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Why is cryptocurrency difficult to use in our daily life? There are many factors, but the one that many people agree on is the price volatility of cryptocurrencies. If you look at the Bitcoin market alone this year, the price which was at $30K in January exceeded $60K in April and has now returned to the level of $30K. This is a clear example of volatility not found in traditional markets.
This volatility acts as an obstacle for cryptocurrencies to play the role of currency in the real economy, so stablecoins were created to compensate for this. Stablecoins maintain a stable price by being linked with fiat currencies through various methods.
Stablecoin Project Status by Country, Source: Blockchain.com
There are three methods of issuing stablecoins. The first is a fiat currency collateral method, the second is a virtual currency collateral method, and finally, an algorithmic method that controls supply/demand with an algorithm.
For example, the commonly known Tether (USDT) was issued as fiat collateral. In other words, it is a stablecoin that is issued only as much as the fiat currency held by the Tether project.
UST of Terra, a blockchain project led by Chairman Shin Hyun-seong (the founder of TMon in Korea), is an algorithmic stablecoin. LUNA is used to maintain the stability of the UST price, and price stability is maintained by purchasing UST through Luna or burning it after additional issuance.
As such, the price stability of stablecoins greatly contributes to the expansion and use of various financial products (loans, insurance, etc.) on blockchain technology by overcoming disadvantages such as expensive fees and physical limitations that exist in traditional finance; and the biggest beneficiary is DeFi (Decentralized Finance). DeFi refers to a decentralized financial service run on blockchain technology without a central control authority. DeFi offers transparency, 24/7 service, low fees, and faster remittance that the traditional financial market could not provide, and it can be used to replace existing financial services such as loans, trading and insurance. Stablecoins play a key role in DeFi, which is not tied to a specific institution and is ushering in an era of transparent finance in which users deposit cryptocurrencies for a certain period of time and receive interests. The expansion of DeFi market has a strong correlation with the demand for stablecoins, the means of transactions.
Source: The New York Times
If so, can the central banks that have been protecting monetary sovereignty for a long time in history give up the sovereignty of money in this change? I don’t think so. As a central bank that has already managed the transition from traditional currency to digital currency, such as trading financial products into cryptocurrency, the creation of the CDBC can be considered an alternative. CBDC, which many central governments are currently experimenting with for adoption, uses blockchain technology and applies some of the advantages of cryptocurrency. Still, it is a digital currency that institutions such as governments and central banks will have the issuing power.
According to various opinions of experts, the issuance of CBDCs will impact the stablecoins, but it is expected that the impact will not be as significant. This is because stablecoins can perform various roles and functions that CBDCs, which specific institutions govern, will not. In the end, there is an opinion that stablecoins and CBDCs will be in a form that maintains an ecosystem where they coexist.
In this post, we talked about stablecoins, DeFi, and CBDCs. In the meantime, we hope that this will provide some clarity to traders to understand the basic concept and its interrelationship in the changes in digital finance. I want to emphasize that it is time to focus on keeping an eye on its growth these days when expectations for its adoptions are growing.
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