Stablecoin: The Pillar of the Digital Money Ecosystem

Stablecoins play a key role in the cryptocurrency industry. As of July 25, 2024, the market capitalization of stablecoins is approximately $165 billion, accounting for nearly 7% of the total cryptocurrency market of $2.417 trillion. Among them, USDT is currently the third largest cryptocurrency by market capitalization, following Bitcoin and Ethereum.

This article will delve into the definition, classification of stablecoins, and their significance in the Digital Money field. We will also explore the operational mechanisms and potential risks through a case study of USDe.

Definition and Importance of Stablecoins

A stablecoin is a "cryptocurrency that aims to maintain a stable value in relation to a specific asset or a group of assets." Typically, stablecoins are pegged to fiat currencies such as the US dollar.

In the context of the widespread adoption of Web3 applications, stablecoins serve as a medium of exchange with stable value to facilitate daily transactions, while also enabling fast and low-cost cross-border payments. Compared to other cryptocurrencies, stablecoins help reduce the impact of value fluctuations, acting as a safe haven for value preservation during market volatility.

Classification of Stablecoins

mortgage stablecoin

Collateralized stablecoins are backed by other assets to ensure their value is supported by collateral. Mainly includes:

1. Fiat-collateralized stablecoins: backed by reserves of fiat currency, such as USDT and USDC.
2. Commodity-backed stablecoins: Supported by commodity reserves, such as XAUt.
3. Cryptocurrency collateralized stablecoin: supported by reserves of other cryptocurrencies, such as DAI.

algorithm stablecoin

Algorithmic stablecoins maintain stability by ensuring the safety of collateral through algorithms or adjusting market supply and demand. The main methods include:

1. Liquidation: Risk collateral is liquidated through auction.
2. Burn and Mint: Influence price by adjusting the token supply.
3. Adjust the lending interest rate: Control the supply of stablecoin by changing the lending interest rate.

It is worth noting that these classification methods are not mutually exclusive; stablecoins can adopt multiple mechanisms to maintain stability.

Security Risks and Solutions of Stablecoins

1. Collateral Transparency: Enhance transparency through third-party custody, regular audits, and reserve proof reports.
2. Fluctuation of collateral value: Implement over-collateralization and liquidation mechanisms to mitigate the impact of value fluctuations.
3. Smart Contract Vulnerabilities: Conduct strict security audits and continuous monitoring.
4. Market Volatility: Design flexible stabilization mechanisms, increase liquidity, and use reliable oracles.

Overview of Mainstream Stablecoins

The top 20 stablecoins account for over 99% of the total market capitalization, with the top 5 stablecoins accounting for 96%. All of the top 20 stablecoins are backed by certain assets, with some also incorporating algorithmic stabilization mechanisms. This indicates a clear preference among users for fully collateralized stablecoins, especially those supported by fiat currency.

USDe Case Study

USDe is a stablecoin issued by Ethena Labs, currently ranking fourth in market capitalization. Its design principle is mainly based on the centralized exchange (CEX) and the "delta hedging" strategy.

USDe uses mainstream cryptocurrencies as collateral and performs delta hedging by "shorting" on perpetual contracts to neutralize the sensitivity of the collateral value to market fluctuations. The income from USDe comes from staking rewards and derivatives position profits.

However, USDe also faces some potential risks:

1. Centralized risk: dependence on CEX may become a vulnerability.
2. Market Risk: There may be a continuous negative funding rate, affecting the yield design.

Conclusion

Stablecoins play an important role in the cryptocurrency ecosystem, providing stability and facilitating transactions. From traditional fiat-currency collateral to innovative algorithmic mechanisms, stablecoins meet the diverse needs of the crypto community. However, stablecoins also face risks such as collateral transparency, value volatility, and smart contract vulnerabilities.

With the emergence of new stablecoins like USDe, the market will closely monitor whether they can maintain stability amid volatility and avoid a collapse similar to Luna. Continuous security audits and monitoring are crucial for maintaining market stability and trust.