What decentralized stablecoins are
A series of papers published a few years ago marked the initial efforts some pioneers made on decentralized stablecoins, and they have produced preliminary plans and ideas. For instance:
- 1."Hayek Money: A Solution for Cryptocurrency Price Stability" by Ferdinando Ametrano in 2014.
- 2."Notes on Cryptocurrency Stability: Seigniorage Shares" by Robert Sams in 2014.
Based on the ideas presented in these papers, we can reach the following definitions for decentralized stablecoins:
Decentralized stablecoins are a type of cryptocurrency that does not need to be guaranteed by a centralized institution or organization. Instead, it adjusts the supply based on specific algorithms and rules and pegs its price at a stable level.
Algorithmic stablecoins are an exciting innovation compared with fiat money, the sovereign credit currency such as the dollar and the euro.
Compared with fiat money, which is most widely used for real-world economic activities, decentralized stablecoins are a more suitable economic medium for the cryptocurrency world. The reasons are as follows:
- 1.Decentralized stablecoins are real decentralized and do not rely on any centralized system for circulation, transaction, issuance and redemption. This is in line with the decentralized concept of cryptocurrencies. Same as Bitcoin and Ethereum, decentralized stablecoins apply the "Code Is Law" Principle. Just like the decentralized collaboration conducted by Bitcoin or Ethereum mining machines, decentralized participants or organizations coordinate to issue, circulate and trade decentralized stablecoins based on rules, building a huge ecosystem in an open and symbiotic manner.
- 2.The rapidly expanding cryptocurrency market needs decentralized stablecoins to function as its economic medium, just as how fiat money is indispensable in modern economic activities. Currently, this need is satisfied by centralized stablecoins such as USDT, USDC and BUSD, or over-collateralized stablecoins such as DAI and LUSD. However, this is far from enough. The upcoming multi-trillion-dollar cryptocurrency market requires a completely decentralized and highly efficient new stablecoin to serve as a robust underlying support.