Chen Gen: Unstable stablecoin is just a game of drumming flowers

Text/Chen Gen

Under the influence of the epidemic, war, and the Federal Reserve's interest rate hikes, in addition to collective calls for the global stock market, cryptocurrencies as high -risk assets have also been treated sharply. At present, the storm of the cryptocurrency industry is still continuing. It is worth mentioning that the storm set off in this cryptocurrency industry is inseparable from the plunge of stable currency that is regarded as "stable".

On May 6, LUNA coins known as the "Moutai of the Currency Circle" began to encounter market changes, and its currency value fell from $ 85 to $ 80. Then it fell all the way. By May 12, the price of Luna had fallen to 6 cents -and less than one month ago, its price was close to $ 120. Luna is the mortgage coin of Terraust, the third largest stabilized coin in the currency circle.

What are the mechanisms and principles behind the stabilization currency system? What risks do they include? Under the cryptocurrency storm, perhaps, people will eventually know that the "stability" of stable currency is the largest trap with stablecoin.

Why is it stablecoin?

In essence, cryptocurrencies are a set of "tokens+bookkeeping systems". Among them, the bookkeeper system is the blockchain (distributed ledger), and the tokens running on the blockchain are cryptocurrencies. The tokens are only a string of digital in the blockchain bookkeeping system. It has no inherent value itself. Only by giving it a certain value can it be associated with the value system in the real world.

Depending on the different ways of assignment, tokens can be divided into two categories: one is the original generation currency (built -in token) of the blockchain, which refers to the tokens that are attached to the blockchain system and generated and used in the system; the other The class is the assets that are issued on the blockchain and to represent an external asset to support tokens.

At present, cryptocurrencies on the market are basically built -in tokens. For example, Bitcoin is the tokens of the Bitcoin blockchain system, and Ethereum is the tokens in the Ethereum system. In these systems, tokens play a role in avoiding spam transactions and the normal operation of the incentive system.

In fact, cryptocurrencies are indeed a successful creation, and the blockchain as its technical foundation is even more considered a technology that is sufficient to become a new generation of Internet infrastructure. Since its birth in 2009, cryptocurrencies have rapidly swept the world in recent years due to their limited quantity, decentralization, and semi -anonymous characteristics, attracting many attention. People use the blockchain to create a variety of cryptocar and try to use them as alternatives of fiat currency.

However, it is obvious that it is difficult to replace the fiat currency with cryptocurrencies. As we all know, currencies need to fulfill the functions of trading medium, value storage, and investment methods. Among these functions, trading medium is the most important. To become a trading medium, it must be easy to use -not only is it easy to carry and settle, but its own value also needs to be very stable.

Cryptocurrencies are affected by huge fluctuations -there are many reasons for volatility, and constantly changing public views, emerging markets, static monetary policies, and markets that are not regulated. Therefore, cryptocurrencies are not only difficult to act as exchange media and account units, but also difficult to play the role of regulating the macroeconomic.

Imagine that if someone wants to pay a $ 1,000 fee with Bitcoin, then from the time he completed the payment to the other party, the Bitcoin, which was originally worth $ 1,000, may have depreciated to $ 900, or or It has appreciated to $ 1100. The previous situation will cause the payment to be completed, and the latter case will lead to the loss of the payment.

Therefore, in order to solve the problem of volatility, stabilized currency came into being. The so -called stablecoin refers to a series of cryptocurrencies that maintain a relatively stable comparison with the price comparison with the legal currency through a series of arrangements and technologies. These arrangements are basically stabilizing some currency stabilization mechanisms that imitate the legal currency, but it has been implemented with some new technical means.

First, the reserve is set up. Putting some assets, such as the legal currency or Ethereum, such as the US dollar, etc., are reserved as the reserve to support and maintain the price of stable currency, just like a legal reserve. Secondly, it is a promise to pay. Investors have claims on the reserve and allow the original monetary assets with stable currency. The last is to believe in the number of currency quantity. When the price of stable currency fluctuates largely, buying and selling through smart contracts and other means, similar to the open market operation of the central bank, thereby increasing or reducing the number of stable coins in circulation to reach the stable price the goal of.

Of course, "stability" is a relative concept. For example, the value of a certain currency may always be $ 1, but the value of the US dollar itself may fluctuate. Therefore, if the value of gold or other assets is measured, its value is measured, and its value It may still fluctuate.

Stable currency is not "stable"

In fact, the earliest banknotes issued by precious metals can be regarded as stable coins. The US dollar under the "Bretton Forest System" after World War II was also a stablecoin at that time. At that time, because the US government had enough gold reserves, it was announced to the world that the US dollar and gold are linked, and the value of 1 US dollar is fixed to fixed to the value of US dollars. 0.888671 grams of gold. As long as people are willing, they can take the dollar to redeem the corresponding amount of gold. As long as there are enough gold reserves, this stable relationship can be maintained forever.

Based on the idea of ​​stable currency, people divide cryptocurrencies into three categories: stable currencies that are mortgaged, cryptocurrencies as mortgages, and stable currencies without low bonding. Among the stable currencies of the fiat currency, the most typical case is USDT issued by Tether, also known as TED. Each Tether issued and circulated has $ 1 US dollar cash and US Treasury bonds as reserves. The corresponding US dollar is stored in Tether Co., Ltd. risk. In other words, users can exchange fiat currency with a fixed exchange rate of 1: 1, and vice versa. If the price of stable currency deviates from the target, arbitrage transactions will quickly return its price to a fixed exchange rate. The limitations of this stablecoin lies in the centralization, opaque, non -stored funds or the cost of redeeming the certificate and mortgage costs.

The operating method of stable currency with cryptocurrency as a reserve is similar to stable currency with fiat currency as a reserve. The difference is that it does not use US dollars or other fiat currency, but cryptocurrency as a reserve asset, that is, the mortgage that supports stable currencies itself is a decentralized crypto asset. This method allows users to create stable currencies by locking the mortgage that exceeds the total currency.

However, the mortgage of stable currency is usually an unstable encrypted asset, such as ETH, if the value of this asset drops too fast, then the stable currency does not have sufficient value mortgage. Therefore, most projects using this model require stable currency to have excess mortgages to prevent violent price fluctuations.

The stable currency without low betting is based on the stabilization mechanism of the coinage tax shares/decentralized banks/algorithms. Unsecured stable coins usually involve some guarantee positions, algorithm rules and complex stable mechanisms. It stabilizes the supply of currencies by expanding algorithm extensions and shrinking prices, just like the central bank does a fiat currency. The issuance of stablecoins is managed by algorithms and smart contracts, similar to the monetary policy of the central bank. Relatively speaking, the number of algorithms stabilizes currency is much less than stable coins supported by reserves, and it is more difficult to run.

In this model, some stable coins are linked directly with assets such as the US dollar after the initial distribution. As the total demand for stable currency increases or decreases, the amount of currency supply will automatically change. The limitations are that the stability is usually maintained by the centralized mechanism. The monetary policy is still complicated, unclear, not proven, and incentive measures may not be enough. UST is the representative currency of algorithm stabilization currency.

However, whether it is a stable currency that is mortgaged, the cryptocurrency is used as the stable currency of the mortgage, or the stable currency without low collateral. From the current situation, the actual effects of these stable coins are not ideal. For example, Tether issued USDT in 2017, which claims to be with the US dollar with a redeeming ratio of 1: 1; supports 100%of the legal currency assets and put it in the reserve account of the hosting bank. This is such a good stable currency that sounds good, but the critics are considered a black box -the operation is opaque, rejects external audits, and is suspected of being abused. Intervention in the investigation.

Fall from LUNA to USS

Back to this day, let's look at the collapse of stable currency in this cryptocurrency.

Terra was a blockchain project launched in January 2018. It was built by a company called Terraform Labs. The main network was launched in mid -2019. Luna is a native cryptocurrency of the Terra chain, with a initial issue of 1 billion, and a considerable part of the LUNA is held by Terraform Labs.

Terra's original vision was to create a set of stable coins linked to fiat currency to reduce the cost of e -commerce transaction and optimize real -time payment. As a result, Terra issued a series of stable coins linked to various fiat currency, such as Terra CNY, an anchored RMB, and Terra Eur, which anchor the euro. The largest market value is the anchored US dollar Terra USD, referred to as USS. It is worth noting that these stable coins are linked to fiat currency but there are no fiat currency as a reserve.

Before the collapse of May in early May, the UST was the third stablecoin in the global market value, second only to USDT and USDC. USDT and USDC are both stable coins of sufficient fiat currency reserves, and UST is algorithm stable coins, using the "dual currency stabilization" mechanism, that is, to maintain the UST price through mutual conversion between LUNA and USST Stablize.

According to the design, 1 USS is equal to LUNA worth $ 1. In other words, a LUNA can exchange for the number of UST depends on the price of LUNA. When the price of LUNA is $ 10, 1 LUNA can be exchanged for 10 USS. If the price of LUNA rises to $ 100, then 1 LUNA can be exchanged for 100 USS. In addition, USST and LUNA are the relationship between "two -way destruction and casting". When the user uses LUNA to exchange USS, Terra will destroy a $ 1 LUNA while casting a USD. Similarly, when the user uses UNA to exchanges LUNA, it will destroy 1 USS while casting a $ 1 LUNA.

If the USS price falls below $ 1, traders will be able to recover its price through programming code "Burn", and these traders will obtain the equivalent value of LUNA. As the supply of LUNA increases, it will increase, and its supply will increase, and its supply will increase. The price will fall. Conversely, if the US price is higher than $ 1, this mechanism will return the US $ 1. In the process, traders are favorable. Assuming the US will fall to $ 0.99, traders will earn 1 US dollar earnings when they get LUNA worth $ 1. In addition, in order to attract investors to participate, the development of the UST Terra algorithm stablecoin platform has also set up a Defi project Anchor Protocol, which focuses on deposits and loans, and promises to provide UST with about 20%of ultra -high -life yields. To maintain such a high current rate of return, Anchor needs to bear at least 1.37 billion U.S. dollars a year. Although it was sustainable in the long run, with the market value of more than $ 40 billion in Terra at that time, this expenditure was not unbearable in the short term. Facts also prove that such operating mechanisms performed well in the bull market. The US circulation supply has increased from US $ 2 billion within a year to $ 18.5 billion.

During the rising period of the LUNA/USST project, there is no problem with the "two -way destruction and casting" mechanism. The project party creates the US use scenario and attracts users to enter, and the user needs push the US casting scale. The continuous entry of users has continued to increase the demand for LUNA used to cast UST. The price of LUNA has risen, and its market value is getting higher and higher. At this time, the transformation between LUNA and USS and the user's arbitrage transactions can maintain the US $ 1 level.

But this mechanism is not stable. When the project declines or the market situation deteriorates, the price of UST cannot be linked to the US dollar for a long time, and if Terra does not buy UST on the market to support its price, the end result is that both the market value of LUNA and the UST both plummeted or even zero to zero zero. For example, now.

On April 26, 2022, an Internet celebrity issued a warning in Twitter, saying that the reserve of the Anchor agreement will be exhausted in about 50 days. You know, the user's demand for UST is based on a single high interest. If ANCHOR's income reserves change or the yield starts to decrease, people will start selling USS and cast LUNA to earn the difference.

In this context, in early May, users began to withdraw a large number of UST from Anchor. From May 6th to 9th, Anchor Protocol's USS deposits fell from the original $ 14 billion to 8.7 billion, and the loss of more than one -third of the bank was equal to the cryptocurrency version of the bank extrusion. A large number of selling UST means losing confidence in Terra ecosystem. This further stimulates more investors to sell USS and LUNA tokens to form a chain reaction, resulting in a sharp decline in the price of the two, which detonates the panic of the entire market.

Drumming game

In fact, algorithms such as UST are largely based on user confidence. Once the user's confidence is lost, it will easily form a "death spiral" that sells for sale, and the project party does not have enough reserves to support the currency value of LUNA and UST. The collapse of the entire stablecoin system is inevitable.

After all, the blockchain technology behind Bitcoin has its own commendable technical value and application field. However, a large number of cottages issued by the cryptocurrency boom are essentially a game of drumming flowers. These cottage coins do not have any basic value support. Once the market is expected to reverse, the risk of stamping has the risk of zero.

You know, as an algorithm stable coin faucet, UST was once highly hoped -before the collapse, UST was the third largest stablecoin in the world, and the market value of LUNA once ranked fifth among all cryptocurrencies. Such a pair of digital currencies with a total market value of tens of billions of dollars are almost zero in just one week. From LUNA to the UST to take off anchoring, it indicates that the Terra project will almost fail, and Terra's sighing ending will also bring devastating blows to the algorithm stablecoin.

It is undeniable that in the entire blockchain economic system, stablecoin plays the role of cornerstone. However, although there are currently many stablecoins on the market, they all contain a lot of risks: pure algorithm stable coins need not be said, the collapse of UST has explained everything;

The USDT such as the mortgage mortgage of the physical assets, whether the assets are sufficient, whether the quality of the mortgage asset is high quality, etc., there are also great problems. USDT and USDC have not yet released a complete public audit report.

Even the cryptocar, which is similar to DAI through mortgage cryptocar, will be greatly influenced by the entire cryptocar market, and rely on community operations highly. The stability of the currency value is easily affected and the risks are still great.

In the final analysis, although stable currency is called the "holy grail" of cryptocurrencies, it can greatly reduce the threshold for entering the cryptococcling market. Many different projects are issued in various ways to issue stablecoins or are under development. Clear best practice. These stable currency cannot ensure the issuer's credit, and lacks mechanisms and capabilities that effectively maintain price stability.

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