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    Gate.io Research: The Value Discussion on Fiat Stablecoins and Algorithmic Stablecoins
    Gate.io
    Updated at:244 days 14 hours ago
    Abstract:
    The vigorous development in the cryptocurrency industry has brought a strong demand for trading. The existing mainstream stablecoins have the risks of debt liquidation and other risks that come with centralization. Investors have a strong desire for a stablecoins that truly meets the vision of blockchain decentralization. The R & D teams in the cryptocurrency industry have been exploring the stability mechanism of algorithmic stablecoins. Algorithmic stablecoins have been updated and iterated frequently in the past two years. There are only a few algorithmic stablecoins that really achieve the stability goal and are truly recognized in the cryptocurrency market. This report will discuss the problems faced by the most recognized fiat stablecoins, and then focuses on the value of algorithmic stablecoins: It will review the following: The iterative process of algorithmic stablecoins; Introducing the stable implementation mechanism of algorithmic stablecoins and verifying its stability effect; Observe its development status from market data and on-chain data; Analyze its monetization and its impact from the perspective of monetary policy; Consider the "Impossible Triangle Theory" of traditional finance and blockchain to explore its true value; As well as looking forward to the future development of algorithmic stablecoins.

    Key Points:
    - The market recognition of fiat backed stablecoins has the highest acceptance rate, but it still faces the risk of centralization. Algorithmic stablecoins are a currency issuance that replace human discretion with built-in rules. This overcomes the problems of centralization with legal currencies, stablecoins and the debt liquidation problem of encrypted asset mortgage stablecoins. Its development is still early and it still needs to be tested by the market;

    - The algorithmic stablecoins have gone through four iterations: Rebase,Seigniorage mechanism, partial reserve mechanism and PCV. The seigniorage mechanism is divided into a debt , equity and a debt stock separation type;

    - Rebase currencies have a simple logic, but are easily affected by FOMO. Debttypes and debt stock separation types are prone to the death spiral of deflation caused by insufficient bond purchases. The equity type has economic value support. The Mortgage hybrid type is the conversion of a mortgage type and an algorithmic stablecoins. PCV or other innovative types are still exploring the stability mechanism. The non-anchored legal currency is a new idea;

    - Stablecoins have gained an appreciation in the crypto market. The effect of a fiat backed stablecoins is obvious. USDT, USDC and BUSD rank among the top three in market value and supply; Among the top 10 stablecoins in market value, algorithmic stablecoins account for 4 seats. Rebase and algorithmic stablecoins with debt mechanisms have seen their market share shrink significantly. Equity mechanisms and some backed stablecoins have continued to develop. Rebase-type algorithmic stablecoins has the leading advantage in currency-holding location and trading location, and dual-token-type algorithmic stablecoins with equity mechanism has come from behind;

    - In terms of stability: backed stablecoins > algorithmic stablecoins, equity mechanism type > partial mortgage type > PCV mode > Rebase type > debt stock separation type > debt mechanism type in algorithmic stablecoins;

    - The fiat stablecoins is referred to as the "USD in Cryptocurrency". Under the "dollarization of encrypted assets", the traditional central bank still controls the liquidity, monetary policy, and decision-making power. But it is unrealistic for the central bank to be responsible for the possibility of an asset bubble; fiat stablecoins is facing regulatory risk. Compliance factors may impact the dominant pattern of the existing fiat stablecoins;

    - The algorithmic stablecoins, performs the basic functions of currency accounting; Medium of exchange and store of value epitomize monetization; The algorithmic stablecoins could have a positive impact on the existing financial . This could be good news for countries or regions with fragile monetary sovereignty and could challenge the hegemony of the US dollar. However, due to the lack of maturity in the market, Governmental control is still needed.The algorithmic stablecoins achieves the goals of free capital flow and fixed exchange rate in the impossible trinity of traditional finance. It also achieves the scalability and security of the impossible trinity of blockchain. However, the concentration of tokens held by the top token holders shows that there is still a a long way to go before reaching the goal of decentralization;

    - The development of algorithmic stablecoins need the support of high liquidity and large market value. At the same time, it also needs the reflexivity of stability and market value; Future algorithmic stablecoins supported by practical economic value have a massive amount of room to grow. Instead of merely relying on the scalability of stablecoin trading, the blockchain eco widen the practical application possibility for stablecoins.. Partial mortgage algorithmic stablecoins are a better transition scheme.

    Disclaimer: Based on the due diligence and objective analysis by internal staff, the research draws a conclusion based on the observed market data. However, it shou
    ld not be treated as the sole basis of any investment.

    The report will be uploaded soon. Please stay tuned!

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    Gate.io Team
    Sep 17th, 2021
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