Stablecoin in Cryptoeconomics

As physical assets become increasingly monetized, it will be crucial to bridge the gap between the real and the digital world, and between cryptocurrency and legal tender. Therefore, it is important to create a stable cryptocurrency. At the same time, “stability” is a necessary feature for the blockchain to function as infrastructure and for the cryptocurrency to realize the three functions inherent in traditional currencies (value storage, medium of exchange, and accounting).

Stablecoin is not a homogeneous category, including three main categories: off-chain collateralized stablecoins, which are secured by legal tender and bundled together; on-chain collateralized stablecoins, secured by a cryptocurrency or a basket of cryptocurrencies; algorithmic stablecoins, based on the smart contract framework of self-supply management. However, there are problems with these stablecoins.

Off-chain collateralized stablecoins rely on a centralized structure and require sufficient auditing levels to solve the problem of transparency of cryptocurrencies. On-chain collateralized stablecoins still rely on traditional cryptocurrencies to a large extent. Therefore, such stablecoins still have high volatility, and there is still great uncertainty about whether the collateral itself can resolve the volatility. Finally, the algorithmic stablecoin implements the seigniorage mechanism, and the result is still uncertain, because it needs the continuous growth of the network to maintain its sustainability.

In addition to the uncertainty caused by design, there are also many uncertainties in the relationship between stablecoins, other cryptocurrencies and the potential regulatory framework. Besides, the unclear relationship between the ownership of the exchange and of the “USDT” has triggered a conflict of interest between the two, and the regulatory uncertainty brought about by the wave of cryptocurrencies and ICOs between 2017 and 2018 has not yet been fully resolved. Although in the hypothetical classification, stablecoins will fall into the category of payment tokens (and therefore not securities), they may still be affected by securities and commodity laws in Europe and the United States.

Finally, stablecoins may accelerate public decision-making by the government and central banks, and the design and issue of official CBDC (token-based or account-based) whose utility and functions can replace stablecoins. This may bring about a variety of possibilities. One is that CBDC may eliminate these traditional cryptocurrencies, including stablecoins. Another is that a hybrid solution based on the complementarity of private anonymous cryptocurrency and public digital currency may be established, as advocated by some academics and former IMF president Christine Lagarde.

All in all, stablecoins have become a new tool in the digital economy and a key part of the market transformation: from securities ICOs, payment systems, central bank actions and general monetary policy. Understanding the utility and the problems of stablecoins is crucial to establishing a stable cryptocurrency market.