Exploring Stablecoins: The Bridge Between the Real World and the Encryption World

Recently, the central bank’s research on legal digital currency has attracted widespread attention. At the same time, the concept of “stablecoin” has frequently appeared in related discussions. So, what exactly is a stablecoin? How does it differ from legal digital currency and electronic currency? Let’s take a deeper look at the relevant content of stablecoins.

Definition of Stablecoin

A stablecoin is a type of cryptocurrency that maintains a fixed exchange ratio to a specific underlying. In the cryptocurrency space, one of the most well-known stablecoins is USDT, which maintains a 1:1 exchange ratio to the US dollar. In addition to USDT, there are other stablecoins pegged to the US dollar, such as TUSD and GUSD, among others. In addition, there are stablecoins pegged to other currencies, such as BitCNY, which is pegged 1:1 to the Chinese yuan.

It should be noted that although the funds in common electronic payment methods (such as mobile banking and third-party payment platforms) also maintain a fixed proportion with fiat currencies, these can only be called electronic money, not stablecoins. Stablecoins are not only an electronic representation of money, but also a programmable cryptocurrency, which is a product of the development of blockchain technology.

The Operating Mechanism of Stablecoins

Stablecoins maintain their value stability through various methods:

1. Fiat currency collateral: For example, USDT, the issuer promises that for every token issued, there is an equivalent amount of US dollars as reserves.

2. Digital Asset Collateral: For example, BitCNY, users obtain stablecoin by collateralizing digital assets (such as BTS coin). This mechanism is similar to traditional mortgages; when the value of the collateralized assets drops, the system will enforce liquidation to maintain the value of the stablecoin.

3. Algorithmic adjustment: Some projects try to maintain stability by algorithmically adjusting the token supply, similar to the monetary policy operation of a central bank.

The Role and Limitations of Stablecoins

Although the application scenarios of stablecoins are limited in daily life, they play an important role in the encryption currency field:

• Serve as a measure of value, reducing the risk of price volatility in transactions.
• Provides a hedging function during market downturns
• Connect traditional finance with the cryptocurrency ecosystem

However, there are still some problems with the current stablecoin system:

• Centralized stablecoins (such as USDT) may face transparency and trust issues.
• Stablecoins collateralized by crypto assets can trigger a ripple effect due to wild fluctuations in the price of the collateral
• The long-term stability of algorithmic stablecoins still needs to be validated.

Looking to the Future

As central banks actively research and develop fiat digital currencies, we may be on the verge of a new type of stablecoin – a digital currency backed by national credit. This fiat digital currency may play an important role in improving payment efficiency, promoting financial inclusion, and strengthening the transmission of monetary policy.

In the future, with the continuous advancement of technology and the improvement of regulatory frameworks, stablecoins are expected to play a role in a wider range of fields, injecting new vitality into financial innovation and economic development.