Wondering whether #ust will depeg or gain adoption?
Well here's a beginners guide on Stablecoins:
You will learn how stablecoins are designed, different types of stablecoins, use cases, drawbacks & much more.
Bonus: We will assess the #ust stablecoin at the end!
Well here's a beginners guide on Stablecoins:
You will learn how stablecoins are designed, different types of stablecoins, use cases, drawbacks & much more.
Bonus: We will assess the #ust stablecoin at the end!
Full transparency: The following framework was proposed by the Giga brains @el33th4xor @kevinsekniqi & Dr. Amani Moin. I give full credit to them for the knowledge.
I am here to break down the whitepaper into simple laymen's language for you to understand easily.
LET'S DIVE IN!
I am here to break down the whitepaper into simple laymen's language for you to understand easily.
LET'S DIVE IN!
Definition: Stablecoins are the gateway to connect real-world currencies to digital currencies. They provide an easy way for users to transact on the internet from anywhere around the world.
An ultra-sound money needs to have these 3 functions:
1. Store of value-For people to store their wealth.
2. Unit of account-To measure the value of goods.
3. Medium of exchange- To facilitate the sale & purchase of goods.
STABILITY IS KEY TO ALL THESE FUNCTIONS!
1. Store of value-For people to store their wealth.
2. Unit of account-To measure the value of goods.
3. Medium of exchange- To facilitate the sale & purchase of goods.
STABILITY IS KEY TO ALL THESE FUNCTIONS!
Since crypto'currencies' are volatile all the time, it is inconvenient to use them as money in our day-to-day lives.
Stablecoins are like cryptocurrencies but they have certain mechanisms to keep their price stable at all times. (or at least try to!)
Stablecoins are like cryptocurrencies but they have certain mechanisms to keep their price stable at all times. (or at least try to!)
Here are the fundamental design features of stablecoins:
1. Peg
2. Collateral
3. Collateral amount
4. Mechanisms
5. Price info
(this is going to get exciting, so buckle up!)
1. Peg
2. Collateral
3. Collateral amount
4. Mechanisms
5. Price info
(this is going to get exciting, so buckle up!)
1. PEG:
A currency is pegged to the value of an external entity such as USD, GOLD, S&P500. The value of that external entity defines the value of the stablecoin, but the value of the stablecoin is susceptible to deviation due to supply & demand issues.
A currency is pegged to the value of an external entity such as USD, GOLD, S&P500. The value of that external entity defines the value of the stablecoin, but the value of the stablecoin is susceptible to deviation due to supply & demand issues.
Types of peg:
1.1) Fiat: USD, euro, yen.
Most of the stablecoins peg their currencies to the USD likely due to USD being a stable store of value.
1.2) Commodity: gold, silver.
They are pegged to the value of gold which fluctuates every day and in turn causes instability.
1.1) Fiat: USD, euro, yen.
Most of the stablecoins peg their currencies to the USD likely due to USD being a stable store of value.
1.2) Commodity: gold, silver.
They are pegged to the value of gold which fluctuates every day and in turn causes instability.
1.3) Combination: Bundle of currencies, commodities.
IMF SDR is a bundle of top currencies around the world to which the #terra ecosystem is pegged to. Stablecoins are pegged to SDR or a group of commodities to avoid instability against one country, currency, commodity.
IMF SDR is a bundle of top currencies around the world to which the #terra ecosystem is pegged to. Stablecoins are pegged to SDR or a group of commodities to avoid instability against one country, currency, commodity.
1.4) Index: CPI(consumer price index)
It's just a unitless index that measures inflation on a monthly basis, and they just peg their currency to this index value.
(idk for what reason, maybe b/c they like it!)
It's just a unitless index that measures inflation on a monthly basis, and they just peg their currency to this index value.
(idk for what reason, maybe b/c they like it!)
2. COLLATERAL:
Emergent currencies often have collateral, so that the user can redeem their currency for the underlying collateral.
When USD was born gold was the underlying collateral that you could get at any time in exchange for dollar bills.
Emergent currencies often have collateral, so that the user can redeem their currency for the underlying collateral.
When USD was born gold was the underlying collateral that you could get at any time in exchange for dollar bills.
Collateral makes sure that the currency has 'REDEMPTION VALUE'.
If a new currency doesn't have any collateral, then it becomes hard for a person to hold it since it has no value in society. Even the great dollar started its system with gold as collateral.
If a new currency doesn't have any collateral, then it becomes hard for a person to hold it since it has no value in society. Even the great dollar started its system with gold as collateral.
Types of collateral:
2.1) Fiat- USD, Euro, Yen
USDT uses a fiat-backed collateral system where it has dollars backing its digital currency.
Unfortunately, collateralizing a coin with fiat money creates the problem of securely storing large quantities of it.
2.1) Fiat- USD, Euro, Yen
USDT uses a fiat-backed collateral system where it has dollars backing its digital currency.
Unfortunately, collateralizing a coin with fiat money creates the problem of securely storing large quantities of it.
The best place to store cash is in a bank, but it is also prone to centralization.
2.2) Commodity- Gold, Silver
Commodity-backed stablecoins also suffer from the problem of where to store their collateral since there are few institutions that accept commodities.
2.2) Commodity- Gold, Silver
Commodity-backed stablecoins also suffer from the problem of where to store their collateral since there are few institutions that accept commodities.
2.3) Cryptocurrency- #btc , #eth
Cryptocurrencies solve the problem of storage and allows for diversification across various assets. The major drawback is that digital collateral can be very volatile making it hard to use, as the value of the collateral can drop significantly.
Cryptocurrencies solve the problem of storage and allows for diversification across various assets. The major drawback is that digital collateral can be very volatile making it hard to use, as the value of the collateral can drop significantly.
2.4) None- :(
Some stablecoins don't have any collateral backing their currency at all. The value of the currency purely stems from people's beliefs. Once the people's beliefs change, there is no reason for people to hold it since you cant redeem it for anything else.
Ex: USD.
Some stablecoins don't have any collateral backing their currency at all. The value of the currency purely stems from people's beliefs. Once the people's beliefs change, there is no reason for people to hold it since you cant redeem it for anything else.
Ex: USD.
3. COLLATERAL AMOUNT:
Amount of collateral held by the digital currency for people to redeem.
Types of collateral amount:
3.1) Full reserve:
Every unit of currency can be redeemed for the underlying collateral anytime in this system.
Amount of collateral held by the digital currency for people to redeem.
Types of collateral amount:
3.1) Full reserve:
Every unit of currency can be redeemed for the underlying collateral anytime in this system.
Having a full reserve, where the value of the collateral is exactly the value of digital currency makes it harder to scale. As the stablecoin grows, the issuers have to keep buying more collateral in order to keep up with demand.
3.2) Partial reserve:
Some currencies initially fully collateralize their stablecoin, then slowly reduce their collateral:stablecoin ratio once the money supply has exceeded some threshold.
Full collateralization is not necessary as long a bank run does not occur.
Some currencies initially fully collateralize their stablecoin, then slowly reduce their collateral:stablecoin ratio once the money supply has exceeded some threshold.
Full collateralization is not necessary as long a bank run does not occur.
3.3) Overcollateralized:
Currencies collateralized by crypto-currencies use this system to accommodate for price swings. If they have 200% BTC in reserves, their collateral ratio will remain the same even if BTC drops down by 50%.
3.4) None:
They have no collateral.
Currencies collateralized by crypto-currencies use this system to accommodate for price swings. If they have 200% BTC in reserves, their collateral ratio will remain the same even if BTC drops down by 50%.
3.4) None:
They have no collateral.
4. MECHANICS:
All stablecoins require some mechanism to adjust the price when it deviates from the peg. Usually, this is done by expanding the supply of the stablecoin when the price is too high and contracting it when the price is too low.
All stablecoins require some mechanism to adjust the price when it deviates from the peg. Usually, this is done by expanding the supply of the stablecoin when the price is too high and contracting it when the price is too low.
Types of mechanisms:
4.1) Reserve of pegged asset:
In this mechanism, users are incentivized to expand or contract supply until the price returns to the peg. Essentially the system will have full collateral and users can come anytime to get 1$ worth of stablecoin for a real 1$.
4.1) Reserve of pegged asset:
In this mechanism, users are incentivized to expand or contract supply until the price returns to the peg. Essentially the system will have full collateral and users can come anytime to get 1$ worth of stablecoin for a real 1$.
When the price of the stablecoin is lower than the peg(say 0.9$), arbitragers will buy it in the open market for 0.9$ and come to the system to sell the tokens for 1$ thus making a profit of 0.1$. This reduces the stablecoin circulating supply and thus increasing the price.
When the price of the stablecoin is higher than the peg(say 1.1$), arbitragers will be able to buy from the system for 1$ and sell it on the open market for 1.1$ thus making a profit of 0.1$. This increases the stablecoin circulating supply and thus reducing the price.
4.2) Dual coin:
To maintain the stability of the stablecoin, it is paired with a secondary coin to absorb the volatility. The secondary coin acts as a valve to control the supply and demand of the stablecoin.
To maintain the stability of the stablecoin, it is paired with a secondary coin to absorb the volatility. The secondary coin acts as a valve to control the supply and demand of the stablecoin.
When the price of the stablecoin dips below the peg(say 0.9$), the system essentially says to you "Give me your stablecoin that is worth 0.9$ and I will give you 1$ worth of 'x' coin."
When the price dips below the peg:
1. Users have stablecoin worth 0.9$.
2. They give it to the system.
3. The system gives them 1$ worth of x coin.
5. The system burns the stablecoin which reduces the supply thus increasing the price of the stablecoin.
1. Users have stablecoin worth 0.9$.
2. They give it to the system.
3. The system gives them 1$ worth of x coin.
5. The system burns the stablecoin which reduces the supply thus increasing the price of the stablecoin.
When the price is above the peg:
1. Holders of the 'x' coin get stablecoins worth 1$.
2. They sell those stablecoins on the market for 1.1$.
3. Holders of the 'x' coin are incentivized.
3. The stablecoin circulating supply increases thus reducing the price of the stablecoin.
1. Holders of the 'x' coin get stablecoins worth 1$.
2. They sell those stablecoins on the market for 1.1$.
3. Holders of the 'x' coin are incentivized.
3. The stablecoin circulating supply increases thus reducing the price of the stablecoin.
4.3) Algorithmic:
Some stablecoins gain stability with the help of algorithms. The supply-demand alterations are recognized by the algorithm and changes the circulating supply which changes the price.
Some stablecoins use algorithmic market makers to absorb the volatility.
Some stablecoins gain stability with the help of algorithms. The supply-demand alterations are recognized by the algorithm and changes the circulating supply which changes the price.
Some stablecoins use algorithmic market makers to absorb the volatility.
4.4) Leveraged loans:
Users lock up collateral such as #eth in the system and they can mint the stablecoin for themselves. The maximum value they can mint is a pre-determined ratio b/w the collateral and stablecoin.
Users lock up collateral such as #eth in the system and they can mint the stablecoin for themselves. The maximum value they can mint is a pre-determined ratio b/w the collateral and stablecoin.
Users can unlock their collateral by paying back the borrowed stablecoin, and the stablecoin is destroyed once it is paid back.
But the drawback is, if the value of the collateral drops below a certain level then it will be liquidated. This makes it hard to hold for a long time.
But the drawback is, if the value of the collateral drops below a certain level then it will be liquidated. This makes it hard to hold for a long time.
5. Price information:
Stablecoins need information about their price to adjust the circulating supply in case of a depeg event.
Types of price info:
5.1) Oracles:
Most stablecoins use an external independent price feed called oracles trusted by the issuers of the stablecoin.
Stablecoins need information about their price to adjust the circulating supply in case of a depeg event.
Types of price info:
5.1) Oracles:
Most stablecoins use an external independent price feed called oracles trusted by the issuers of the stablecoin.
The drawback is it leaves a crucial component of the system out of the hands of the stablecoin issuer. The entities publishing the price feed might manipulate or make errors in their calculations.
Ex: @CoinMarketCap suddenly decided to stop including prices from South Korea resulting in a sudden drop in reported prices.
5.2) Crowd oracles:
This system uses voters to vote with the help of oracles to form consensus on the price of the stablecoin at all times.
5.2) Crowd oracles:
This system uses voters to vote with the help of oracles to form consensus on the price of the stablecoin at all times.
The drawback of this system is that the 'pegged price' is a more advantageous equilibrium for voters to manipulate and incentivize themselves than to serve the system which makes the information less trustworthy.
5.3) Trades:
Some stablecoins require no external oracles to remain stable. In these systems, users can always trade-in for the underlying collateral. There is no need for a price feed, instead, the prices are determined by the users by cashing in and out of the system.
Ex:USDT
Some stablecoins require no external oracles to remain stable. In these systems, users can always trade-in for the underlying collateral. There is no need for a price feed, instead, the prices are determined by the users by cashing in and out of the system.
Ex:USDT
Now let's take look at a popular stablecoin #ust :
1. Peg- The #ust is pegged to the US dollar.
2. Collateral- None. (But I'd argue that #btc can be considered as decentralized crypto collateral, even though it acts as a release valve for swelling pressure to exit UST to LUNA.)
1. Peg- The #ust is pegged to the US dollar.
2. Collateral- None. (But I'd argue that #btc can be considered as decentralized crypto collateral, even though it acts as a release valve for swelling pressure to exit UST to LUNA.)
3. Collateral amount- None. (But again BTC is kept in #ust reserves to provide a further layer of support to ensure that UST maintains its peg, so partial reserves is also a plausible answer.)
4. Mechanism- Dual coin. (#luna acts as a secondary coin to absorb the volatility of #ust in case of a depeg event. #luna is minted or burned to adjust the circulating supply of #ust thus adjusting the price of #ust .)
5. Price info- #ust uses a voting system by sampling only
a subset of voters who are miners of the system. The miners form consensus on the price of the stablecoin.
They are rewarded for staying within the median value of the price and their stakes are slashed for wrong info.
a subset of voters who are miners of the system. The miners form consensus on the price of the stablecoin.
They are rewarded for staying within the median value of the price and their stakes are slashed for wrong info.
I believe that I have given you all the basic principles and definitions of a stablecoin. I will leave it to you to think and decide whether #ust is a good idea or not.
If you are expecting me to shill or condemn #ust then you are at the wrong place, my friend.
Think Hard!
If you are expecting me to shill or condemn #ust then you are at the wrong place, my friend.
Think Hard!
This thread was inspired by:
@avalancheavax @el33th4xor @kevinsekniqi @luigidemeo @terra_money @LFG_Reserve @stablekwon @TaschaLabs @thedefiedge @Route2FI @shivsakhuja @CryptoHarry_ @Cov_duk @alpha_pls @DU09BTC @MonetSupply @0xfoobar
@avalancheavax @el33th4xor @kevinsekniqi @luigidemeo @terra_money @LFG_Reserve @stablekwon @TaschaLabs @thedefiedge @Route2FI @shivsakhuja @CryptoHarry_ @Cov_duk @alpha_pls @DU09BTC @MonetSupply @0xfoobar
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