Will the algorithmic stablecoin USDN be the next generation of
stablecoin model?
Many players are moving into the stablecoin, even the social media, Facebook is also about to issue the libra. Where will be the actual direction of supervision and trust issues in developing the stablecoin?
Money has three functions, which are value storage, accounting unit, medium of exchange. The stablecoin clearly does not comply with these three functions but assumes a part of the monetary attributes of cryptocurrencies. It is used as a trader access to gold and being used to preserve or arbitrage purposes.
Is there a real stablecoin? Not at all, not in the real world. Is the dollar stable? It’s also unstable. The country does not guarantee the stability of the dollar, so it is only relatively stable.
The stablecoin has many functions, currency functions, market liquidity, encryption, and easy access to the fiat currency. A new monetary system may be established in the future.
How to achieve a stability? Asset collateral or algorithm. The asset collateral is more than 80% of the choice. There are real fiat currencies in the asset mortgage, like gold, there are also methods of mixed fiat currencies, and there are also encrypted assets. The issuance of currency is a lending behavior. Depending on the way of issuance of stablecoin, the pledge rate is an important indicator. If the pledge rate is 1%, there will be a lot of arbitrage traders in the ecology, making the entire closed loop and liquidity better.
Algorithmic stablecoin may be an opportunity for the next generation of stablecoin. The reason why is due to its advantage lies in its extensivity; the digital native algorithm stablecoin is more complex apparently. As we all know, money also has impossible triangle, stability, autonomy, and liquidity.
USDT is a kind of stablecoin and it would be facing the similar challenges if it gave up its autonomy and put its roots within the control of the state or sovereignty in exchange for relative stability and liquidity.
Libra is weak because of their application that is not distinctively done. It first contemplated the cross-border payments in the India and US markets and was quickly being eliminated. India’s attitude on this matter was very firm and did not give it a chance. Its main business supports with a very large number of apps and 27 partners such as PayPal and Visa.
But now there are already many players in the industry, such as USDN. The pattern is novelty using the supply and demand of money and Bancor algorithm to achieve the stablecoin and dollar anchoring. The USDN can provide us with a good reference, most importantly in the following points.
First, the user and the scene are the two veins of the stablecoin. From the past, it is not clear whether the stablecoin is small or large but it’s used for the international exchange, or some domestic scenarios, whether it is a model of To C or a model of To B.
USDN began by positioning itself on specific payment scenarios, small payments, similar to retail transactions in traditional businesses. This approach is both a mission of Bitcoin to solve the world’s most overlooked micropayment problems, while also maximizing the liquidity value of tokens.
Another challenge in stablecoin is the need for a set of macroeconomic models to make the currency relatively stable. In fact, the way the money supply is growing with sales, repurchase, as well as interest rate adjustment required the backup funds. It will be a difficult dealing with the liquidity crisis.
When all institutions think that issuing stablecoins is very profitable, many people have not seen the cost of it. The other is the way of governance, whether it is code or human governance, the code is written by people, the rules are also set by people, if it is discretionary, there is likely to be a risk of centralization.
USDN itself has an inherent macro-control model and is based on a fully decentralized distribution. The overall logic of its algorithm is that when the price of the coin is higher than $1, the stablecoin is issued, otherwise the stablecoin is destroyed. The Bancor algorithm is also embedded under this logic to solve the balance of liquidity (trade supply and demand).
When we consider whether a stablecoin has any value, firstly, it should be relatively stable, which is a minimum threshold. Next, the liquidity is a strongest barrier and the consensus is the largest resource hill.
USDT has a dominant position in the current currency circle of users and trading scenarios. If a new stablecoin or aiming at the access of users in the currency circle, it cannot be said that there is no chance, but essentially it still does not solve the key problem.
Monetary returns are low in the stablecoin. It should be an infrastructure and the commercial returns should be done by the ecological technical part. The issuance of stablecoin is concerned about the operational capabilities and possible scenarios. USDN is a player in this field and provide us with more references.
