USDT and other stablecoins have become the financial settlement infrastructure of the United States? An article on the evolution of stablecoins

A piece of news in the industry recently caused a heated discussion. I believe that when we look back at the end of the year, the importance of this news will definitely be ranked among the top ten news in the industry in 2021.

“On the evening of January 4, the Office of the Comptroller of the Currency (OCC), the largest banking regulator in the United States, announced on its official website that it would allow U.S. banks to use public blockchains and U.S. dollar stablecoins as settlement infrastructure in the U.S. financial system .”

It is said that due to the huge number of visits, the official website was paralyzed for a time. Regarding this news, we can make the following three interpretations:

1. The "US dollar stablecoins" mentioned in this article refer to stablecoins that have been reviewed and approved by regulatory authorities and are subject to their continuous supervision. They mainly include USDC, GUSD, PAX, etc. USDT is not acceptable, and blockchain-native ones such as DAI are definitely not acceptable.

2. The public blockchain here is most likely not Ethereum, but a consortium chain with an access mechanism. All regulatory regulations such as user real-name, anti-money laundering, and anti-terrorist transmission must be complied with.

3. From this, we can see the different ideas of China and the United States on digital currency. From CDBC, we can see that China is more likely to use the top-level design of the central bank to promote the development of digital currency from top to bottom, while the United States is more of a "bottom-up" solution led by major financial institutions. At present, each has its own strengths, and it will take time to test which is better.

But no matter what, this official announcement by the OCC has completely raised the height of stablecoins to a new level. The biggest hot spot in the blockchain industry in 2021 may be stablecoins. This can be seen from the recent launch of dozens of popular algorithmic stablecoin projects.

So let’s take a look at the development of stablecoins to date and the current development direction that can be seen.

2013-2017
Pre-stablecoin era

Friends abroad and those who entered the market before 2018 should be familiar with this term. Yes, before 2017, no one paid attention to the stablecoin, and it can be said that it had zero presence.

You may say that is not right, USDT was issued in 2015.

That's true, but you have to know that the rise of USDT started in the second half of 2017 when the three major exchanges began to support it. What was it like before that?

In the pre-stablecoin era, Bitcoin was the "medium of exchange" for all currencies, and foreign compliant trading platforms have always supported direct recharge and purchase of fiat currency.

2017-Present
The era of fiat-collateralized stablecoins

Tether USD is the full name of USDT, and its Chinese name is Tether. The issuer Tether launched USDT on Bitfinex and Poloniex in 2015. As a stablecoin, Tether promises that each USDT has one dollar worth of cash or equivalent to support the value of USDT.

USDT became popular in the second half of 2017 after the three major trading platforms launched USDT and opened USDT trading pairs.

In the first half of 2017, USDT only printed more than 10 million. At the end of 2017, it quickly increased to 1 billion. Now, if you look back at the bull market at the end of 2017, you know how it happened, right? BTC's surge at the end of 2017 had a lot to do with the crazy printing of USDT.

USDT has experienced several credit crises in the past few years. Users were mainly concerned about whether Tether Bank had sufficient 1:1 USD margin and compliance issues, but it has basically been able to get through them smoothly every time.

Now, 20 billion USD has been issued, and it has been the leading stablecoin. It has also gradually expanded from the earliest BTC chain to ETH, TRX, Algorand, OMG and other chains.

Later, everyone saw the business opportunities in the stablecoin market, and major institutions issued their own stablecoins. For a time, various USDXs occupied people’s vision, including the current second largest USDC, and later TUSD, PAX, GUSD...

At present, USDT is undoubtedly the best in the industry. The trading pairs supported by the trading platform, the scale of issuance, and the number of public chains are all huge advantages. In terms of going beyond the industry, USDC is the best, with strict audits and full compliance with regulations...

Last month, USDC issuer Circle even reached a cooperation with Visa. Perhaps at some point in 2021, Visa will issue a credit card that allows businesses using the credit card to directly send and receive USDC payments.

2018-Present
The Era of Crypto-Collateralized Stablecoins

Cryptocurrency-collateralized stablecoins are basically a one-man show of DAI. Although there are many other projects trying to copy or improve MakerDAO, it can be said that so far no project has posed even the slightest threat to DAI, which is far less than the threat posed by various USDX to USDT.

In the field of cryptocurrency-collateralized stablecoins, if you understand DAI, you basically understand all stablecoins of this type.

Completely different from the style of the currency value supported by centralized institutions and US dollars such as USDX, DAI is basically supported by ETH (now DAI can have multiple crypto collaterals, including BAT, OMG, etc. For simplicity, we will use the initial single-collateral ETH to introduce it).

Maker relies on ETH collateral and arbitrageurs to achieve relative price stability. For example, if an ETH is $1,000, you pledge 1ETH to open a CDP (collateralized debt position) and receive 700 DAI. In the future, you will have to repay 700 DAI to get your 1ETH back.

If the price of DAI drops to $0.9, the CDP owner can spend $630 to buy 700 DAI to repay the loan, making a net profit of $70. If the price of DAI rises to $1.1, the user can directly sell the 700 DAI in his hand for $770, also making a profit of $70.

However, DAI has several problems:

1. Low capital utilization rate. Because it is anchored to ETH instead of USD, and the price of ETH itself fluctuates greatly, it can only be over-collateralized, resulting in a capital utilization rate of only about 60-70%, which limits the capital utilization rate. This is also the direct reason for the birth of stablecoin projects such as Lien that improve capital utilization.

2. The arbitrageur game model mentioned above is not always effective because of the existence of over-collateralization. Since USDT is 1:1 mapped to USD, the arbitrageur game model can work perfectly, which is why the volatility of DAI is much greater than that of USDT. This topic is entirely the length of an entire article, so I will just skip it here.

3. When ETH plummeted, the liquidation system was affected by the current ETH performance and was prone to problems. On March 12, the price of ETH plummeted instantly due to the black swan, resulting in many cases of winning the auction with 0 yuan. As a result, the Maker system had bad debts, and the gap once exceeded 500W US dollars. Later, Makerdao had no choice but to issue more MKR to repay the debt.

Due to these reasons, although DAI is absolutely No. 1 in cryptocurrency-collateralized stablecoins, it is also difficult to expand. After a few years, the total issuance volume has only been several billion, which is still an order of magnitude behind USDT, a stablecoin with tens of billions of dollars.

2020 - Present
The era of algorithmic stablecoins

Regarding this track, we have almost entered the second half. For a summary of the first half, please look back at the article a month ago: "In the endless rapid evolution of DeFi, are the skyrocketing algorithmic stablecoins just a carnival for a few people?"

In the past month, Basis, the leader of the third-generation algorithmic stablecoin, has had dozens of imitations, and has expanded to Huobi public chain, TRX, and Binance Smart Chain, which shows how popular it is. So here, following the previous article, I will write about the current stage of algorithmic stablecoins.

Note from Plain Language Blockchain: The algorithmic stablecoin projects mentioned below are only examples and no recommendations are given. The risks are currently quite high, so do not follow the trend blindly.

1. Three generations: Basis, Mith, Onecash

Among Basis and its dozens of imitations, these three are the most worth writing about.

Basis: A third-generation original, it experienced explosive growth and reached a market value of nearly 100 million. In recent days, it has gone underwater (underwater means BAC < 1 USD) and started to experience the test of a "death spiral". It has accumulated tens of millions of debts. Even if it comes out of water (comes to the surface, i.e. BAC>1 USD), it is likely to be quickly brought back underwater by the debts. The situation is not optimistic.

However, as an original, Basis is still the most promising one among the three generations, because the blockchain world has rich rewards for the first originality in any track. If the three generations of algorithmic stablecoins are falsified as a whole, then Basis should be the last one to fall.

Mith: A high imitation of Basis. No changes were made to it. It was a pure imitation. At the beginning, even the text on many pages was still BAS. It was found and posted by sharp-eyed users and became a laughing stock on the entire Internet.

However, the creator is Huang Licheng, the creator of Mithril Coin, known as Big Brother Maji and "Old Huang" in the circle. He has strong financial resources and extensive connections in the circle. Mith is basically supported by Big Brother and several large funds like SBF. Its market value is close to Basis , and the third generation ranks second. Recently, like Basis, it is also experiencing underwater tests.

Onecash: The most original project among Basis' many imitations, including the 10% limit on Rebase, the newly added LP pool of Boardroom, the original liquidity design of the bond system, etc., which have effectively improved many defects of the original design of Basis.

Because of the 10% additional issuance design, the market value has grown slowly and is still only more than 1 million. It is one of the few Basis imitation projects that are still on the water.

2. Fourth generation (i.e. partially mortgaged algorithmic stablecoin): Frax, XUSD

Frax : Similar to Token, it also has a three-currency model, FRAX (stable currency), FXS-Frax Shares (governance and value accumulation token), and Frax Bonds (debt financing token).

The difference is that without Rebase, Frax is initially minted with 100% collateralized USDC. As time goes by, the ratio of part USDC + part FraxShares (FXS will be destroyed) x Share required to mint Frax becomes larger and larger, and eventually it is completely collateralized by Frax Shares, completing the transition to a pure algorithmic stablecoin.

The way to maintain the stability of the token price is similar to that of DAI. Both are based on the difference between the price and 1 US dollar, and the price difference is filled by arbitrageurs. I will not go into details here.

XUSD : A copycat of Frax, the difference is that it is a Fair Launch, unlike Frax which has private placements

3. Fifth Generation: StableCredit? A new project that combines the first four generations?

AC recently made a comeback and announced a Wyfi, which caused the price of YFI to soar.

Simply put, the StableCredit lending + stablecoin that AC wants to make is a combination of "everything can be MakerDao" + partially mortgaged stablecoins. The amazing thing is that everything can be mortgaged to obtain stablecoins like MakerDao.

At the same time, these mortgaged tokens will enter the AMM pool individually to form a lending pool of "various tokens: StableCreditUSD", opening up the asset interoperability between Swap and borrowing. Unlike current assets in different projects such as Uniswap and AAVE, the liquidity problem is not severely fragmented. Capital efficiency has always been one of the most concerned issues for AC.

At the same time, Wyfi was introduced, which is similar to Frax Share in Frax. Not only can it share 50% of the profits of the entire system's stablecoins, but it can also burn Wyfi to mint StableCreditUSD when the price of StableCredit USD is greater than 1 US dollar, thereby arbitrage and stabilize the price of StableCredit USD.

WYFI is generated by YFI1:1000 and is irreversible, so it is a big benefit for YFI with its deflation function. In other words, is it possible for a project to appear in the market in the future that combines the characteristics of all previous stablecoins?

For example, it supports static collateral of USDC and dynamic collateral of ETH + flexible Rebase, just like USDC+MakerDAO+Basis. If such a project appears, whether you participate or not, I think it is always right to learn about it as soon as possible.

What do you think about stablecoins? Who do you think will win the holy grail of the crypto world in the future? Please leave your comments in the comment section.