To the moon!
Here's what any crypto-asset enthusiast will tell you about the future of crypto-assets.
However, the current situation shows that if some of the short-term problems caused by stablecoins are not permanently resolved, crypto assets may indeed become the currency used on the moon.
As stablecoins take over the crypto economy, a key question that needs to be answered is"How much liquidity is in the system?"
innovation"innovation", but they may also pose a threat to the entire encrypted asset ecosystem.
They are considered a panacea that can help solve all problems because stablecoins allow anyone to use them even without a bank account and are an easy way to transact globally.
Stablecoins make the entire system more vulnerable, as they often rely on private organizations that lack transparency, whose balance sheets currently look like black holes, and we are not sure what lies behind them.
A quick premise is that stablecoins can traditionally be subdivided into off-chain (those backed 1:1 by fiat currency that are not directly on top of a blockchain protocol) and on-chain (those backed 1:1 by fiat currency) collateral backed and sits on top of the blockchain protocol).
In this discussion, when using"stable currency"When the term is used, I mean off-chain.
As I explained in my article on Tether, this type of stablecoin became a trick for CEXs to move liquidity between different cryptoassets (and prevent having to deal with bank account closures). However, stablecoins also bring hidden systemic risks, and as investors in encrypted assets, we are all taking these risks.
Although stablecoins solve the liquidity problem of CEX, they also externalize the entire hidden risk to millions of investors in the field of encrypted assets.
Stablecoins add value to the system by facilitating (or potentially inflating) liquidity if it appears in the short term, but they also facilitate large-scale speculation with the potential collapse of the entire cryptoasset ecosystem.
Who will be left to blame if it collapses? The answer is simple: potential millions of retail investors in crypto assets (as whales may be bailed out by CEX).
So if we want to build a solid cryptoasset ecosystem in the long run, we need to make some clarifications here.
And to do that, we need to eliminate short-lived threats.
Address false liquidity and externalize risk throughout the system
The core problem with stablecoins is the asymmetry of the underlying system. On the one hand, they are used by some central exchange platforms as the main medium of exchange. On the other hand, though we don't know how much cash and liquid assets they have.
Although the financial system also creates wealth by retaining a small amount of liquidity. Yet banks that did this (especially after the 2008 financial bubble) had to go through so-called stress tests, and very strict regulations, in addition to having to disclose their balance sheets.
In contrast, stablecoins"Financial Innovation"Allowing CEXs to print digital currencies without actually showing the world which digital assets are supported (some stablecoins are more regulated than others).
this kind
this kind"Financial Innovation"Also beyond what Wall Street managed to create during the 2008 financial bubble. There, financial derivatives with fancy names are repackaged so that they can be taken off balance sheets and thereby evade regulation.
Paradoxically, Bitcoin was born as a way to counter Wall Street, and it has become its modern version.
The most interesting features of a crypto-asset-driven world (transparency and openness) have been erased by stablecoins.
How do we understand this conundrum?
Let’s take a look at the top 3 stablecoins on crypto asset exchanges right now:
USDT
USDC
and BUSD
Tether has been covered extensively here (I will add some key points at the end).
As we saw in Tether’s case, which was originally pegged to the U.S. dollar, USDT has indeed become the most popular way to exchange Bitcoin (in fact, most of Bitcoin’s trading volume may come from Tether).
This means that if you want to exchange your bitcoins for cash, you will likely need to do so via USDT. If so, there may not be anything left to back it up.
So your Bitcoin is illiquid (convertible into USD), so it may be worth zero in the short term (unless you are willing to hold it indefinitely).
If so, this could translate into a domino effect on the entire cryptoasset market (although some Bitcoin holders claim that Tether's collapse could have a lift in Bitcoin price, which doesn't make much sense to me) .
What about other stablecoins?
USDC: Coinbase Stablecoin
USDC is Coinbase's stablecoin. As explained on the platform:
USDC is a cryptographic asset that is a stablecoin. You can always redeem 1 USDC for 1 USD, giving it a stable price. Qualifying customers at Coinbase can earn rewards for every dollar they hold.
What are the key components of this stablecoin? As Coinbase explained:
But how do we know that USDC will preserve its value? Coinbase explains it this way in its FAQ:
Centralization, the consortium that mints USDC, collectively holds $1.00 for each USDC. The funds are held in a special bank account that is constantly monitored and audited.
Also in this section, Coinbase emphasized that the advantage of stablecoins is that they do not require a bank account. It is borderless and easily traded with any other crypto asset.
While stablecoins do attempt to solve an important problem for CEXs (stability of currency, and perhaps liquidity), they defeat the entire purpose of a blockchain-based ecosystem. There, there is no central authority to mint them, and everything needs to be visible and open to the community.
On June 22, 2021, there was an announcement on the blog that the market value of USDC had exceeded $25 billion.
How do we know what the basis of this $25 billion is?
Circle and Coinbase publish a monthly report on the Center website. These reports don't tell us anything about the breakdown of their reserves, they're just certified by accounting services firm Grant Thornton LLP (in short, accounting firms look for consistency in the data, if that's true, but it doesn't guarantee"audit"audit"）。
It's important to emphasize that, as a proof, this doesn't really address the risk to USDC's balance sheet. Instead it only looks for high-level information.
Such as the size of USDC issued and the currencies that have been blacklisted. In fact, in the April 2021 report, we found information that 100,000 USDC had been blacklisted.
Here's what the reserve account report looked like in April:
We only know of coins that were blacklisted, some keys had to be frozen due to requests from law enforcement.
There are also a growing list of banned addresses, which you can track here.
Now let's look at another key stablecoin: BUSD.
BUSD: Binance Stablecoin
As is the case with the Coinbase stablecoin, Binance BUSD is advertised as a 1:1 USD-backed coin and is"highly regulated"(We'll see what that means).
It was developed in partnership with Paxos (creator of crypto asset exchange ItBit and stablecoin Pax).
At the June 30, 2020 hearing of the U.S. Congressional Committee on Banking, Housing, and Urban Affairs, the"Digitization of money and payments"On this theme, Paxos CEO and co-founder Charles Cascarilla explained:
We believe stablecoins can solve systemic problems in our financial system. We must update this architecture for the 21st century world, where commerce happens in real time; we can no longer rely on a system that is only available for a few hours, five days a week, with high latency. Due to settlement delays for bank transfers, international wire transfers and other activities, consumers and institutions alike are unable to get their funds in time as it can take more than five days for their own funds to clear. This makes it difficult for us to manage other payments in any predictable fashion. Across the economy, this creates a complex system of lending obligations and unnecessary middlemen.
He continued: By design, blockchain-based stablecoins (such as those issued by Paxos) allow everyone to have equal access to digital wallets and digital dollars, just like cash. The simplest wallets can be set up as easily as email accounts; in addition to accommodating regulatory requirements, they don't require a lot of paperwork and have no concept of minimum balances. Stablecoins can build an ecosystem that supports the underprivileged, reducing unnecessary fees such as onerous fees associated with high-cost checking accounts, overdraft fees, predatory lending, and check-cashing and cross-border remittance fees.
Stablecoins are crucial to Binance because these stablecoins act as a medium for transactions on the platform.
It’s important to emphasize that Binance stablecoins utilize Paxos technology to back them, and in theory Binance stablecoins may be safer compared to other currencies because their USD deposits are held in FDIC-insured banks.
Below is"What keeps stablecoins stable?"An interesting table in , as an overview:
If we go back to Binance USD, its proof looks back to Paxos.
The monthly attestation report is also known as"Reserve Account Report", it only shows us the balance (last available May 2021).
The same report also explained the likely support for these reserves:
As such, the Paxos Standard Token (on which Binance USD is built) claims to maintain a strict 1:1 peg to the U.S. dollar and its reserves are more regulated.
It is worth noting, however, that we do not know exactly how many FDIC-insured accounts Paxos has. For each FDIC-insured account, there is a limit of $250,000. So in order to make up for BUSD's $1 billion market cap, we can imagine that Paxos would have to keep hundreds or even thousands of FDIC-insured accounts open?
In addition, in 2020, Coin Metrics found that the two most active accounts on Paxos were related to MMM BSC, a well-known Ponzi scheme company.
Therefore, several key questions remain here.
What does it mean to be insured by an FDIC insurance company? What is the level of liquidity? this stablecoin"more regulated"Does the fact that it is also being audited more frequently?
As far as we know, we only have monthly proofs which, like other stablecoins, only show the total available supply of those tokens.
Key takeaways on what went wrong with off-chain stablecoins
While stablecoins originally attempted to solve an important problem, and they do represent a potential evolution of money (by making them borderless and usable by anyone), the way they are structured now also poses systemic risks.
The core risk of stablecoins is the asymmetry of their importance to the entire cryptoasset ecosystem (some central platforms only use stablecoins as a medium of exchange, and stablecoins like USDT may be the main liquidity provider for Bitcoin) , and how much they are willing or have to disclose to the public (so far we only have a few months of proofs telling us the total value of stablecoins in circulation, but we have no clue as to their breakdown).
Paradoxically, while stablecoins may be an evolution of money, they also require strict regulation to work properly and prevent fraud. However, as of now, they are only regulated in certain circumstances. If so, does it make sense to have off-chain stablecoins in the first place?
When we look at the current state of stablecoins, we can segment them by what collateral they use as reserves. For example, stablecoins like USDT (Tether) are in"Tether treasury"Among them, USDC (Coinbase stablecoin) is in decentralized private accounts. Both are self-regulatory and they require a high level of trust in these organizations. And other stablecoins like Pax (from Paxos) and BUSD (the Binance stablecoin) are collateralized through FDIC-insured banks (how many of these accounts are there, and how much is in them, is also hard to know).
In some cases, stablecoins may lack transparency altogether (Tether), and in others, we may wonder whether these stablecoins are actually redeemable (like USDC) if a liquidity flight is likely to occur. And in other cases, we might wonder how much of these things are actually insured (like Pax and BUSD). Therefore, having more clarity, information available, more regulation, and better audits on these stablecoins can help us have a more robust cryptoasset ecosystem.
But isn't that just a Bitcoin problem?
If Tether had been exposed between 2018-2019, this could have saved the crypto-asset economy from disaster, as its size is still limited.
However, by the end of 2020 and the beginning of 2021, Tether's market value exploded. As of now, Tether has taken over the entire ecosystem, and trying to crowd out a $60 billion-plus behemoth sounds like a python trying to digest an elephant. As this tweet highlights, Tether is also taking over the DeFi space, so this is a problem for Ethereum as well.
If these two major crypto assets crash, guess what happens to all other crypto assets?
Can we solve this by converting all liquidity to on-chain stablecoins?
On-chain stablecoins like Dai (a cryptographic stablecoin built on Ethereum) are very interesting because their philosophy aligns with an open and transparent system.
This is in theory. In fact, Dai itself is collateralized by off-chain stablecoins.
what can we do?
what can we do?
It is difficult to predict what will happen next. And Bitcoin has indeed survived existential threats time and time again over the past decade. Yet paradoxically, at this scale, Tether's time bomb really has the potential to kill Bitcoin and send the entire cryptoasset space back to the ice age.
Compilation: Bibabu
Original: hackernoon
Compilation: Bibabu
