Is human intervention good for Stablecoins?
Here is our pick of the 3 most important Stablecoin news stories during the week.
This week we saw a very interesting dynamic play out. The Central Bankers made the case for a CBDC’s on the basis that it gives them a whole new set of tools to balance and manage the economy and at the same stage algorithmic stablecoins that rely purely on a set protocol of burning or issuing based on demand started to prove themselves.
First the ECB released a paper for real Central Bank policy wonks.
A unified framework for CBDC design: remuneration, collateral haircuts and quantity constraints (europa.eu)
There are three major algorithmic stable coins in the market, RAI, FRAX and FEI. FEI is the largest of the three in terms of market capitalization at roughly $350 million. By comparison, FRAX has a total market value of $245 million, whereas RAI is valued at roughly $28 million, according to Coingecko data.
RAI follows a “redemption price” protocol that targets secondary-market sales, which allows it to maintain stability over time versus the underlying ETH-based asset. Barton says RAI is a more suitable option for traders as opposed to long-term investors.
FRAX is collateralized by USDC, though its total backing is always less than the supply of FRAX. That makes it under-collateralized and the stability mechanism is supported by using USDC as opposed to ETH.
FEI differs markedly from these projects by using a bonding curve that sells FEI for ETH. Wealth entering the system is locked in something called Protocol Controlled Value, which is used to maintain the peg through liquidity management on exchanges.
Algorithmic stablecoins show promise of reducing volatility — ShapeShift (cointelegraph.com)
Meanwhile, Federal Reserve Governor Lael Brainard on Friday laid out a range of reasons for “urgency” around the issue of developing a U.S. central bank digital currency, including the fact that other countries such as China are moving ahead with their own.
Fed’s Brainard: Can’t wrap head around not having U.S. central bank digital currency (marketscreener.com)
So in summary, the Central Bankers had better hurry up or we will have a world filled with a choice of currency, some Digital, some Government backed, some not and maybe just maybe some very stable ones all based on code without any human involvement. Does not sound like a bad outcome to me!
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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