Explore the Distinctive Attributes and Mechanisms of Stablecoins_blog

27 Oct, 2023

Explore the Distinctive Attributes and Mechanisms of Stablecoins

Cryptocurrencies are known for their remarkable price volatility. While the majority of participants in the crypto sphere chase astronomical price surges, they are often met with a rollercoaster ride of ups and downs. Nonetheless, a distinct category of cryptocurrencies takes a different approach by striving for price stability and consistency. These digital assets are commonly known as stablecoins.

In our previous article, we introduced the fundamental concept of stablecoins and outlined their main categories. This article is dedicated to exploring the significance of stablecoins and delving into the operational intricacies that define the various types.

Unique Attributes of Stablecoins

Minimal Volatility

As is widely recognized, the cryptocurrency space exhibits remarkable volatility. Cryptocurrencies can experience 10x increases in value, but they are equally susceptible to sudden and complete loss of value

In this environment of turbulence, there arises a necessity for a stable reference point where investors can securely shelter their capital against the perils of price fluctuations. Consider a scenario in which the cryptocurrency market enters a bearish phase, resembling the events of the first half of 2022, during which almost every coin faced a significant decline in value. In such circumstances, it is imperative that there exists a segment within the ecosystem or on the blockchain where investors can maintain tokens that retain their worth.

The prospect of shifting assets from the cryptocurrency realm into real-world assets for every transaction is cost-prohibitive and excessively time-consuming. Consequently, it is entirely rational that the majority of trading pairs are linked to US dollar-pegged stablecoins such as USDT. This is due to the fact that the US dollar functions as the world’s global reserve currency. In the metaphorical machinery of the cryptocurrency market, the US dollar-pegged stablecoins serve as the lubricant that sustains its operations. They function as the standard against which most other cryptocurrencies are assessed. Devoid of these stablecoins, the cryptocurrency market would be at risk of collapse.

Be Your Own Bank

This leads us to the next distinctive characteristic of stablecoins. There is no requirement for a banking institution to safeguard or facilitate the transfer of stablecoins. This characteristic unveils a realm of opportunities. Consider residing in Venezuela, a country where, at the outset of 2022, the recorded inflation rate stood at a staggering 1198.0%. In such a scenario, the official currency of Venezuela, the bolivar, is depreciating in value more rapidly than any other currency worldwide.

Under these circumstances, holding onto this currency is the least desirable option. However, it is possible that your local bank does not offer the option to open an account denominated in any currency other than bolivars, or perhaps there is no local bank accessible to you. What alternatives are available? Well, you have the option to access a cryptocurrency exchange online and purchase a stablecoin, such as one pegged to the USD, euro, or even backed by gold. Consequently, your funds are now denominated in a significantly more stable currency.

This approach aids in combating inflation and safeguards the purchasing power of your funds.

Smooth Cross-Border Transaction

We will utilize an example to demonstrate this part. A man need some extra money from his cousin who moved to Canada and he needs it fast. He doesn’t have time to deal with slow wire transfers and exorbitant exchange fees. Instead, his cousin can send him a stablecoin directly to his own wallet, not a bank’s, within minutes for a very small fee. Easy peasy, problem solved.

This transfer can be completed within a matter of minutes and typically incurs only a nominal fee. This example illustrates the potent capabilities of stablecoins, showcasing how they can swiftly resolve financial challenges. It is important to recognize that stablecoins derive their power from their existence on global, decentralized blockchain networks that operate independently of government oversight, traditional financial institutions, and corporate entities.

Diverse Mechanisms of Stablecoins

By dividing stablecoins into 3 different categories: fiat-backed, crypto-backed, and algorithmic, we can begin to elaborate on the mechanisms behind them.

Fiat-Backed Stablecoins

Earlier in the USDT example. Fiat collateral must always be in a 1:1 proportion to the number of tokens issued.

The collateral is held in reserve by a central issuer or financial institution. Regulators require these issuers to frequently disclose the reserves to make sure they always have enough backing for the tokens they mint.

Crypto-Backed Stablecoins

Crypto-backed stablecoins aim to achieve this objective by utilizing smart contracts instead of relying on central issuers.

As the name implies, crypto-backed stablecoins utilize other cryptocurrencies as collateral. When a user acquires these stablecoins, they lock their cryptocurrency assets within a smart contract. In return, the smart contract issues tokens that hold an equivalent representative value. This mechanism is referred to as a collateralized debt position (CDP).

DAI is a prominent stablecoin in this category. Typically, these types of crypto-backed stablecoins necessitate overcollateralized positions, meaning that a user must deposit more cryptocurrency into the smart contract than the value of the stablecoins they receive. This overcollateralization is a safeguard against potential price fluctuations that could lead to liquidation. Nevertheless, in extremely volatile market conditions, even overcollateralization may not shield users from the risk of liquidation.

Algorithmic Stablecoins

In contrast to the preceding categories, algorithmic stablecoins do not rely on fiat currency or cryptocurrencies as collateral. Instead, they employ a sophisticated framework of algorithms and smart contracts to govern token supply and circulation, effectively regulating the coin’s price.

When the stablecoin’s value falls below its targeted peg, tokens are removed from the circulating supply through a process known as “burning,” which serves to elevate the price. Conversely, should the stablecoin’s value exceed its intended peg, tokens are introduced into the circulating supply through a process known as “minting,” with the objective of reducing the price.

What About USDA?

USDA serves as a crypto stablecoin fully backed by secure fiat assets. It seamlessly moves on the blockchain akin to other digital currencies and can be minted directly with ASEAN countries’ fiat, maintaining a 1:1 value peg to the US Dollar.

Lao National Digital Technology Group, the issuer of USDA, offers a comprehensive financial assurance package:

100% Third-Party Fund Insurance: Banking insurance services provide complete coverage to protect the entire reserve pool.
100% Reserve Backing: All reserves are securely held with 100% allocation in US dollar deposits, US treasuries, and cash equivalents.
100% Transparency: LADT upholds complete transparency by publishing a monthly report detailing the current total assets and reserves.
100% Real Yield: With one-click lending, investors have the opportunity to earn a genuine yield on their investments.

With its unwavering peg to the US dollar and robust support from the Lao Government, USDA provides a foundation of stability and reliability, poised to revolutionize the digital economy landscape in the ASEAN region.

Stablecoins, with their stability, user control, and frictionless cross-border transactions, are pivotal in shaping the future of digital finance.

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31 Oct, 2023

Thailand’s 4th-largest bank buys $103M stake in crypto exchange

K-bank acquired the crypto exchange via its subsidiary, Unita Capital, which also introduced three new entities for digital asset management.Kasikornbank, also referred to as K-Bank, on Monday announced its acquisition of a majority stake in the parent firm of local crypto exchange Satang.In a filing to the Stock Exchange of Thailand, K-Bank President Pipit Aneaknithi disclosed that the acquisition, worth 3.7 billion Thai baht ($102.8 million), was made through the bank’s fully-owned subsidiary, Unita Capital. Following the takeover, Satang will renamed to Orbix Trade Company Limited, the filing showed.Operating in Thailand since 2017, Satang claims to be the country’s longest-standing crypto exchange.According to the filing, Unita Capital has also established three new subsidiaries: Orbix Custodian for digital asset custody, Orbix Invest for digital asset fund management and Orbix Technology & Innovation Company Limited for blockchain infrastructure development.K-bank ranks as Thailand’s fourth-largest bank in terms of assets, per Nikkei Asia. Established on June 8, 1945, the bank operates in commercial banking, securities, among other sectors.In 2003, it transitioned from its former English name, Thai Farmers Bank, to its current name, mirroring its Thai pronunciation. With a presence in over 1,000 locations domestically, the bank also has overseas branches, primarily in China.The bank’s crypto exchange acquisition comes about a month after it launched a $100 million tech venture fund focused on artificial intelligence, Web3 and deep tech startups.Meanwhile, its competitor, Siam Commercial Bank (SCB), established a blockchain and digital asset subsidiary, SCB 10X, in early 2021, according to Ledger Insight.Shortly after, SCB initiated a $600 million joint venture, the Global Disruptive Technology Venture Capital Fund, and rebranded the parent company as SCBx. SCB further pursued an over $500 million acquisition for a majority share in Thailand-based exchange Bitkub, but had to back out when local authorities called for changes from the exchange.

26 Oct, 2023

Bank of Spain Embraces the 'Digital Euro' and Explains Its Advantages

The digital euro will make electronic payments a vital piece of the financial system, the statement claims.Banco de España, Spain’s central bank, has joined a chorus of European banking institutions preparing their customers for the potential benefits of a digital euro. The central bank published a short text on Oct. 19 explaining the nature and uses of the European Union’s potential central bank digital currency (CBDC).The bank claims that the physical cash format “does not allow to exploit all the advantages offered by the growing digitalization of the economy and society.” However, the digital euro will make electronic payments a vital piece of the financial system.The authors highlight the possibility of offline payments with the digital euro, emphasizing its level of privacy, equivalent to cash. They also make reservations that in the online form, users’ data would still be visible only to their financial institutions and not to the CBDC infrastructure provider, Eurosystem.According to the project calendar published in the text, the current “preparation phase,” launched on Oct. 18, will finish by 2025. However, a final decision on issuing a pan-EU CBDC is yet to be made.The Bank of Finland recently expressed the same amicable sentiment toward the digital euro. A board member, Tuomas Välimäki, called it “the most topical project” in the European payment sector.On Oct. 25, the European Central Bank (ECB) shared a link to the landing page dedicated to basic information about the digital euro. It promises to deliver an “easier life” and a “stronger Europe.”Earlier in October, the governing council of the ECB announced the beginning of the ”preparation phase” for the digital euro project. It will last two years and focus on finalizing rules for the digital currency and selecting possible issuers.