Cryptocurrency exchange rates are characterized by extremely high volatility, that is, extremely high fluctuations in the rate. This sharply limits the use of cryptocurrencies outside a narrow area. Over the past 5 years, the coefficient of variation in the price of the Dow Jones technology index, gold and Bitcoin amounted to 28%, 6% and 123% respectively. Therefore Bitcoin, which is often called the gold of the future, based on statistics, is still quite far in its investment properties from the "safe haven" that gold is. StableCoin or Stablecoins, on the other hand, are directly pegged to the price of a certain asset, that is, pegged to reserves of ordinary currencies or physical goods, whose exchange rates are subject to smaller fluctuations than the rates of typical cryptocurrencies.
The term StableCoin is a general name for cryptocurrencies whose value is pegged to a stable fiat instrument – for example, to the US dollar. Stablecoins are a bridge to connect the value of volatile Blockchain assets with the world of more stable fiat instruments. Investors see the appeal of an SC in the fact that such an instrument has the stability of the US dollar and all the properties of a Blockchain asset. When using US dollars within the banking system, a number of difficulties arise – going through KYC procedures, transaction costs, significant time for transfer and other restrictions that banks may impose. A Stable Coin pegged to the US dollar allows all of this to be avoided – a transaction on the blockchain can be anonymous, carried out within 15 seconds with a low fee.
The universe of Blockchain assets represents a complex combination of technologies, while the Stablecoin is a fairly simple instrument to understand. Interest in SCs is an important marker that can be assessed as a proxy for interest in Blockchain assets in general. Market participants are looking for an entry point into the industry and expectedly pay attention to those projects that are easiest to understand. At the beginning of 2019, there were many deterring factors that limit the development of the Blockchain asset industry – regulatory policy, limited human capital and an overabundance of toxic projects. Against the backdrop of general pressure on the industry, one can see how a wide range of players, from the most conservative to the most radical, demonstrate significant interest in Blockchain assets in the form of Stable Coin. The ease of use of SCs, which was a key driver of the growth of such instruments, is being displaced by another business logic. At the business level, an SC is perceived as an instrument of cheap funding, and from the state's point of view – as an instrument for creating competition with decentralized Blockchain assets.
Stablecoins can be divided into 3 main classes:
1) backed by fiat money or commodities – issuers of such SCs promise to exchange the token for the equivalent of a real asset on demand. In practice, such protocols are difficult to consider safe – there is no reliable legal practice for protecting token holders, and in some cases the commodity resources have not yet been extracted;
2) stablecoins that use other Blockchain assets as collateral – such protocols can be considered more reliable – management is implemented on smart contracts and fully decentralized, and counterparty risk is excluded from the system. This class of SC is difficult to call truly stable, since very volatile instruments are used as the base asset;
3) protocols built on the basis of tokenomics – such systems do not use collateral in the form of a real or Blockchain asset, but apply a mechanism for maintaining price stability through a system of incentives and penalties.
At the moment, the largest Stablecoin by volume of funds in circulation is USDT Tether – 2 billion US dollars. Today it occupies the 7th position in the cryptocurrency ranking. Among the negative aspects of using USDT, one can note the issuer's refusal to undergo an audit and verify the availability of the necessary reserves, as well as the lack of transparency when issuing new tokens. The presence of a centralized issuer in the structure of the USDT protocol is a point of failure and creates significant risks for users.
Among the second class of SCs, the largest protocol by volume of funds involved is a token implemented on the basis of Ethereum. The algorithm for creating this Stablecoin looks as follows: sending Eth as collateral to a smart contract -> freezing the sent tokens -> issuing an SC pegged to the US dollar. The protocol allows the creation of debt obligations on a smart contract with collateral in the form of Ethereum tokens. By analogy with banks, the system applies a collateral ratio. If the ratio falls below a critical level, the position may be sent for liquidation.
This protocol was launched in 2017 and is one of the first in its class, but it has a number of drawbacks:
1) the mechanism for motivating users to issue Stablecoins is limited. There are two incentives – issuing an SC and obtaining financial leverage through a decentralized mechanism. The protocol does not provide direct motivation in the form of fees or cash flow that would motivate users to issue StableCoins;
2) the collateral mass is formed from a volatile asset, thus, there is a scenario in which a market correction would lead to the liquidation of the SC. As of mid-January 2019, there were about 104 million Ethereum tokens in circulation, of which 1.8 million were frozen as collateral for the SC protocol. The fall in the price of the Ethereum token affected the stability of the protocol, but the system's ability to resist external shocks turned out to be much higher than could have been expected. In November 2018, when the price of the Ethereum token was approaching its local minimum around 100-120 US dollars, the largest liquidations of positions occurred for a total amount of about 95 thousand Ethereum tokens, which is about 5% of the total collateral mass. Given that the Ethereum rate fell more than 12-fold, it can be said that a 5% margin call of the collateral mass is a good indicator.
The total volume of issued Stablecoins as of mid-January 2019 amounted to 71.5 million US dollars. The average size of the collateral ratio over the entire existence of the protocol was 300%, while this indicator steadily holds around this mark. Despite logical gaps in the design of the protocol, the system absorbs external shocks very efficiently and confidently keeps key indicators at good levels. Such a situation does not necessarily indicate the successful market performance of the protocol – the system may receive external capital injections, or a fortunate combination of indicators allowed it to maintain stability at the moment. Compared with the size of the market, the volume of capital in circulation is still insignificant – in such a situation the conclusions drawn may be erroneous.
The third class of Stablecoins is under development and has not yet gained sufficiently wide distribution. The design of such protocols looks promising; it is precisely this class of SC that has the greatest prospects to take a dominant position in the market. At the beginning of 2019, there were a total of about 50 significant projects for developing a Stable Coin. It is expected that such an instrument will be in demand in the short and medium term.
There is significant demand for Blockchain assets that are not subject to excessive volatility and that can be easily measured in US dollars. The brightest projects in the StableCoin segment have very high investment appeal. In the long term, Blockchain assets may compete with fiat assets, their price will be much more stable, and the need for additional instruments to stabilize positions will disappear.
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Статьи о криптовалютах / Термины и определения криптовалют
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