"Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options."
― Janet L. Yellen, Secretary of the Treasury
Stablecoins are private money on distributed ledgers (blockchains).
The first stablecoin caught my eyes is the Libra-Now-Diem from Facebook-Now-Meta. Given the Meta's size and the deposit-like in nature, I cannot stop thinking that it may one day allure some deposits away from traditional financial system and eventually push up funding costs for banks and credit-union alike.
In this post, i was trying to introduce what's stablecoins and their main use cases.
To date, stablecoins have no universal definition.
The President's Working Group on Financial Markets regards stablecoins as
Stablecoins are digital assets that are designed to maintain a stable value relative to a national currency or other reference assets.
The scholars consider stablecoins in a broader scope. For example,
Stablecoins are crypto-assets that attempt to peg their value to another asset or a basket of assets including reserve currencies or high-quality liquid asset (HQLA).
Stablecoins can also be perceived from the technology perspective. One example is
Stablecoins are digital currencies recorded on distributed ledger technologies (DLTs), usually blockchains, that are pegged to a reference value.
The recent turmoils beg a question: do they survive and stay?
Meaningful use cases are driving force for sustainable/organic growths, like any other financial instruments. Below surveyed a few by its importance.
| Type | Use Case | Details |
|---|---|---|
| Primary | Off-chain Payments | Facilitate p2p and cross-borader payments for purchase of goods & services. |
| Primary | On-chain Payments | Facilitate trade of non-investment digital assets that are used for consumptive purpose. |
| Primary | DeFi | Underpinning for and core service in DeFi |
| Auxiliary | Digital safe assets | Hedging against excessive volatility in other crypto-assets |
| Auxiliary | Yield Farming | lock up the liquidity or collateral provision by paying interest |
| Auxiliary | Internal transfers and liquidity management | allow efficient movement of internal cash across subsidiaries for business and regulatory management |
This article describes some institutional features that help explain the use of stablecoin.
Stablecoins purport to be stable because it offers a promoise or expectation that the coin can be redeemed at par upon request
TerraUST, a top tier stablecoin with $17bn market cap at its peak, falls apart within a few days in May 2020, wiping out the mysterious $ (e.g., $60bn vs $45bn vs $40bn)
Therefore, it's important to understand what backs up the claim that stablecoin is always redeemable 1:1 for U.S. Dollars. One may view or assess the popular stablecoins in two dimensions below.
| Centralized | De-centralized | |
|---|---|---|
| Under-Collateralized | ??? | TerraUST |
| Fully-Collateralized | USDC and USDT | ??? |
| Over-Collateralized | ??? | dai |
A few comments: