Been in Standard Protocol team for half year, with all the crypto & political dramas in Cefi world, some thoughts on stablecoin do start brewing in my head — Is it just all about enduring for the price peg or something more than that? How should we view the stability of stablecoins?
Indeed, what is stability?
Again this is more as a condensation process of my own learnings, not anything official nor properly academical. It’s not an introductory to this topic either yet do feel free to leave me a comment if you have any questions. Still i do hope this might give you some inspiration on how currency might operate in this crypto era.
Enjoy. :)
Why bother about stability?
Because it’s the value proposition of stablecoin. From a product perspective.
Stablecoin is not strange to most Degens. By googling and you will learn about it’s the crypto token that pegs to a particular price point or range. With the success adaption of Tether & USDC (regardless their backing assets) as well as DAI/MakerDAO during last Defi Summer, market has been well adopted this type of tokens to be one of the essential nutrients within Defi blood. Its “stability”, or more precisely, its to-1-USD peg, indeed bloom the Defi Summer last year and making decentralized finance applications exploded, from saving and lending, margin trading and even layers after layers of yield farming, aka strategies, have been introduced. Crypto enthusiastic certainly enjoy the gains they have been driven from all those innovations, yet seldom question about what exactly bring the stability of a stablecoin token, despite facilitating all the blooming in Defi.
In this short article, I will try to bring up some additional dimensions on seeing this magical token.
Same concept. Different lens.
To begin with, there’re six different angles to view Stability. This may not be the most correct, or academical way to dissect this topic, but should give you an idea next time when you see another “stablecoin” being released.
- Stable at market acceptance
- Stable by convergence
- Stable by promise
- Stable by financial operations
- Stable by intrinsic value
- Stable by purchase power
Let’s begin.
Stable by market acceptance
The most collective understanding from crypto market on stablecoin is that it’s stable when it’s accepted at particular price point. i.e. anything, regardless of its algorithmic or even treasury-backing, as long as it’s accepted by the market at its peg, usually 1 USD per token, then it is a stablecoin. This view in fact only abstract the application side of any stablecoin based on its market acceptance as a currency, regardless any of its fundamental.
Tether is one of the notable example of this, just by launching early in its day, it somewhat wildly accepted despite its fraudfully handled treasury. No offense, but its name in crypto is somewhat infamous.
Stable by convergence
What if, the price could be converge, usually algorithmically, to a particular price point? Ampleforth $AMPL and Frax Protocol $FRAX fall in this category. The former one rebasing the holdings from all the AMPL holder to peg their stablecoin by expanding or shrinking the available circulation in the market, while the latter one, FRAX, uses its Algorithm Market Operation (AMO) to govern the collateralization and even an external money market (on Curve) — both are playing around with the demand-&-supply in the market to ensure their stablecoin will be floating around, or soft-pegging, towards their desire price point. Any converging to an equilibrium is viewed as stable in such perspective.
Let’s just say such view is, well, hard to understand unless you Maths is good.
Stable by promise
Another type of stability is indeed promises, or at least, a belief that the token is convertible to its pegged value. Most of tertiary tier CEX or any centralized custodians would have issued their own “stablecoin”, claiming to be worth a certain price (likely 1 USD) and allowing you to redeem as fiat upon withdrawal, while not necessarily to have any other mechanics or even treasury to back. The redemption as peg is its promise. It’s all about trust, even though in crypto we usually promote trustless-ness. Stability in this sense is indeed no other than words.
Stable by financial operations
A view that adapted from traditional finance. US Dollar itself is based on its treasury bond issuance system when printing dollar bills, relying capitalization on the future values of their currency in exchange for the present circulation. In other words, its stability is fuelled by the complicated financial operation behind the scene, in order to ensure the currency could be represented as its peg, a dollar in US Dollar case.
Some stablecoin like Empty Set Dollar did inspire from USD and tried to stabilize their peg with debt coupon, but it seems failed. So far seems no proven, or yet-to-be-disproved solution on defi yet (except the next one.).
With assumption of following how traditional Cefi has been operating, most CBDC seems likely falling into these view. i.e. as part of its national Monetary policy supported by their own financial framework.
Stable by intrinsic value
This perspective could be one of the most well-established, but often overlooked one. When we talk about if certain assets is “stable”, in this view, we expect not only it’s wildly accepted as its peg, says 1 USD, but also proven to be worth at least the value of its peg. In other words, the “stable token” has intrinsic value of at least 1 USD in this case, and for most of the time, the token is hence backed by certain value of collaterals.
USDC is a notable example with their recent movement to be 1:1 full backed by USD in their off-chain treasury, which, in blockchain terms, require loads of trust to be functionable. In contract, Standard Protocol is based on over-collateralization, meaning that each 1 USD of its stablecoin will be backed by > 1 USD value of collaterals, while sometimes the collateral could be even as high as 2 USD or even 4 USD for each 1 MeterUSD, Standard stabelcoin, minted. This provides a sufficient buffer to endure the volatility as well as making the entire protocol permissionless, trustless, and fully on-chain.
In short, this group sees stability based on the intrinsic value that the token could prove confidently.
Stable by purchase power
Been in the market for half a year, i started to wonder what could be indeed considered as a currency, and exactly what we want to achieve using certain medium (e.g. shells in the old days or bottlecap in Fallout) as value settlement. My initial thought is the current should help exchanging for service not only as a common measurement, but maybe to an extreme, it could help exchanging for the same service for the same amount that we spend.
In economical terms, this view ties the stablecoin to the actual purchase power in the real world. It could be the CPI of a nation, say USD stablecoin tie to US CPI, or just as simple as each stable token could always exchanged (in value) as a McDonald Big Mac. Holding such coin will surely be stable in view of being anti-inflation by default, yet such new concept, despite knowing some newer protocols are tackling this area, would be certainly a huge challenge to tackle.
After all, what IS a stablecoin?
Depends.
The elephant in the room is in fact what value does certain Stablecoin claims to offer. Indeed, what I could recommend is no longer view Stablecoin as stable as they claim to be (a stablecoin), but instead, preserve them as a financial product, a settlement medium, a common currency, which, each of them are indeed a different product that help you to surf on Defi. This, of course, including all the traditional players like USDC, the political battleground CBDC, and our CeDefi solution Standard Protocol.
Baseline, do not believe if something is stable just because it’s claimed to be a stablecoin or a currency. There’re way more variables in this rabbit holes.
And yes my statement applies to innovation from Defi, Cooperates, and national Governments. Including all Fiats. Period. :)
Afterthoughts
The first centralized stablecoin launched years ago has brought quite a noise to crypto space, followed by the first fully-decentralized collateral-based MakerDAO years later and all the subsequent innovations in this area, all have been facilitating not only the rapid growth of decentralized finance but also suggesting to everyone that Stablecoins would be the bridge between Defi & Cefi, presented as the final puzzle to bring crypto into the main stream. Years have passed, now even National Government see the opportunity to claim this untamed cyberspace to strengthen their fiat, with some, wanna challenge USD as the global settlement currency as well. Stablecoin is no longer just a technological playground but soon to be a global movement. Regardless of how it achieve its stability, the winner of this tournament will surely become the new standard in stablecoin stability.
At least, this is my belief, and Standard is where my belief rests. For now.
As always, I hope this brings you some insights in the topics, and feel free to drop me some claps, comments, or even inquiries. You know where to find me. :)
Cheers,
DW
