In the minds of many people, the generation and usage of fiat-backed stable coins are easier than the cryptocurrency-backed stable coins. In fact, this view is a one-sided perception because it confuses the production and circulation of stable coins.
Taking USDT, whose circulation is currently close to $10 billion, as an example. If an ordinary user wants to generate USDT from the US dollars in their bank account, he must first register an account on the Tether official website and submit KYC verification materials (including proof of residential address such as water, electricity and gas bills), bank information (including account statement) and wait for Tether’s review. After the review is passed, he also needs to operate the bank account to transfer USD to the account designated by Tether. After the remittance arrives, USDT can be withdrawn from the Tether official website account to your wallet/exchange address.
In these complicated processes, mainland Chinese users basically are not able to pass some steps such as address verification and bank accounts review. Therefore, the issuer of USDT is insulated from ordinary users in mainland China.
As we can see from the previous operation, generating USDT is difficult and complicated for users in mainland China. Why do you still think USDT is easy to use?
The most important advantages of the fiat-backed stable coins are zero holding cost, arbitrage space, the huge vacuum of supervision, and successful Asian market strategy, which are some of the reasons why USDT has achieved the current market size. These factors have been analyzed in different articles, so I will not repeat them here.
As a researcher of decentralized cryptocurrency-backed stable coins, I believe that from the perspective of the operational complexity and success certainty of issuing stable coins, the cryptocurrency-backed stable coins are significantly better than fiat-backed stable coins.
1. The issuance of the cryptocurrency-backed stable coins is more concise and equal
As long as you have a crypto wallet and crypto assets, you can generate DAI stable coins through the MakerDAO system. At present, MakerDAO has basically achieved full-process visualization operations. Users will get corresponding prompts for every step of the operation whether they are using imToken, BitPIE, and other crypto wallets, or MetaMask and other web-side wallets, which is truly ready to use and achieve one-stop generation.
For the cryptocurrency-backed stable coins like DAI, the two steps of registering an account and KYC do not exist. The entire operation process does not need to interact with a bank account which is especially important for European and American users.
As long as you have been in contact with the banking system in Hong Kong, Europe, and the United States, you would know that using local banks to transfer money to third-party accounts not only require a step of pre-registering the payee but have various regulations on the daily transfer limit, which cannot be convenient. In contrast to the banking system in mainland China, the user experience has absolute advantages over that in European and American counterparts. No need for cumbersome operations about bank accounts is undoubtedly an important reason why DAI, As the first decentralized stable coin on Ethereum, can be quickly accepted by users in Europe and the United States.
In terms of certainty, cryptocurrency-backed stable coins also have advantages. Due to KYC, bank restrictions, etc., not every user can successfully use the funds in their bank account to generate USDT. As for the cryptocurrency-backed stable coins, everyone is equal and there are no thresholds such as geography. Anyone can interact with their own crypto wallet and smart contract to generate stable coins. Therefore, the potential issuance group of the cryptocurrency-backed stable coins is naturally more than that of fiat-backed stable coins. Its issuance mechanism is also more fair and user-friendly.
2. Fiat-backed stable coins have outstanding advantages in circulation and holding
Limited by policy and other factors, the issuing side of fiat-backed stable coins is basically controlled by investment institutions and whales in European and American countries. The issuance of decentralized stable coin is mainly based on European and American users. The processes that mainland Chinese users can participate in are mainly circulation and usage. It is precisely at this stage that the advantages of fiat-backed stable coins are outstanding.
For users who produce USDT, no matter how long the USD funds are deposited in Tether’s account, there is no need to pay interest, so USDT can be held for the long-term and used for circulation. DAI and other the cryptocurrency-backed stable coins are subject to the underlying business model of loaning, and users who produce stable coins inevitably have to pay service fees/interest to smart contracts. The longer they hold the DAI, the higher the interest fee they need to pay. As a result, the overall circulation will be restricted.
As for the huge vacuum of supervision mentioned above, Tether has been investigated and litigated many times by the New York Financial Bureau, which has cast a shadow on its business prospects. Users have no idea whether USDT’s reserve assets are sufficient and whether it can cope with potential run-offs. Once the USDT has problems, it will cause huge losses of users. As for the cryptocurrency-backed stable coins like DAI issued by MakerDAO, most of them do not involve the fiat currency channel, so they will not touch the regulatory red lines of various countries, and the project can be smoothly developed.
3. USDT’s market arbitrage opportunities boosted circulation
Another factor contributing to the surge in USDT issuance comes from its Asian market strategy, which resulting in arbitrage opportunities. This mechanism is particularly obvious in the case of a negative premium of USDT. When European and American institutions holding a large number of US dollars notice a negative premium in USDT, they would use the US dollars in exchange for USDT and buy BTC in exchanges like Binance and Huobi, after which they withdraw the BTCs to the European and American exchanges (such as Coinbase) and sells it in exchange for US dollars; or does not sell it and holds low-cost BTC for a long time.
Such an operation is more cost-effective than buying BTC in US and European markets directly with US dollars. After getting the low-cost BTC, European and American institutions go to the trading market to sell into US dollars and continued to generate USDT on Tether. As this process continues, BTC in the Asian market is gradually lost to the European and American markets, and more and more USDT remain in the Asian market. This process ultimately causes huge losses of Asian BTC holders. Eventually, they had to accept the fact that BTC was already held in large quantities by European and American institutions and whales, and gave up the pricing power from the Asian market. By then, the US dollar can continue to harvest the world with the help of BTC, and all this is market behavior.
So, what if it is the cryptocurrency-backed stable coin dominates the market? If most operators of the cryptocurrency-backed stable coin do not actively provide access to fiat currencies and rely solely on private OTC exchange requirements, the above-mentioned cross-market arbitrage model around the US dollar will not be possible. In the long run, the cryptocurrency-backed stable coin will promote the balanced development of the global cryptocurrency market and play an active role.
4. Potential demand and innovation of cryptocurrency-backed stable coin
Without changing the current model of pledging and loaning of the cryptocurrency-backed stable coin, thorough innovation of the stability mechanism, and effective adjustments to liquidation and position opening, the cryptocurrency-backed stable coin cannot avoid a situation similar to DAI accidents happened on March 12, 2020, and will fail to gain the approval of a larger group of users.
Focusing on the innovation of cryptocurrency-backed stable coin, the technical team where the author is working has conducted in-depth research. At present, a complete product design plan has been formed, and the white paper is about to be officially released. We will name this stable coin product QIAN 2.0.
We believe that QIAN 2.0 provides a new type of decentralized financial tool that everyone can participate in. It will promote the cryptocurrency-backed stable coin to expand its audience. It can gradually increase the proportion of RMB-denominated tokens in the crypto asset market and provide new options to USD stable currency market.
The author will next publish an analysis of many product design features of QIAN 2.0, explain the characteristics of the new cryptocurrency-backed stable coin to you. Please stay tuned.
If you have any topic about stable coins to discuss with me, contact me at david@theforceprotocol.com.
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