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Special report on the blockchain industry: look again at the deleveraging, improvement of "quality" and compliance of stable currency

Time : 17/01/2022 Author : y8gi5n Click : + -
        After the Luna event, how about the leverage level of the crypto market? Are there risks in other stable currencies? What is the balance sheet behind the stable currency? In this paper, we will focus on the above issues, focus on the stable currency track, and observe the industry changes through the chain data: 1) where is the industry deleveraging caused by the explosion of Luna and ust? 2) Traditional stable currencies such as usdt and usdc can anchor US dollars. In essence, offshore US dollars are put on the blockchain through pledge, realizing point-to-point circulation. What is the "quality" of its balance sheet? 3) What are the advantages and disadvantages of usdc as the most powerful stable currency? 4) What are the measures taken by the European and American governments to stabilize the currency?.
        The dollar stable currency ust collapsed. According to Wikipedia, stable coins, as a crypto asset, is committed to 1:1 anchoring the price of another asset, including crypto assets, fiat currency, gold, etc. Among them, the US dollar stable currency ust was issued on the public chain Terra. Since it was launched in 2021, it has been well anchored to the US dollar, never lower than US $0.85. However, it began to be anchored on May 9, and fell to US $0.8 on May 10. Although it rebounded, it became stable on May 13. Since May 27, it has not been higher than US $0.07, close to zero. Ust belongs to "algorithmic stable currency" and "left-right competition" with the token Luna.
        According to whether to rely on mortgage / underlying assets to obtain trust, stable currency is often divided into two categories: algorithm type and mortgage type. The latter can be subdivided into two categories: excess mortgage and non excess mortgage, or legal currency mortgage and encrypted asset mortgage. Among them, ust is an algorithmic stable currency. At the beginning of its launch, there was no underlying asset support (after the agreement, the project party purchased a large number of bitcoins), and its anchoring with the US dollar was realized by "left and right mutual Bo" with Luna, another token on terra. Specifically, yes,. Assuming 1ust > 1 US dollar, the agreement allows Luna holders to exchange Luna worth 1 US dollar for 1ust, then the supply of ust will increase and the price of ust will drop to 1 US dollar. Accordingly, the supply of Luna will decrease and the price will rise;.
        Assuming that 1ust < 1 dollar, the agreement allows the holders of ust to exchange 1ust for Luna worth 1 dollar, then the supply of ust will decrease and the price of ust will rise to 1 dollar; Accordingly, Luna's supply increased and the price decreased. However, after May 9, due to market panic, ust continued to break anchor. At the same time, more ust was converted into Luna, and Luna kept falling. When Luna's market value continued to shrink, the market thought that ust gradually lost its support, and ust accelerated its anchor breaking. Finally, both tokens plunged. After basiscash and other tokens, the argument that "algorithmic stable coin model has been falsified again" reappeared in the market.
        From the perspective of traditional finance, the anchor on terra gives users 20% of the current benefits, which also has the suspicion of "high interest for saving". However, the return on the asset side cannot match, and a large number of leverage is superimposed. The hidden worry has always existed, and it is easier to be exposed when encountering a bear market. The volume of crypto assets fell sharply, and the market value shrank by half. According to coinmarketcap data, the market value of crypto assets reached a low point of US $1.23 trillion on May 12 after ust began to break anchor on May 9, down 24% from US $1.63 trillion on May 8, while the trading volume increased by 212% (from US $66.2 billion to US $206.2 billion), and the volume fell sharply.
        With the chain reaction rumours such as the liquidation of Sanjian capital and the acquisition of blockfi, on June 19, the market value of crypto assets reached a new low of $816.5 billion, down 50% from May 8. Defi closed position (TVL) fell 64%. According to the data of defillama, on May 9, after the anchor of ust began to be removed, on May 15, the defitvl reached a low point of US $128.2 billion, down 42% from US $219.8 billion on May 8. On June 20, the defitvl fell to US $79.5 billion, down 64% from May 8. The shrinking of TVL's total locked positions in defi also represents the deleveraging process of the industry to a certain extent.
        Defi realizes transaction and loan functions through smart contracts. For the holders, it enables the "idle money" in their hands to generate interest and obtain liquidity through pledge, thus giving birth to a large number of leverage. If we say that the cryptocurrency in the early years had the property of transaction and circulation, we can say that the financial property of the crypto market was completely activated after the advent of defi. Various protocols and tools appeared one after another, boosting the activity of the chain. Defi has also become the first application on many public chains. The market value of stable currency fell by 18%. According to the data of defillama, on May 9, after ust began to break anchor, on May 15, the market value of stable currency reached a low point of US $161.2 billion, down 14% from US $188 billion on May 8. On June 20, the market value of stable currency fell to US $154.1 billion, down 18% from May 8.
        We believe that the deleveraging triggered by ust has not seen a significant "price rise" of the stable currency, indicating that there are still a lot of funds leaving the market instead of being converted into usdc and usdt for temporary hedging. After the UST crash, the crypto market entered a long "deleveraging" state. Generally speaking, leverage refers to borrowing to expand one's position. In recent years, investors in the crypto market have expanded their leverage through circular lending and margin trading. For example, a user can mortgage eth in excess, lend us dollar stable currency Dai from the stable currency agreement makerdao, and then buy eth with Dai, and then mortgage this part of eth to lend more Dai, which is the same as other loan agreements.
        As the third largest stable currency with a market share of nearly 10% before the crash, ust was once used as collateral for agreements such as anchor for people to leverage. However, its decline forced relevant institutions to sell UST, triggering a "death spiral" and collapsing other debts of such institutions. The crypto market entered the "deleveraging" mode. The market value of stable currency / crypto assets increased by 5% to 17%. On May 8, the market value of stable currency / crypto assets was 12%, which remained at this value on May 15 and rose to 17% on June 20. We believe that this phenomenon shows that although the UST crash also brought down the overall market value of crypto assets to a certain extent, it did not make users lose confidence in stable currency, reflecting the decline of users' risk appetite.
        Within the stable currency, the market share of calculated stable currency decreased, and the market share of mortgage stable currency increased. According to coingecko, after the anchor of ust was released on May 9, the market share of head legal currency collateral such as usdt, usdc and busd increased significantly, while the market share of head algorithms such as MIM and FraX decreased significantly. Market value: usdt ranks first, followed by usdc. The scale of Dai, tusd and other stable currencies has not reached 10 billion. At the time of writing this report (June 21, 2022), according to coinmarketcap, the market value of only three major stable currencies is more than 10 billion US dollars, followed by usdt (US $67.8 billion), usdc (US $55.9 billion) and busd (US $17.2 billion). They are also among the top ten crypto assets. Among them, the market value of usdt is only second to bitcoin and Ethereum, and the market value of the other two major stable currencies is between 1 billion and 10 billion US dollars, followed by Dai (US $6.8 billion) and tusd (US $1.2 billion).
        Usdt is well known, and usdc is the dollar stable currency issued by the centre alliance in 2018. The company issues native stable currency on 8 public chains. Centre is an open-source stable currency alliance established by circle and coinbase. Members of the alliance can issue usdc and help customers redeem legal currency under the condition of meeting regulatory and compliance requirements. Granthorntollp2 issues monthly capital verification report for usdc and publishes it on usdc website. It will audit usdc reserves every year and submit the report to the sec. As of June 30, 2022, the total market value of usdc was US $55.6 billion, which was the second largest stable currency in market value.
        Circulation: usdt has the largest circulation, and usdc is catching up. According to the data of glassnode on June 21, usdt is still the first stable currency in circulation (US $67.9 billion). However, since usdc began to break the anchor on May 9, the circulation of usdc has increased sharply (US $55.9 billion), and the gap with usdt has been narrowing. Number of addresses: the number of Ethereum coin holding addresses: usdt leads significantly. Currently, usdt and usdc, the top two stable currencies, have the largest circulation on Ethereum. Specifically, the number of usdt Ethereum coin holding addresses is 4.61 million, and the number of usdc is 1.46 million (Etherscan, June 23, 2022).
        Address balance distribution: the number of small addresses of usdc is close to that of usdt, and the number of large addresses keeps leading. According to coinmetrics data, on May 9, after ust began to break anchor, an obvious trend was that the number of usdc addresses with a balance of more than 1000 US dollars / 10000 US dollars / 100000 US dollars continued to increase. Among them, on June 21, the number of usdc addresses with a balance of more than 1000 US dollars reached 160000, approaching the same level of usdt (210000), while the number of usdt addresses with a balance of more than 1000 US dollars / 10000 US dollars continued to decrease. This once again proves that after the anchor of ust is removed, the market's preference for usdt shifts to usdc.
        Busd is a US dollar stable currency created by Paxos trust and Bi'An. As of June 24, 2022, the market value of busd was US $18.5 billion, making it the third largest stable currency. The busds cast and destroyed on Ethereum are the responsibility of Paxos and are regulated by the New York Financial Services Authority (nydfs). Paxos embeds the regulatory function setlawenforcementrole in the token smart contract, which has the right to freeze accounts and remove illegal activity funds. Busds on the Bi'An chain or Bi'An smart chain are issued by Bi'An and are not regulated by nydfs.
        Among them, the amount on the Bi'An smart chain is 4.85 billion US dollars. According to the reserve details released by busd, as of June 30, 2021, among the underlying assets of busd, the cash and equivalents reached 96%, and the short-term US Treasury bonds reached 4%. From the public data, the proportion of cash held by busd is the highest among the three major stable currencies. The audit of busd is completed by withum. (report source: future think tank). USDP is a US dollar stable currency issued by paxotrust, formerly known as Pax, and was issued in Ethereum in 2018. As of June 24, 2022, the market value of USDP is USD 946 million, which is the seventh largest stable currency.
        USDP is the first batch of stable currency in the market that complies with regulatory regulations. Monthly audit of the company is in the charge of withum, which is consistent with busd. USDP's reserve cash will also be placed in banks with FDIC insurance protection. The full name of GUSD is geminidolar, which is a stable dollar currency issued by Gemini. As of June 24, 2022, the market value was US $180 million, ranking 16th in the stable currency. GUSD is reserved by Gemini USD 1:1, an old exchange, and is only issued on Ethereum and regulated by nydfs (New York financial authority).
        BPM is responsible for auditing GUSD and issuing monthly reports. Trailobits is responsible for auditing smart contracts on the chain. Dai is a crypto asset backed stable currency, which was issued in Ethereum by the makerdao project team in 2017. As of June 21, 2022, the total market value of Dai was US $6.316 billion, ranking fourth in the stable currency market. The advantage of Dai is that it is the largest decentralized stable currency. There are two main tokens in the maker system. The first is the stable token Dai, and the second is the community governance token MKR. Users with MKR form a decentralized management community. They can decide which valuable digital assets can be used as collateral assets and the liquidation ratio.
        The user obtains Dai at a certain rate by pledging the encrypted assets. The mortgaged encrypted assets are stored in the CDP (collateralized debt positions) smart contract. At the same time, the user needs to pay the interest called "stabilization fee", which is paid in MKR. In order to ensure the stability of the lending system, the mortgage lending in the system belongs to excess mortgage, and there are strong equalization measures. In other words, when the value of the collateral is lower than the liquidation value, CDP will be liquidated, and the collateral will be forced to close the position to buy back Dai to ensure the solvency of Dai. Dai is not a hard anchored currency, but it will maintain a 1:1 stability with the dollar through a series of financial incentives.
        FraX is composed of FraX Finance was launched with partial mortgage mechanism. The casting mechanism of FraX is the mixed casting of stable currency usdc and governance token FXS. As of June 22, 2022, the collateral ratio was 89.75%. Users cast 100 FraX, needed to pledge 89.75 usdc, and destroyed FXS worth $10.25. As of June 22, 2022, FraX's market value was $1.424 billion. It is the second largest decentralized stable currency in market value and one of the few stable currencies after the collapse of UST. The income from the agreement is mainly commission fees, including 0.2% for casting and 0.4% for destruction.
        Compared with the Dai mortgage rate of about 130%, FraX's capital utilization efficiency is higher. However, since 89.75% of FraX is centralized stable currency usdc, its degree of decentralization is far lower than Dai. According to the historical data of the market value of the well-known stable currency, in the year when the "No. 1" stable currency usdt was launched, other stable currencies almost monopolized the market share. In 2021, usdc, whose market share increased rapidly, also went online earlier. We believe that to a certain extent, this shows that the first mover advantage is an important competitive driving factor for the stable currency market. After all, more people are the key to the trading function of the stable currency.
        As a stable currency of the US dollar, the anchoring degree with the US dollar is obviously an important driving factor for the competitive pattern of the stable currency market. According to the statistics of duneanalytics, in the recent period (may 15-June 13, 2022), most stable currencies are close to the U.S. dollar in anchoring degree and low in anchoring degree. USDP and GUSD may be low in anchoring degree due to small transaction volume and high sliding point, especially USDP. We believe that the anchoring degree with the US dollar is the basic threshold for the stability of the US dollar and is not enough to constitute a key competitive advantage. Although the usdt dispute is still ongoing, it does not damage the fact that usdt can be converted into US dollars and the circulation volume is the largest in the market. The major transactions are the walls behind the usdt that will try their best to maintain the value of usdt and ensure the stability of confidence and consensus.
        Because the place with the largest inflow / outflow of usdt is the exchange. PROTOS, the encryption research team, said that from 2014 to October 31, 2021,
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