[UDC Report] The stablecoin answer to the main crypto question
[UDC2019 Report]-2 Blockchain is still in its infancy. If you think of where the industry is in terms of early capital market development, it would be somewhere around the 18th century. For whatever the currency is finally used for -- whether for the exchange of goods, as a measure of value or as a store of value -- it needs to be stable. For cryptocurrency to function like a real currency, it needs to overcome the volatility problem. In the blockchain industry, stabilizing cryptocurrency is the stablecoin project. Pegging coins to legal tender Stablecoins are often pursued by companies issuing cryptocurrency pegged to a country’s legal tender. Such attempts are mostly pursued in developing countries with poor financial business infrastructure. The Rupiah Token, based on the Luniverse blockchain platform from Dunamu subsidiary Lambda256, is one example. One Rupiah Token, a cryptocurrency pegged to the Indonesia’s Rupiah, is valued at 1 Rupiah. Some say the stable coin market has been saturated, but the market is centered around cryptocurrencies pegged to U.S. dollar, so there is still growth potential for such projects in the Asian market, said Jeth Soetyoyo who established Rupiah Token. The token is currently traded on Upbit, a cryptocurrency exchange that has been aggressively expanding its business in the Southeast Asian market. Pegging coins to a basket of legal tender The process of issuing a stablecoin pegged to a single flat currency can be quite simple since you only need to issue the same amount of tokens as balance of that legal tender. However, if value of a legal currency that a stablecoin is pegged to suddenly plummets, the existence of the stable coin can be at risk because the value of the stablecoin depends on the value of its pegged currency. Blockchain-based global fintech company Terra pegged its cyrptocurrency Terra to special drawing rights (SDR) created by the International Monetary Fund (IMF). The SDR is an international reserve asset created by the IMF. The value of the SDR is based on a basket of five currencies - the dollar, the euro, the renminbi, the yen and the pound. Pursuing stability of a coin For those who hope to maintain the decentralized nature of cryptocurrencies, the idea of reducing the currency’s volatility by depending on legal tender is problematic. So these people choose to issue stable coins with cryptocurrencies as collateral, thus maintaining the decentralized nature. The dai stable coin by MakerDAO is one example of a decentralized finance projects. Individuals issue dai with ethereum as collateral. To create a sustainable Dai ecosystem, there is also a loan rate on the stable coin. The loan rate is 10.5 percent as of the end of September. If the ethereum price falls dramatically, users need to put in more ethereum as collateral or pay back some of the dai coins. If such measures are not taken, the currency is automatically liquidated. If centralized debt position is liquidated, and ethereum held as collateral will be put to auction at a price cheaper than market price. In this process, users are fined a 13 percent penalty and an additional commission for having bad loans. A system that keeps stability of dai by penalizing bad loans is called keeper. Users can become keepers and purchase ethereum sold at below market price to achieve additional benefit. Still, decentralized finance lacks risk management compared to existing centralized systems. Dai’s price is set based on the supply and demand of ethereum. But since demand has been greatly exceeding supply for a while, loan rates or commissions to stabilize the coin rose from 0.5 percent to as high as 19.5 percent at one point. There is a long way to go before decentralized finance is adopted in our daily lives. ※UDC 2019 videos and presentations can be found at https://udc.upbit.com/program/detailed_program, also the full report can be found at https://static.upbit.com/reports/udc2019_report_en.pdf. This report was sponsored by Upbit, and the information in it is based on the Upbit Developer Conference held at Grand Hyatt Incheon on Sept. 4 and 5.