(This article is written by XREX)
Real USD ($USDR), the U.S. dollar stablecoin issued by TangibleDAO, decoupled from the U.S. dollar on 10/11 and fell by 50%. Real USD is the protocol with the fourth largest total locked position value on the Polygon chain. It is increasingly used in stablecoins, from the function of investing and buying cryptocurrencies, to real-world financial applications such as cross-border payments, and the decoupling of $USDR It deserves our attention and reflection again, what is the role of stablecoins? Because of such a role, what kind of design and specifications should it have?
$USDR has two characteristics. First, it mainly uses real estate as a reserve. Second, it feeds back the reserve, that is, the profits from real estate, to users. "Dividend stable currency" is a type of stable currency that on the one hand serves as a payment tool and on the other hand returns its own profits to users. This type of topic has been very popular in the blockchain industry recently, but the discussion and understanding of risks are obviously insufficient.
The “money velocity” of stablecoins is insufficient, which is a risk
The first line of defense for any currency is "transaction scenarios and frequency of use," which is its "currency flow rate." Stablecoins are regarded as "payment tools." Whether the entire system can be "stable" and whether the entire product is in line with the market (Product Market Fit), the most important indicator is not the circulation volume or the number of users, but:
How often is it "used"?
Do users hold this currency and use it frequently for "payment" and "transaction" needs?
To put it more bluntly, it is whether this stablecoin has rich transaction-related application scenarios and is frequently used and traded.
For example, USDT is very popular in emerging markets, such as India, Africa, the Middle East, South America and other countries and regions, whether it is used by small and medium-sized enterprises for cross-border payments, clearing and settlement tools, or for personal cryptocurrency investment , asset allocation, etc., USDT is the most important medium and unit. USDC is a stable currency that is commonly used by large financial institutions when doing large transactions and clearing settlements, or it can be converted into USDC for safe temporary storage when buying and selling cryptocurrencies.
The risk of "interest-bearing stablecoins" is that when a currency is not regarded as a "payment tool" but as an "investment tool", then it is very likely that the reason why people buy and hold it is not for use Trading, but treating it as an investment. That will result in a large issuance of this currency but a low flow rate. At this time, when its return rate decreases, holders have no reason to continue to hold it, and non-holders have no reason to take over, quickly forming huge selling pressure. This caused a run on the reserves behind them.
If we quantify the multiple risk factors of a currency, then:
Currency risk factor.1 = circulation / flow rate
In other words, large issuance volume and low flow rate are a major risk factor for any currency, and "dividend-distributing stablecoins" can easily trigger this risk factor as long as they do not have rich payment application scenarios (Note 1).
Looking back on the previous collapse of Terra Luna $UST, Terra, the issuer of $UST, used the Anchor protocol to provide a "subsidized" annual interest rate of 20% to attract users to hold $UST. Most users hold $UST simply to obtain high staking rewards. However, as a US dollar stable currency, $UST has obvious shortcomings in meeting payment needs.
One of the core reasons for the subsequent collapse was that the high-value pledge subsidies with strong subsidy nature could not be sustained. When the Anchor annualized interest rate decreased, a large number of users would sell $UST without reservation. At the same time, new users would not have any Motives for taking over. Because $UST is simply an "investment tool" for everyone, not a "payment tool", and has no payment application scenarios.
In addition to stablecoins like $USDR that use real estate as reserves, there is another hot topic in the currency circle. Seeing the high interest rates on U.S. debt, it is popular to issue stablecoins using U.S. debt as reserves, and will U.S. bond proceeds are returned to users.
"Dividend stablecoin" is very attractive, easy to understand and easy to promote. The problem is that the interest provided by these projects does not come from the "organic interest rate" borrowed or traded in the market, but the interest rate with a "subsidized nature" from the US government, which is not sustainable. The current ultra-high interest rates on U.S. debt will eventually end and return to low interest rates.
At this time, if this type of "stable currency with U.S. debt interest distribution" is not used as a payment tool, it will inevitably:
"Currency risk factor.1" index is high
"Currency risk factor.1" has undergone significant changes due to changes in the capital market.
Like $USDR and $UST, a run occurred.
Currency as a "payment tool" and an "investment tool" are essentially in conflict with each other.
Currency as a "payment tool" and an "investment tool" are essentially in conflict and can be divided into two. The first conflict is that "investment instruments" often contain speculative elements in nature, and their issuance volume changes greatly: as market sentiment and investment returns fluctuate, their issuance volume may increase or decrease rapidly. In addition, investment tools often require maturity transformation. In order to protect reserves and reduce the risk of runs when issuance drops sharply, there are often lock-up mechanisms. The most common one is fixed deposit, which must be limited to a certain time. Withdrawals are not allowed to reduce liquidity and alleviate instantaneous run pressure.
However, this mechanism is in conflict with the "payment instrument": the "payment instrument" needs to provide maximum liquidity, just like living can be withdrawn and transferred at any time. Therefore, when the use of payment instruments is mixed with speculative elements, resulting in large changes in circulation, it will further kill the most important convenience and stability of payment instruments.
The second essential conflict between currency as a "payment tool" and an "investment tool" is that unlike an "investment tool", the services provided by the "payment tool" itself are inherently prone to repetitive use. Habits, overall user behavior is easy to predict and relatively stable. In order to increase their own stability, many "payment instruments" will try their best to remove the element of speculation, so that the increase or decrease in their issuance mainly comes from changes in payment demand, rather than the market's speculative atmosphere, interest levels, etc.
This is why any brokerage app will have a disclaimer: "Investments may lead to profits and losses, and investors shall assess the risks themselves." However, there will not be printed on Easy Cards or cash "payment systems may lead to profits and losses. Use It is up to the individual to assess the risks themselves.”
If you are interested in a certain "interest-bearing stablecoin" that has been very popular in the currency circle recently, please think clearly: Is it mainly positioned as a payment tool or an investment tool? Do users choose it mainly because of its payment function or its investment attributes?
The value of a payment tool lies in its payment scenario. This is why EasyCard does not pay interest, and Shopee Coin does not pay interest either. To put it more deeply, this is why in traditional finance, the base currency / M0 / banknotes must not be allocated interest. Because the user owns and uses it, and the demand for it must be based on payment, not "profit sharing" or "profit". The white papers on central bank digital currency (CBDC) issued by governments of various countries, as far as I can see so far, including those in Taiwan, will emphasize that central bank digital currency does not carry interest, because it is a payment tool, not an investment tool.
How to judge the role of a stablecoin?
How to judge whether a stablecoin occupies the role of "payment tool"? Then it depends on whether it occupies the role of "unique transaction medium". The following two simple questions are provided to help everyone think:
When trading BTC or ETH, which stablecoin has the most depth and liquidity?
In emerging market trade, if you need to use US dollar stable currency to pay for goods, which one are merchants willing to accept?
The U.S. dollar is an example: the United States has long deliberately used its national power (military force, economic power) to allow the U.S. dollar to occupy many unique "medium of transactions" roles, such as: U.S. stocks, oil, cross-border currency exchange, government-to-government payments, etc. .
So today, although the risk of US insolvency has increased, there is no way for everyone to immediately break away from the US dollar and sell the US dollar, because everyone needs to use the US dollar.
Taiwan looks forward to the development of stablecoins in the next ten years, and supervision and innovation must keep pace with the times.
As a blockchain financial institution, XREX has always been concerned about the application of stablecoins in cross-border financial flows, especially in developing countries such as India. This year, we held the first Stablecoin Summit in Singapore to think about stablecoins in the next ten years from various aspects such as stablecoin models, institutional and personal applications, information security, bank docking, central bank digital currency docking, and supervision. develop.
Taiwan’s current cryptocurrency regulation is also becoming increasingly mature, and the central bank is also studying the issuance of a central bank digital currency in Taiwan dollars. Central Bank President Yang Jinlong also recently emphasized when being questioned by the Legislative Yuan that stable coins are part of virtual assets and the two cannot be separated. The development and application of stablecoins in the future are worthy of our attention, because they will directly involve our economy, trade, transactions and various aspects.
Although we are happy to see many innovations in stablecoins, many projects still have many risks, and we must have the ability to judge and prevent these risks. Stablecoins are a new payment industry born out of blockchain technology. Not only the blockchain industry is involved, but also many traditional financial institutions and electronic payment giants, such as PayPal, VISA, MasterCard, JPMorgan Chase, Standard Chartered Bank, etc. Actively grabbing stablecoins in the next ten years is worth looking forward to, and it also requires close and healthy dialogue between the blockchain industry, regulatory agencies, and the traditional financial industry.
related articles:
Opening Speech at the Stablecoin Annual Conference: "Stablecoin Social Movement: The Next Ten Years"
From the collapse of UST, look at the three lines of defense of stablecoins pegged to the US dollar
Is there any way to save the U.S. dollar stablecoin UST’s death spiral? The enlightenment brought to us by the instantaneous decoupling of algorithmic stablecoins –
Note 1:
When the demand contains significant investment/speculation components, the denominator of this currency risk factor will be unstable, with large short-term fluctuations, leading to price fluctuations, which is not good as a trading medium. This risk factor has the possibility of large short-term fluctuations. The absolute value or relative magnitude of this indicator is not critical, but its fluctuation is. For a healthy payment-oriented stablecoin, this factor will not change significantly. Even if there is a significant trend, the trend will be slow and gradual rather than rapid.
This article Payment instruments are not investment instruments! Why USDR, a U.S. dollar stablecoin that uses real estate as a reserve, decoupled 50% overnight appeared first on Chain News ABMedia.
