Stablecoins have always played a crucial role in the cryptocurrency industry, and they can even be considered the cornerstone of the crypto economy. Essentially, stablecoins are issued by protocols or entities with the aim of providing stable price expectations through on-demand liabilities. Stablecoins and their underlying mechanisms must ensure the stability of their prices. However, upcoming regulatory policies and severely limited liquidity pose challenges to the stability of stablecoins.
1.What are Stablecoins?
Stablecoins are digital currencies that are pegged to reserve assets such as fiat currencies or gold. They are freely tradable, extendable on the blockchain, and backed by reserve assets. The primary purpose of stablecoins is to reduce price volatility. Stablecoins, including popular ones like USDT, USDC, BUSD, and DAI, offer a sharp contrast to cryptocurrencies like Bitcoin, as they lack inherent mechanisms to reduce volatility. Traders can use stablecoins for transactions without worrying about risks caused by price fluctuations, as stablecoins mimic currencies such as the US dollar, Euro, Chinese Yuan, and Swiss Franc.
2.Types of Stablecoins
2.1 Fiat-Collateralized Stablecoins
These stablecoins are issued and managed by central institutions or companies, including USDT, USDC, BUSD, etc. Centralized stablecoins can collateralize real-world assets such as fiat currencies, bonds, stocks, gold, real estate, etc., under regulatory compliance. This enables the swift and continuous introduction of real-world assets (RWA) onto the blockchain.
2.2 Overcollateralized Stablecoins
Overcollateralized stablecoins are backed by one or multiple underlying assets such as ETH, DOT, etc. They require a higher amount of collateral to support their value and maintain stability. These stablecoins typically utilize smart contracts for collateralization and issuance, storing collateral in decentralized smart contracts. Major products include MakerDao's DAI, Venus's VAI, Synthetix's alUSD, etc. The collateralization and minting mechanisms of overcollateralized stablecoins are implemented on the blockchain through smart contracts, providing relatively high transparency and security.
2.3 Algorithmic Stablecoins
Algorithmic stablecoins attempt to maintain a peg to assets like the US dollar by dynamically expanding and contracting token supply. Algorithmic stablecoins do not use fiat currencies or cryptocurrencies as collateral. Instead, their price stability is achieved through specialized algorithms and smart contracts that manage token supply in circulation. When the market price falls below the pegged asset's price, an algorithmic stablecoin system reduces the number of tokens in circulation. Conversely, if the token price exceeds the pegged asset's price, new tokens enter circulation, adjusting the stablecoin's value downward.
3.Market for Stablecoins
As of May 2023, there are 24,071 cryptocurrencies worldwide with a total market capitalization of $1,117 billion. The total market capitalization of stablecoins is approximately $131.8 billion, accounting for about 11.84% of the cryptocurrency market. Among all types of stablecoins, centralized stablecoins hold a market share of 94%, while decentralized stablecoins only have a market share of approximately 6%.
4.Regulatory Policies
In April 2023, the U.S. Congress introduced two versions of stablecoin legislative bills and held two consecutive hearings on the matter. The U.S. Congress stated that they will issue a third version of the legislative bill within two months, and they believe that this bill is likely to receive bipartisan support and be officially passed. During the hearings, members of the U.S. Congress repeatedly mentioned the representation of digital assets as a future trend, and the absence of legislation could lead to the U.S. and the U.S. dollar losing their leading position in the digital asset field, emphasizing the urgency of enacting legislation.
Regarding stablecoin regulation, several countries and regions, apart from the United States, have taken steps forward by conducting consultations and/or issuing legislative bills. The Monetary Authority of Singapore (MAS) released a proposed regulatory framework for stablecoin-related activities in October 2022, which includes more specific regulatory measures compared to other countries or regions. MAS plans to publish a summary response to the consultation by mid-2023. Additionally, the Hong Kong Monetary Authority (HKMA) issued the "Consultation Conclusion on Crypto-asset and Stablecoin Discussion Paper" in January 2023, summarizing industry feedback and HKMA's corresponding position on stablecoin consultation conducted a year earlier.
5.Risks and Opportunities of Stablecoins
The stablecoin industry has experienced a series of negative events, including the collapse of LUNA, USDC's anchor instability, and restrictions on BUSD due to scrutiny. DAI and USDT have also shown signs of instability amidst these challenges. Central banks around the world are gradually introducing their own central bank digital currencies (CBDCs), posing strong competition for decentralized stablecoins. The cryptocurrency industry will also face strict regulatory policies from various countries. With various internal and external factors at play, decentralized stablecoins seem to be gradually declining.
However, in the upcoming Web 3.0 world, there will undoubtedly emerge a type of currency that is not dependent on any individual or institution but controlled by the general public. This refers to a decentralized cryptocurrency that possesses the attribute of decentralization. Furthermore, with the continuous development of Web3, stablecoins will inevitably overcome all restrictions imposed by regulations, policies, economic cycles, and technology, gradually creating more robust and resilient products.
6.Conclusion
The global financial environment is rapidly evolving, and technological innovation is thriving. With the emergence of stablecoins pegged to currencies such as the Euro, Hong Kong Dollar, Singapore Dollar, British Pound, and Japanese Yen, the monopoly of the U.S. dollar as the anchor currency for stablecoins is gradually diminishing. Diversification of anchor currencies is becoming a future trend, and regulatory authorities in the United States, Hong Kong, and Singapore have recognized the potential for stablecoins to evolve into a means of payment. The smooth and orderly development of the stablecoin field will become a cornerstone for the virtual asset industry to mature.
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