in two phases: Basis Cash is in a contraction cycle when there are outstanding bonds, and the money supply is not growing fast enough to pay off all system debt. However, if demand continues to increase, eventually all bonds will be repaid, the system will enter an expansion cycle, and shareholders will again be rewarded with newly minted Basis Cash. The newly minted Basis Cash is "seigniorage", the profit the central bank makes from issuing new currency. A normal central bank would keep this money on its own balance sheet for a rainy day. But Basis Cash pays all taxes to its shareholders the moment the cash is received. You can intuitively see that Basis "mortgaging is very efficient". Having no assets on its balance sheet allows it to back a very large stablecoin supply on zero asset reserves, but it also makes it vulnerable to a "death spiral" or crisis of confidence. In fact, Basis Cash encountered the latter situation. It is important to understand how Basis Cash works. Most subsequent algorithmic stablecoins are descendants of the Basis design, including the last stablecoin we'll examine: ESD. Empty Set Dollar (ESD) is an absolutely fair stablecoin launched by an anonymous team. The original version of ESD (now called ESD v1) was designed based on Basis Cash. The peg was broken for ESD v1 and they have since moved to a new design. ESD's innovation is the fusion of "share" tokens with "stablecoin" tokens. This means that if stablecoins are mortgaged, more stablecoins will be generated. As you can probably guess, this caused the stablecoin to become very volatile and move away from the peg, sometimes going as high as $2.00 and sometimes dropping below $0.20.


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