How do you engineer a Stablecoin?
Here is our pick of the 3 most important Stablecoin news stories during the week.
First from the crazy and wild world of DeFi we got some lessons on how not to do it. The most important data point is this: Fei was built to maintain a 1:1 peg with the U.S. dollar but it has not quite hit the mark over this first week of its existence.
Backed by major VCs, Fei aimed to create a stablecoin protocol that would outright buy assets with its token, rather than holding them as collateral for loans.
The White Paper described a system of incentives. “This paper proposes a new stability mechanism called direct incentives. A direct incentive stablecoin is one in which both the trading activity and usage of the stablecoin are incentivized, where rewards and penalties drive the price towards the peg.”
It appears the team underestimated the demand (it raised over 1 Billion USD) it would see to participate in the launch. It also seems clear that many of those who jumped into the project didn’t understand Fei’s “direct incentive” method for stabilizing the price.
Fei was designed to meet the perceived drawbacks of other leading stablecoins. MakerDAO’s DAI is over-collateralized, and requires thousands of users to manage individual vaults of their collateral. USDC and USDT are centralized and censorable. Purely algorithmic stablecoins, such as basis cash, are very strange.
$1B Fei Stablecoin’s Rocky Start Is a Wake-Up Call for DeFi Investors
In the meantime, The Bank of Russia has presented a target model for its proposed digital ruble: That closely matches the existing two-tier retail model that assumes that the Russian central bank is both the issuer of digital rubles and the operator of the digital ruble platform. At the same time, financial institutions open electronic wallets for their clients and perform operations over these wallets on the digital ruble platform.
Households and businesses will be able to access their digital rubles through any bank where they are serviced.
Bank of Russia presents Digital Ruble Concept | Bank of Russia
Whilst Russia and most other Central Banks are still in the design phase, China and its Central Bank (PBoC) are perhaps following the lead of the cool kids in DeFi land and experimenting in real time with air drops and expiry dates. That’s right you get free money as manna from heaven but you have to spend it within the allotted time or it just disappears before your eyes.
Central Bank Digital Currencies and Airdrops
In summary, we are still seeing a lot of experimentation and design work, both on paper by many Western Central Banks including Russia, or with an actual CBDC in the field as in China, and then finally with spectacular busts and bursts of investment in DeFi.
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.
For context on stablecoins please read this introductory interview with Alan “How stablecoins will change our world” and read articles tagged stablecoin in our archives.
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