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Understand the importance of stable currency economic system in the article "past and present life of stable currency"

Time : 22/02/2022 Author : 64ylg1 Click : + -
        With the rise of bitcoin, more and more market participants have added cryptocurrencies to their portfolios. While the market value rises, it also brings drastic price fluctuations, which greatly hinders the promotion of blockchain technology to the real society. The concept of stable currency came into being and attracted the attention of investors as a better means of storing value. Nowadays, there are three types of stable currency in the market: Legal asset mortgage, encrypted asset mortgage and non mortgage. This report will scan these three kinds of stable coins, give examples for analysis, and explain how to use this stable mechanism for reference to establish a token economic model in some blockchain projects. Finally, this report will compare stable currencies and analyze industry trends.
        From the design of the simplest stabilization mechanism, the stable currency has successfully entered the public's view as a cryptocurrency with stable market value. In just a few years, many ICO projects have cited the stability mechanism to better realize the separation of various attributes of tokens. Until now, the emerging stable currency project has designed a multi currency token to get rid of the dependence of the stability mechanism on the value of mortgage assets. The development of the stable currency industry will be an important target for the application of blockchain technology. In addition to being a means of payment, stable currency will also play an important role in the application of blockchain projects. Because it is very simple and crude to integrate the financial content and use content of a token, and we think the bridge is the stable currency.
        The design of token economic model to stabilize the currency and understand the industry is also the key to the current hot currency reform. Since the birth of bitcoin, blockchain technology has been attracting public attention. With the continuous updating and development of technology, the blockchain technology has gradually developed from a distributed ledger to the underlying technology of a programmable smart contract. People have also seen the possibility of the application of blockchain technology in various industries. Therefore, the cryptocurrency market has developed rapidly. So far, there are nearly 1700 cryptocurrencies circulating in the market, diluting the proportion of the total market value of bitcoin (see the figure below). Mainstream currencies (bitcoin, Ethereum and ripple coin) still account for the vast majority of the market value. However, their prices are highly volatile, which greatly hinders the use of cryptocurrencies in the real world.
        Market participants regard cryptocurrency as an asset to a large extent, so the market liquidity decreases. Therefore, investors need to find better means to store value, and the stable currency market is slowly rising. Stable currency is a cryptocurrency with stable value. Its value lies in the combination of the decentralized system of the encrypted payment network and the relatively stable price level. As a trading medium, enterprises and consumers will not bear huge price fluctuation risk in the trading process. As a means of storing value, investors can manage digital assets more effectively and reduce the occurrence of excessive asset shrinkage. Based on these two points, stable currency can promote the application of cryptocurrency in the real world.
        Stable coins also provide ideas for the application of blockchain. The combination of token economy and blockchain can promote the establishment of autonomous communities, and the establishment of incentive mechanisms requires community tokens to quantify. If the value of tokens fluctuates violently in the market, it will greatly affect the circulation of tokens in the community and cause the loss of community activity. Therefore, while establishing the token economic model, more and more developers have adopted the multi currency mechanism and defined a stable currency to maintain the value of circulating tokens in the community, effectively separating the real rights and financial attributes of the token. Steemdollar, a representative of steem community, etc. Looking at the cryptocurrency market, payment currencies still dominate.
        With the development of blockchain technology, people will realize the application of blockchain technology as the underlying technology in all walks of life. The anchoring and reserve industry accounts for 1% of the total market value, but it is of great significance to improve the currency liquidity of cryptocurrency. In order to achieve currency stability, the simplest design is to anchor it with legal assets, because all legal assets exist in the form of legal reserves. By ensuring a 1:1 conversion ratio, the value of stable currency can be guaranteed. The usdt issued by tether company is the precedent of stable currency, and the virtual currency is anchored to the US dollar 1:1. In other words, every time a user purchases a usdt token, tether will add one dollar of capital reserve to its account.
        When users need to exchange US dollars, tether will destroy the corresponding tokens and pay a 5% handling fee. This method is easy to understand and the process is simple. As an effective legal currency, the mortgaged assets are not on the blockchain, avoiding potential hacker attacks. Therefore, usdt has attracted a large number of investors since its launch in 2015, and its market value has exceeded US $2.5 billion so far. The second layer is omnilayer protocol: Omni protocol can generate and destroy digital currency (usdt) on bitcoinblockchain. Omnicore API can track and report every usdt transaction.
        At the same time, the protocol ensures that usdt can be stored and traded in a secure, anonymous and encrypted environment through omniwallet, an open-source browser network wallet. Finally, tether Limited: it is the entity company of tether. They receive legal currency, namely US dollars, and then issue usdt pledged by US dollars. When the user withdraws the collateral, tether will destroy the corresponding usdt. Tether keeps all the legal currency of usdt in circulation. At the same time, all audit results, including proof of reserves, are publicly released. Proof of reserves (POR) is a consensus algorithm.
        Each usdt corresponds to tether Limited. This means that the amount of usdt in the system should be exactly the same as the USD in the tether account. Because usdt is a digital currency placed on bitcoinblockchain. Every transaction can be tracked. Therefore, the total amount of usdt in circulation can be found at any time. And tether will regularly send audit reports to inform users of the amount in reserve. All transaction history and current usdt can be found from O. However, at the same time of solving the floating risk, the decentralization that cryptocurrency should have is sacrificed.
        As a centralized US dollar custodian, tether may have the same problems as traditional financial institutions. Due to the opacity of information, it is difficult to avoid black box operations and excessive issuance. Therefore, it is controversial whether there is an equivalent dollar on the account book of tether. The following is a summary of usdt prices and events in 2017:. It can be seen that the existence of disputes increases the price fluctuation of usdt. However, as usdt is a token that can be exchanged for one dollar, the currency value is basically stable at one dollar. Here is a brief explanation: if the trading price of usdt is US $0.9, market participants will buy usdt in exchange for an endorsement of US $1. The demand for usdt will increase and the price will rise.
        If the trading price is $1.1, market participants will sell usdt until the price returns to one dollar. However, the information opacity of usdt brings the following problems:. 1. Whether there is enough cashing money in the bank account will not be disclosed to the user. The user has no legal way to query whether the bank account of tether really has so many USD issued by it. 2. Secondly, tether does not promise to guarantee the payment, and in its exemption clause, it also mentions that it is exempt from the liability of cashing legal currency under any conditions (including the liquidation of the company). 3. The factors that regulate and control the circulation of usdt are actually not disclosed.
        It is also unclear whether the destruction mechanism at the beginning of its design was actually used. 4. At present, it is too long to buy usdt through official channels. The number of people queuing for KYC certification is thousands every month, while the number of people passing the certification is less than 100. 5. The audit report itself is compiled and reported to the user by usdt, rather than issued by an independent third party. There is the possibility of secretly operating. If more banks freeze their accounts, tether is likely to be unable to meet the needs of a large number of depositors and face the possibility of bankruptcy. In other words, while addressing floating risks, centralized management brings a crisis of trust to the third party. In view of the opacity of usdt informatization, trustcoin tries to reduce risks by increasing regular supervision.
        Tusd can be understood as an upgraded version of usdt. By adding frequent KYC (user background investigation) and AML (anti money laundering), it can strengthen supervision and improve the transparency of information. However, the corresponding additional costs will be incurred, and investors will have to wait for a longer time when they put forward the requirements for realization. In addition, gold, as another legal asset to maintain value, also breeds stable currency. Digixdao (DGD), hellogold (HGT), etc. However, when users propose to exchange legal assets, they need to send money by mail, which leads to higher transaction costs. Can the trust risk caused by the centralization of legal asset mortgage be solved by the cryptocurrency itself? Therefore, another stable currency appeared in the investors' sight: crypto asset mortgage stable currency.
        This process can be analogized with the mortgage of real estate loans. When a user applies for a real estate loan from a bank, he needs to use the real estate as a mortgage to obtain cash. When the real estate appreciates, users will have more space to apply for more loans, thus realizing leverage. When the value of the property falls, the bank will urge the repayment of the loan. If the loan cannot be repaid, the property will be taken away to reduce the bank's losses. In the world of stable currency, real estate is the cryptocurrency of multiple mortgages, and loans are the stable currency tokens issued by the system. This series can be realized on the blockchain through smart contracts. As a representative of crypto asset mortgage type stable currency, Dai completely exists on the blockchain, completely eliminating the need for third-party trust intermediaries.
        Using the smart contract based on Ethereum, Dai has effectively realized the stability of the currency value, and the current currency value basically remains anchored to the US dollar. Here is a brief illustration. If the mortgage rate is 400%, the user can obtain 0.25 stable coins Dai for each Ethereum mortgage to the system. If the value is 2 times higher than that of taicoin, the user can repay 0.25dai to redeem the mortgaged Ethereum and realize 2x income. The system will also encourage users to create more Dai so that the currency value can be re anchored to the dollar. If the bitcoin value is reduced to 1 / 2, and the user fails to repay Dai or replenish Ethereum in time, the system will detect that the value of the collateral is insufficient and auction the mortgaged Ethereum. The auction proceeds will be used to repay the debt in the form of Dai.
        Dai is supported by collateral (Ethereum). Suppose you hold Ethereum and you want to generate Dai. First, you need to send your Ethereum to a place called "collateralized debt position (CDP)". CDP is a smart contract running on the blockchain. In this case, it is the Ethereum blockchain and exists in the maker ecosystem. When the market is unstable, the target rate feedback mechanism (trfm) of Dai will be activated.
        When trfm is activated, the target ratio and target price will constantly change iteratively to balance the supply of Dai by encouraging users. The target price of Dai is one dollar. When the market price of Dai is less than one dollar, the target ratio will rise. This will cause the target price to rise at a faster rate, and generating Dai will become more expensive. At the same time, the rising ratio will lead to an increase in the income of holding Dai, which will increase the market demand of Dai. Therefore, the decrease of Dai supply and the increase of demand will cause the market price to rise until it reaches the target price. Similarly, when the market price of Dai is higher than one dollar, the target ratio will decrease, resulting in an increase in the demand for generating Dai and a decrease in the demand for holding Dai. Therefore, the market price of Dai will decrease until it is near the target price.
        The stability of Dai largely depends on the market value of Ethereum. The reason why Dai is relatively successful is that the market price of Ethereum is on the rise as a whole (see the figure below). If there is a "black swan" rapid collapse in the value of Ethereum, it remains to be verified whether the system can withstand the huge clearing volume. Similar stable coins also include bitcny, i.e. bityuan. Behind each bitcoin, there are bitshares at least twice the value pledged by the borrower. In order to realize the anchoring of each bitshare and one RMB, the bitshare system has set up two mechanisms through smart contracts: "forced liquidation" and "forced liquidation". Here, I will briefly explain how these two mechanisms can achieve a stable mechanism.
        Forced closing is initiated by the platform's smart contract. The feed price is the weighted average price of the internal and external trading platforms of bitstocks and can be regarded as the overall market price. When the price of bitshares drops, the value corresponding to each bit will also be less than one yuan. When the collateral ratio is less than 1.75 times, the compulsory liquidation will be triggered. The pledged bitshares will be sold at 90% of the feed price to repay the debt, and the remaining 10% will be returned to the user. At this time, the supply of bit stocks increases, but the bit units are recovered and reduced. Therefore, the bit units will appreciate relatively and return to the anchor price. The forced clearing is initiated by the user to ensure that one bit can be exchanged for one RMB.
        If the price of bitstock market falls, or even the "black swan" effect appears, the mortgaged bitstock may not find a buyer even if it is sold in the market. At this time, the user initiates forced liquidation, and the smart contract will first liquidate the bitstocks with the lowest mortgage rate until the clearing volume requirements are met. The price of forced clearing is 1.05 times of the feed price, so it can be used as compensation to pay users. However, because the price of bitshares fluctuated violently, bityuan had a continuous liquidation and burst in the early stage. After the price of bitshares has stabilized, the price of bitcoin has gradually stabilized, and the total market value has increased. From this, we can conclude that the crypto asset mortgage type stable currency solves the trust risk brought by the legal asset mortgage, and at the same time, it brings the currency floating risk to a certain extent.
        The stability of the currency value largely depends on the price stability of the mortgage assets. In the cryptocurrency market where the price fluctuates violently, the clearing ability of the system in the event of a sharp price drop remains to be verified. Since the first two types of stable coins depend on other assets to maintain their value, another type of stable coins is generated immediately: without any mortgage, the system can control the value of money by issuing and destroying money through algorithms. Compared with the first two stable coins, this form of currency is still in the early stage of development. In the world of legal currency, the central bank has the right to issue legal currency and control the circulation, and can control the value of legal currency. In the cryptocurrency world, central banks will be replaced by smart contracts.
        Give a simple example to illustrate. If the stable currency is anchored to the dollar, when the transaction price is higher than one dollar, the smart contract will create new coins, flow into the market for auction, increase supply, and reduce the value of the currency. When the transaction price is less than one dollar, the smart contract will buy back the currency and distribute bonds to reduce the circulation. Bondholders will receive interest in the future until the bonds are redeemed. There are two kinds of tokens in the system: one is shares and the other is stable currency. The two kinds of tokens can be freely exchanged, and a little Commission will be charged for conversion. When the stable currency is higher than the anchor price, the system will automatically issue additional coins to increase the supply and reduce the price. When the stable coin is lower than the anchor
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