PanatagamaA Deep Dive Into IPFS: Filecoin
As the centralized services have become an increasingly critical part of how we live our lives online, so the need for alternatives becomes ever greater. Humanity will need a better internet that can harness the web infrastructure far more efficiently. That’s where project like Filecoin comes in, let’s dig in!.Demystifying Storage with IPFSThis section will explain a bit technical about IPFS, we will discuss how Filecoin solves each and every drawback of IPFS to become a pioneer in providing ...
PanatagamaInvestment Club: Traditional Equity, Tokens, and NFTs
The interest in investing has really grown up lately. People believe that investing is an effective way to put their money to work and potentially build wealth. They firmly believe, based on past information that supports, smart investing allows your money to hedge against inflation and increase its value. Basically, a theory of predicting future performance based on past information. The growth of investing primarily comes from a simple quantitative framework—compounding and risk-return trad...
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PanatagamaA Deep Dive Into IPFS: Filecoin
As the centralized services have become an increasingly critical part of how we live our lives online, so the need for alternatives becomes ever greater. Humanity will need a better internet that can harness the web infrastructure far more efficiently. That’s where project like Filecoin comes in, let’s dig in!.Demystifying Storage with IPFSThis section will explain a bit technical about IPFS, we will discuss how Filecoin solves each and every drawback of IPFS to become a pioneer in providing ...
PanatagamaInvestment Club: Traditional Equity, Tokens, and NFTs
The interest in investing has really grown up lately. People believe that investing is an effective way to put their money to work and potentially build wealth. They firmly believe, based on past information that supports, smart investing allows your money to hedge against inflation and increase its value. Basically, a theory of predicting future performance based on past information. The growth of investing primarily comes from a simple quantitative framework—compounding and risk-return trad...
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A functional currency should be a means of exchange, a unit of account, and a store of value at the same time. Cryptocurrencies thrive at the first, but they perform poorly (ineffective) as a store of value or unit of account (price fluctuates everday, everywhere all at once).
This is where stablecoins come in. Stablecoins are price-stable cryptocurrencies, which means that their market price of a stablecoin is pegged to another stable asset (US dollar), functioning as branch out into mainstream banking to ease the cost and burdens of making payments. For normies (non-crypto), it might not be obvious why stablecoin exist today, in term of search the shed of light—let’s dive into it!
Fiat currencies are prone to fluctuation of exchange rates, diminishing purchasing power, and inflation. These fluctuations are exacerbated in the realm of cryptocurrencies, which are subject to massive volatility, making them appealing to speculators yet also impractical for mainstream use. In their most simplistic form, stablecoins are simply cryptocurrencies with stable prices measured in fiat currency.
The volatility of a cryptocurrency may fuel speculation—prevents mainstream adoption of applications built on top of protocols, but it subsequently (in the near future) hinders real-world adoption; precludes derivatives, blockchain-based loans, prediction markets, and other longer-term smart contracts that require price stability.
Price volatility may also prevented a currency from retaining its medium of exchange and store of value properties—defining prices for goods and services becomes more difficult as prices fluctuate, deeming the currency unsuitable as a unit of account. Therefore the adoption of stablecoins will be a catalyst to the new decentralized internet becoming mainstream.
But what type of "stable" mechanism is required to counteract volatility?, a perfectly engineered stablecoin is the key to achieve the essential properties of a currency. Graphic bellow summarize it.
As cryptocurrencies, stablecoins use blockchain technology to run their smart contracts. Stablecoins are often backed by an external asset class, while others rely on complicated algorithms to maintain their value. By being on chain, these assets gain the underlying protocol's security, speed, and ease of use while retaining a fixed value in the historically volatile cryptocurrency market; provide stable pairings for foundation of liquidity pools, and are regarded as a core DeFi infrastructure.
Stablecoins are the fundamental Decentralized Finance (DeFi) money component (specific category of cryptoassets), the essential denomination—basic primitive that use various mechanisms to maintain their value at one unit of account
Stablecoins typically have low volatility; serve as the basic building block for simple and much more complex financial products, provide a familiar mechanism to transfer capital and store value that easily bridgeable to traditional finance, and enable investors to exit positions on chain by acting as a safe haven during market volatility, but what is the price for it?.
A stablecoin proclaims to be an asset that prices itself rather than an asset that is valued by supply and demand; stablecoins are just currency pegs, and currency pegs are far from impossible—numerous currency pegs are still being maintained. However, practically all major central banks have abandoned currency pegs. This is due in part to the realization that currency pegs are rigid (inflexible) and difficult to maintain, efficiently, no currency peg can be maintained against sufficiently adverse conditions.
The reality is, any peg can be maintained, but only within a particular band range of market behavior. The band may be broader for certain pegs than others. But it’s straightforwardly true that under certain market conditions, it's possible to maintain a peg.
To summarize, an ideal stablecoin should be able to withstand significant market volatility, be relatively inexpensive to maintain, should have easy to analyze stability parameters, and should be transparent to traders and arbitrageurs. These features maximize its real-world stability.
Generally speaking, newer and larger stablecoins do not fail as aresult of the use of an algorithm, but rahter due to “collateral design”. The relative risk with respect to the latter usually boils down to:
How much collateral is required by the protocol to mint the stablecoins
The quality of the assets making up the collateral
When “stability” comes into play, there is a dimension in which different stablecoin schemes emerge to fill the gaps. There are taxonomy of stablecoins includes three families: fiat-collateralized coins, crypto-collateralized coins, and non-collateralized coins.
Stablecoins are the most straightforward way to create a stable currency. A certain amount of fiat currency is deposited as a collateral and coins are issued 1:1 against this fiat money, such as USDT, USDC, BUSD. Although this method is simple and robust, it requires a central party (custodian) which guarantees the issuance and redeemability of the stablecoin. Regular audits are needed to ensure that the stablecoin is indeed fully collateralized. Naturally, other pegs backed by interchangeable assets such as gold, silver or oil are also possible; linked to a specific amount of the commodity and stored in a known location—frequently subject to outside audits (collateralized, i.e. PAX Gold, DGX)
999999999999% price-stable
Simplest (a big virtue!!!)
Less vulnerable to hacks, since no collateral is held on the blockchain
Comodity stablecoins give investors the opportunity to trade tangible assets, along with the ability to accumulate value over time
It can affected by the health of the asset they’re pegged to. For instance, If the value of the USD is debased, it affects the value of USDT and other off-chain collateralized stablecoins.
Centralized — need a trusted custodian to store the fiat (otherwise vulnerable to brick and mortar theft)
Regulation always poses a risk with these centralized—need regular audits to ensure transparency
Counterparty risk—the value of the stablecoin will spiral downwards if the company's cash reserves don't exist
Expensive and slow liquidation into fiat
Stablecoins work quite similar to their fiat-counterparts, with the exception that the collateral is not an asset in the “real-world” but rather another cryptocurrency. To account for the price-volatility of the underlying crypto-collateral, these stablecoins are often over-collateralized. The most popular crypto-collateralized stablecoin currently is DAI; minted by users who deposit assets like ETH and USDC as collateral into the Maker protocol. In doing so, users effectively take out a loan in DAI by collateralizing their crypto assets.
However, in case of a black swan event, where the underlying asset becomes completely worthless, the stablecoin would collapse too. In this case the loss-exposure would even be amplified for the stablecoin owners because of the over-collateralization. This is also why some experts are strongly discouraging this approach.
More decentralized (trustless)—there is no counterparty risk, resistant to censorship and government regulation
Can liquidate quickly and cheaply into underlying crypto collateral (just a blockchain transaction)
Very transparent — easy for everyone to inspect the collateralization ratio of the stablecoin
Can be used to create leverage
Can be auto-liquidated during a price crash into underlying collateral
Less price stable than fiat, over-collateralized to manage volatility
Tied to the health of a particular cryptocurrency (or basket of cryptocurrencies)
Inefficient use of capital
Most complexity
Stablecoins are not actually “backed” by anything other than the expectation that they will retain a certain (the assets backing up the outstanding stablecoins), often says as “algorithmic stablecoins”. One often-mentioned solution to non-collateralized stablecoins is the seigniorage shares approach. This concept builds on smart contracts that algorithmically (it uses both for liquidations and to maintain the stablecoin peg) expand and contract the supply of the price-stable currency much like a central bank does with fiat currencies, but in a decentralized manner, for reference: USTC, USDN, AMPL, FEI, FRAX.
No (need to lock up) collateral required—capital efficient
Most decentralized and independent (not tied to any other cryptocurrency or to fiat)
Just like crypto-collateralized stablecoins—do not have counterparty risk
The seigniorage mechanism is defined by audited, open-source, smart contract code that can be viewed by everyone
Requires continual growth
Most vulnerable (high-risk) to crypto decline or crash, and cannot be liquidated in a crash
Difficult to analyze safety bounds or health
Some complexity
Despite the volatility that the crypto market is known for, the growth of the stablecoin market is unphased by this unpredictability. Market capitalization growth is at an exponential pace despite the extremely low adoption outside of the crypto industry.
Stablecoin are here to stay; represent a large growth sector in digital assets, provides a crucial on-ramp to the crypto ecosystem. But as In times of high volatility, the chances of breaking the peg increases—especially for those stablecoins that are not sufficiently backed by assets in their treasury. This is particularly concerning when we realize that high volatility in crypto markets is very common. As a result, there is a sense of doubt that has been cast over the industry.
Some may argue stablecoin critics suspect that stablecoins, particularly crypto-collateralized stablecoins, are inevitably doomed to fail, because even over-collateralized stablecoins would collapse in the face of a black swan event. Others doubt that pegging a cryptocurrency to a fiat currency such as the US Dollar is the right fundamental problem to solve in the first place.
With this argument, an actual stablecoin should not be stable in relation to a fiat currency, but rather remain stable in its purchasing power. Only time will tell whether a mainstream stablecoin emerges.
Smart contracts might help maintain the (constant) value of a stablecoin and make it a viable unit of account.
The outstanding problem, however, is that smart contracts brings a unique set of risks to the table ranging from treasury management to censorship and no team has been able to develop a universally accepted stablecoin that does not compromise features of either privacy, security or decentralization.
Another concern that smart contracts represent is that the currency control can be compromised in such a way that causing the treasury could be mismanaged. This manipulation might involve currency hyperinflation or the removal of treasury funds. In the governance case related to the treasury, compromise of the stablecoin can be caused through a failure in governance to act in the best interests of the stablecoin. If the coin contains treasury reserves that are maintained in secrecy and do not have transparent audits, holders may be concerned since this is seen as less transparent than central banking.
Crypto collateralized stablecoins offer transparency into the governance and treasury but if they are using on-chain governance it is feasible to game the governance architecture and essentially take control of the protocol managing the stablecoin treasury.
On-chain governance has been exploited with devastating effects, drawing attention to the necessity for careful vigilance with all on-chain components of the stablecoin.
In the centralization risk, certain stablecoins have the capacity to censor users the use of them may not be desirable as this is the same effect as having their assets frozen. It reflect with the assumption that people can have custody over the stablecoin isn’t a given with every design. For example, financial institution may utilize a stablecoin to perform transactions on your behalf, but the institution retains custody of the stablecoins.
Institutions may decide that they do not want custody of public forms of crypto but instead want to capitalize on the strengths of crypto by using private blockchains and tokenized assets defined by an institution or group of institutions such as banks, whereas the government may choose to ban certain digital assets in favor of government-issued tokens there is a risk that governments may choose technology managed by the state (central bank denominated currencies depending on people jurisdication).
The crypto industry seeks consistent and clear regulation across a wide range of jurisdictions that span not just countries but smaller authorities such as states and provinces, which further complicates compliance.
Modernization of regulatory frameworks must embrace the distinct properties of digital assets while also acknowledging that many of the existing products are designed to be genuinely decentralized and trustworthy on an international scale.
Until laws are reworked, or new laws are introduced, the crypto industry still faces a degree of uncertainty until more clarity is in place. The crypto industry is more advanced these days, and lobby groups are more common to advocate for the use of digital assets and finance.
As for assessing the quality of the assets, it’s useful to separate “undercollateralized pegged coins” (including those using endogenous collateral) from the categories of “algorithmic” and “stablecoins” to add more nuance to policy discussions prioritizing consumer protection and supporting innovation.
A successful implementation of a stablecoin could potentially be a major catalyst for fundamental long-term innovation in the crypto ecosystem. Lack of price stability prevents cryptocurrencies from displacing most forms of fiat money and enabling decentralized applications, stablecoins can provide the solution. A broadly established fiat-free currency that’s price stable will likely challenge the legitimacy of weak government issued currencies around the world—until then, let’s debunking myth around this industry.
https://decrypt.co/resources/stablecoins
https://ethereum.org/en/stablecoins/
https://medium.com/dragonfly-research/a-visual-explanation-of-algorithmic-stablecoins-9a0c1f0f51a0
https://newsletter.banklesshq.com/p/the-stablecoin-wars-5c4
https://newsletter.banklesshq.com/p/rise-of-the-cryptodollar
https://www.theblock.co/data/decentralized-finance/stablecoins
A functional currency should be a means of exchange, a unit of account, and a store of value at the same time. Cryptocurrencies thrive at the first, but they perform poorly (ineffective) as a store of value or unit of account (price fluctuates everday, everywhere all at once).
This is where stablecoins come in. Stablecoins are price-stable cryptocurrencies, which means that their market price of a stablecoin is pegged to another stable asset (US dollar), functioning as branch out into mainstream banking to ease the cost and burdens of making payments. For normies (non-crypto), it might not be obvious why stablecoin exist today, in term of search the shed of light—let’s dive into it!
Fiat currencies are prone to fluctuation of exchange rates, diminishing purchasing power, and inflation. These fluctuations are exacerbated in the realm of cryptocurrencies, which are subject to massive volatility, making them appealing to speculators yet also impractical for mainstream use. In their most simplistic form, stablecoins are simply cryptocurrencies with stable prices measured in fiat currency.
The volatility of a cryptocurrency may fuel speculation—prevents mainstream adoption of applications built on top of protocols, but it subsequently (in the near future) hinders real-world adoption; precludes derivatives, blockchain-based loans, prediction markets, and other longer-term smart contracts that require price stability.
Price volatility may also prevented a currency from retaining its medium of exchange and store of value properties—defining prices for goods and services becomes more difficult as prices fluctuate, deeming the currency unsuitable as a unit of account. Therefore the adoption of stablecoins will be a catalyst to the new decentralized internet becoming mainstream.
But what type of "stable" mechanism is required to counteract volatility?, a perfectly engineered stablecoin is the key to achieve the essential properties of a currency. Graphic bellow summarize it.
As cryptocurrencies, stablecoins use blockchain technology to run their smart contracts. Stablecoins are often backed by an external asset class, while others rely on complicated algorithms to maintain their value. By being on chain, these assets gain the underlying protocol's security, speed, and ease of use while retaining a fixed value in the historically volatile cryptocurrency market; provide stable pairings for foundation of liquidity pools, and are regarded as a core DeFi infrastructure.
Stablecoins are the fundamental Decentralized Finance (DeFi) money component (specific category of cryptoassets), the essential denomination—basic primitive that use various mechanisms to maintain their value at one unit of account
Stablecoins typically have low volatility; serve as the basic building block for simple and much more complex financial products, provide a familiar mechanism to transfer capital and store value that easily bridgeable to traditional finance, and enable investors to exit positions on chain by acting as a safe haven during market volatility, but what is the price for it?.
A stablecoin proclaims to be an asset that prices itself rather than an asset that is valued by supply and demand; stablecoins are just currency pegs, and currency pegs are far from impossible—numerous currency pegs are still being maintained. However, practically all major central banks have abandoned currency pegs. This is due in part to the realization that currency pegs are rigid (inflexible) and difficult to maintain, efficiently, no currency peg can be maintained against sufficiently adverse conditions.
The reality is, any peg can be maintained, but only within a particular band range of market behavior. The band may be broader for certain pegs than others. But it’s straightforwardly true that under certain market conditions, it's possible to maintain a peg.
To summarize, an ideal stablecoin should be able to withstand significant market volatility, be relatively inexpensive to maintain, should have easy to analyze stability parameters, and should be transparent to traders and arbitrageurs. These features maximize its real-world stability.
Generally speaking, newer and larger stablecoins do not fail as aresult of the use of an algorithm, but rahter due to “collateral design”. The relative risk with respect to the latter usually boils down to:
How much collateral is required by the protocol to mint the stablecoins
The quality of the assets making up the collateral
When “stability” comes into play, there is a dimension in which different stablecoin schemes emerge to fill the gaps. There are taxonomy of stablecoins includes three families: fiat-collateralized coins, crypto-collateralized coins, and non-collateralized coins.
Stablecoins are the most straightforward way to create a stable currency. A certain amount of fiat currency is deposited as a collateral and coins are issued 1:1 against this fiat money, such as USDT, USDC, BUSD. Although this method is simple and robust, it requires a central party (custodian) which guarantees the issuance and redeemability of the stablecoin. Regular audits are needed to ensure that the stablecoin is indeed fully collateralized. Naturally, other pegs backed by interchangeable assets such as gold, silver or oil are also possible; linked to a specific amount of the commodity and stored in a known location—frequently subject to outside audits (collateralized, i.e. PAX Gold, DGX)
999999999999% price-stable
Simplest (a big virtue!!!)
Less vulnerable to hacks, since no collateral is held on the blockchain
Comodity stablecoins give investors the opportunity to trade tangible assets, along with the ability to accumulate value over time
It can affected by the health of the asset they’re pegged to. For instance, If the value of the USD is debased, it affects the value of USDT and other off-chain collateralized stablecoins.
Centralized — need a trusted custodian to store the fiat (otherwise vulnerable to brick and mortar theft)
Regulation always poses a risk with these centralized—need regular audits to ensure transparency
Counterparty risk—the value of the stablecoin will spiral downwards if the company's cash reserves don't exist
Expensive and slow liquidation into fiat
Stablecoins work quite similar to their fiat-counterparts, with the exception that the collateral is not an asset in the “real-world” but rather another cryptocurrency. To account for the price-volatility of the underlying crypto-collateral, these stablecoins are often over-collateralized. The most popular crypto-collateralized stablecoin currently is DAI; minted by users who deposit assets like ETH and USDC as collateral into the Maker protocol. In doing so, users effectively take out a loan in DAI by collateralizing their crypto assets.
However, in case of a black swan event, where the underlying asset becomes completely worthless, the stablecoin would collapse too. In this case the loss-exposure would even be amplified for the stablecoin owners because of the over-collateralization. This is also why some experts are strongly discouraging this approach.
More decentralized (trustless)—there is no counterparty risk, resistant to censorship and government regulation
Can liquidate quickly and cheaply into underlying crypto collateral (just a blockchain transaction)
Very transparent — easy for everyone to inspect the collateralization ratio of the stablecoin
Can be used to create leverage
Can be auto-liquidated during a price crash into underlying collateral
Less price stable than fiat, over-collateralized to manage volatility
Tied to the health of a particular cryptocurrency (or basket of cryptocurrencies)
Inefficient use of capital
Most complexity
Stablecoins are not actually “backed” by anything other than the expectation that they will retain a certain (the assets backing up the outstanding stablecoins), often says as “algorithmic stablecoins”. One often-mentioned solution to non-collateralized stablecoins is the seigniorage shares approach. This concept builds on smart contracts that algorithmically (it uses both for liquidations and to maintain the stablecoin peg) expand and contract the supply of the price-stable currency much like a central bank does with fiat currencies, but in a decentralized manner, for reference: USTC, USDN, AMPL, FEI, FRAX.
No (need to lock up) collateral required—capital efficient
Most decentralized and independent (not tied to any other cryptocurrency or to fiat)
Just like crypto-collateralized stablecoins—do not have counterparty risk
The seigniorage mechanism is defined by audited, open-source, smart contract code that can be viewed by everyone
Requires continual growth
Most vulnerable (high-risk) to crypto decline or crash, and cannot be liquidated in a crash
Difficult to analyze safety bounds or health
Some complexity
Despite the volatility that the crypto market is known for, the growth of the stablecoin market is unphased by this unpredictability. Market capitalization growth is at an exponential pace despite the extremely low adoption outside of the crypto industry.
Stablecoin are here to stay; represent a large growth sector in digital assets, provides a crucial on-ramp to the crypto ecosystem. But as In times of high volatility, the chances of breaking the peg increases—especially for those stablecoins that are not sufficiently backed by assets in their treasury. This is particularly concerning when we realize that high volatility in crypto markets is very common. As a result, there is a sense of doubt that has been cast over the industry.
Some may argue stablecoin critics suspect that stablecoins, particularly crypto-collateralized stablecoins, are inevitably doomed to fail, because even over-collateralized stablecoins would collapse in the face of a black swan event. Others doubt that pegging a cryptocurrency to a fiat currency such as the US Dollar is the right fundamental problem to solve in the first place.
With this argument, an actual stablecoin should not be stable in relation to a fiat currency, but rather remain stable in its purchasing power. Only time will tell whether a mainstream stablecoin emerges.
Smart contracts might help maintain the (constant) value of a stablecoin and make it a viable unit of account.
The outstanding problem, however, is that smart contracts brings a unique set of risks to the table ranging from treasury management to censorship and no team has been able to develop a universally accepted stablecoin that does not compromise features of either privacy, security or decentralization.
Another concern that smart contracts represent is that the currency control can be compromised in such a way that causing the treasury could be mismanaged. This manipulation might involve currency hyperinflation or the removal of treasury funds. In the governance case related to the treasury, compromise of the stablecoin can be caused through a failure in governance to act in the best interests of the stablecoin. If the coin contains treasury reserves that are maintained in secrecy and do not have transparent audits, holders may be concerned since this is seen as less transparent than central banking.
Crypto collateralized stablecoins offer transparency into the governance and treasury but if they are using on-chain governance it is feasible to game the governance architecture and essentially take control of the protocol managing the stablecoin treasury.
On-chain governance has been exploited with devastating effects, drawing attention to the necessity for careful vigilance with all on-chain components of the stablecoin.
In the centralization risk, certain stablecoins have the capacity to censor users the use of them may not be desirable as this is the same effect as having their assets frozen. It reflect with the assumption that people can have custody over the stablecoin isn’t a given with every design. For example, financial institution may utilize a stablecoin to perform transactions on your behalf, but the institution retains custody of the stablecoins.
Institutions may decide that they do not want custody of public forms of crypto but instead want to capitalize on the strengths of crypto by using private blockchains and tokenized assets defined by an institution or group of institutions such as banks, whereas the government may choose to ban certain digital assets in favor of government-issued tokens there is a risk that governments may choose technology managed by the state (central bank denominated currencies depending on people jurisdication).
The crypto industry seeks consistent and clear regulation across a wide range of jurisdictions that span not just countries but smaller authorities such as states and provinces, which further complicates compliance.
Modernization of regulatory frameworks must embrace the distinct properties of digital assets while also acknowledging that many of the existing products are designed to be genuinely decentralized and trustworthy on an international scale.
Until laws are reworked, or new laws are introduced, the crypto industry still faces a degree of uncertainty until more clarity is in place. The crypto industry is more advanced these days, and lobby groups are more common to advocate for the use of digital assets and finance.
As for assessing the quality of the assets, it’s useful to separate “undercollateralized pegged coins” (including those using endogenous collateral) from the categories of “algorithmic” and “stablecoins” to add more nuance to policy discussions prioritizing consumer protection and supporting innovation.
A successful implementation of a stablecoin could potentially be a major catalyst for fundamental long-term innovation in the crypto ecosystem. Lack of price stability prevents cryptocurrencies from displacing most forms of fiat money and enabling decentralized applications, stablecoins can provide the solution. A broadly established fiat-free currency that’s price stable will likely challenge the legitimacy of weak government issued currencies around the world—until then, let’s debunking myth around this industry.
https://decrypt.co/resources/stablecoins
https://ethereum.org/en/stablecoins/
https://medium.com/dragonfly-research/a-visual-explanation-of-algorithmic-stablecoins-9a0c1f0f51a0
https://newsletter.banklesshq.com/p/the-stablecoin-wars-5c4
https://newsletter.banklesshq.com/p/rise-of-the-cryptodollar
https://www.theblock.co/data/decentralized-finance/stablecoins
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