Photo by Shubham Dhage on Unsplash

Stablecoin is essential to Defi. However, stablecoin is not as stable as it sounds 🧐.

Particularly, when the market has weakened, the stablecoin likely de-pegged ⚠️.

Stablecoin is not a currency but rather a debt 🧾 you buy from the private reserve.

Of course, you can argue that the US dollar 💵 is not a currency but a debt from the central bank.

However, will you hold stablecoin for the next 30 years compared to keeping the US dollar? It is probably not, simply because you feel it risky ⚡ to have stablecoin.

🤨 How Come Dollar Is So Strong

Image credit: https://www.researchgate.net/publication/305661915_US_DOLLAR_STABILITY_AND_THE_GLOBAL_CURRENCY_RESERVES

1️⃣ One way to see the dollar's strength is if many foreign reserves will hold the dollar. The answer is yes. Also, there are many long-term securities backed by the US dollar.

2️⃣ Another way is the broad usage everywhere in the world. Banks around the globe are likely holding more US dollars than stablecoins.

3️⃣ The third way is warfare. When there is a war, the US dollar devalues itself and supplies more cash to fund the war. And it will become stronger when the war has ended.

🤨 How Come Stablecoin Is So Weak

1️⃣ First, stablecoin itself is risky. It is a debt product that unclearly reports its backing assets.

2️⃣ Second, stablecoin is centralized instead of decentralized, which was confirmed by the CEO of Circle, who created the popular stablecoin USDC.

3️⃣ Third, a stablecoin backed by an unstable asset will create volatility in the coin itself. For example, Luna stablecoin UST is backed by Bitcoin.

🤨 How Stablecoin Works

Image credit: https://www.nber.org/system/files/working_papers/w27136/w27136.pdf

Stablecoin is an arbitrage bot that receives a dollar from investors who purchased stablecoin and stablecoin investors seeking stablecoin in the crypto market.

The bot will pick the best price in the exchange and make a profit with a different price from different investors while adjusting the supply of the stablecoin treasury.

The arbitrage only works when under the normal market condition. However, stablecoin tends to de-peg the US dollar when the market is volatile.

👉 Opinion

Stablecoin is still in the earlier phase of becoming more stable and adopted by other institutional investors. It depends on how transparent their assets backing will reveal to the public.

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Photo by Shubham Dhage on Unsplash