You may have read in the media that central banks are working on fiat digital currencies, and you may have heard the term "stablecoin" a lot.
So what is a stablecoin? Is it the same thing as fiat money or electronic money issued by central banks? Today, we are going to talk about stablecoins.
What is a stablecoin?
Stablesoins, as the name suggests, are cryptocurrencies that maintain a stable exchange ratio with an underlying currency.
The stablecoin you hear about most in blockchain circles is USDT (Teda). Take USDT as an example. It is the token Tether USD (hereinafter referred to as USDT) that anchors the US dollar launched by Tether Company. 1 USDT=1 US dollar.
In addition to USDT, there are also TUSD, GUSD, BitUSD, etc. Of course, there are stablecurrencies anchored to other currencies, such as BitCNY, which is 1:1 anchored to the Renminbi.
You may ask whether the money transferred by wechat or Alipay is stable currency or not. After all, they are also tied 1:1 to the yuan.
In fact, the money in mobile phones and alipay can only be called electronic money, rather than stable currency. If the central bank issues a fiat digital currency in the future, which is anchored to the current YUAN, the fiat digital currency can be called stable currency.
In other words, stablecoins are more than just electronic money. They are also a programmable cryptocurrency, a currency category that didn't exist until the advent of blockchain technology.
How does the stablecoin remain "stable"?
How does the stablecoin maintain its "stable exchange ratio" when the exchange rates of currencies around the world fluctuate?
For the USDT mentioned above, Tether promises to strictly abide by the 1:1 reserve guarantee, that is, for every USDT token issued, its bank account will have a fund guarantee of $1. Users can conduct fund inquiries on the Tether platform to ensure transparency. This is "stability" through "fiat money collateral".
The second stablecoin relies on "digital asset collateral". The typical example is BitCNY, where you can pledge BTS coins to the system and the system gives you BitCNY. Since the price of digital assets will fluctuate, if the price of BTS drops sharply, the total value of BTS coins you mortgaged to the system falls close to the total value of BitCNY coins lent to you by the system, and you do not increase the amount of BTS coins mortgaged by the system, the system will force you to sell BTS coins you mortgaged and repay the BitCNY coins the system gave you. This is similar to a bank mortgage in real life, when the value of the house mortgaging to the bank goes down and you have no ability to increase the collateral, the bank takes the house and sells it to fill the loan to you.
The third stablecoin relies on algorithms to ensure stability. The classic example is Basis, which, like the Fed, adjusts its supply to stabilise its parity with the dollar. However, the Basis project has been discontinued for now.
The role and drawbacks of stablecoins
You may wonder why wechat and Alipay are so convenient.
Indeed, staboins have little use in daily life, and transfer money is not as convenient as wechat and Alipay.
But in the cryptocurrency world, stablecoins have many uses, serving as a bridge between the real world and the crypto world. Cryptocurrency prices are volatile, and stablesoins serve as a measure of value and a hedge against declines.
Of course, the stablecoin is not perfect.
The stablesoin "legal tender collateral", such as USDT mentioned above, is issued by Tether, which lacks financial transparency, and is often suspected of privately issuing USDT for profit.
Stablecoins "secured by digital assets", such as BitCNY mentioned above, fluctuate greatly in the price of BTS coins. When the price drops sharply and is close to insolvency, BTS coins pledged by many investors will be forced to sell below the market price by the system, resulting in further price decline and a series of stock explosion events.
Stablecoins, which rely on algorithms to maintain stability, have even more criticism.
At present, many countries in the world have started to study national digital currencies, and Venezuela has even launched its own national digital currency, the petro. In digital currency research, China's central bank is in the forefront of the world.
National digital currency, also known as fiat digital currency, is a stable currency.