Market Research and Value Discussion on Fiat Stablecoins and Algorithmic Stablecoins （Part I）

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.

Summary of 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 system 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 system, equity system and a debt stock separation type;

◆ Rebase currencies have a simple logic, but are easily affected by FOMO. Debt system types and debt stock separation types are prone to the death spiral of deflation caused by insufficient bond purchases. The equity system 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 system. 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 ecosystem widen the practical application possibility for stablecoins.. Partial mortgage algorithmic stablecoins are a better transition scheme.

1. OVERVIEW OF STABLECOINS

1.1 MONNAIES STABLES ET MONNAIES STABLES ALGORITHMIQUESSTABLECOINS AND ALGORITHMIC STABLECOINS

In the DeFi world, the main products that can be seen in the market include the Lending market, the decentralized trading market (DEX), the Derivatives market, the Payments market and on-chain asset market. The infrastructure can be divided into trading, lending and stablecoin markets. Stablecoins are the most basic constituent element of the whole DeFi ecosystem. As the core bridge between traditional currencies and cryptocurrency, stablecoins have a wide application space.

At the time of writing, the market value of stablecoins has exceeded US $120 billion according to Coingecko's data. People's exploration of stablecoins has never stopped. The stablecoins generally experience three stages: the fiat-backed stablecoins represented by USDT, USDC and BUSD, the cryptocurrency asset- backed stable currency represented by Dai and the algorithmic stablecoins represented by AMPL. There is no doubt that the fiat-backed stablecoins are still the most widely used and most accepted stablecoins at present. It has a simple and easy to use mechanism, absolute monetization with strong security and trust. However,it is also prone to third-party risks. The form of centralized trusteeship contradicts the decentralized thinking of blockchain. Similarly, the on-chain asset backedstablecoins focus on the process of decentralized stablecoins, deeply binding the stability mechanism with the secondary market. However, its high liquidation risk and low asset utilization caused by excess mortgages are often criticized.

The third generation of algorithmic stablecoins, also known as unsecured/ unbacked stablecoins, are adjusted by an algorithm or internal mechanism. It tries to create a real unbacked and decentralized stable currency. There is a common development logic in the current most common algorithmic stablecoins, that is, using the supply and demand theory of economics. The idea is to adjust the market money supply through the algorithm, increase the market supply when the stablecoin price is higher than the anchor price, reduce the supply when the stablecoin price is lower than the anchor price, or provide arbitrage space through a certain internal mechanism to maintain the stability of the price. This kind of currency stability through smart contracts is closer to the decentralized vision of blockchain. As algorithmic stablecoins are still in the preliminary exploration stage, the influx funds into the market often lead to an unstable price. Many stablecoins are still at an early stage, and their vision of creating stable value still needs to be tested by the market.

1.2 ITERATIVE PROCESS OF ALGORITHMIC STABLECOINS

Compared with backed stablecoins, the implementation of algorithmic stablecoins is more difficult. Exactly how algorithmic stablecoins can achieve the core meaning of stability and can be widely accepted is the goal of various R & D teams. Reviewing the algorithmic stablecoins market, from the perspective of launch time and innovation of the stabilization mechanism, its process of updating and iteration can be followed.

The first generation of stablecoins adopt a pure algorithm mechanism to adjust the price through full supply adjustment. Regarding of the death spiral phenomenon under the first generation of Rebase mechanism which is too somple, the second generation of algorithmic stablecoins provides arbitrage opportunities from the debt system or equity system to stabilize the price. The stablecoins of debt system introduces coupons and debt system, trying to attract participants to balance the price of stablecoins with the incentive of bond arbitrage. The equity system more intuitively anchors the price range with arbitrage opportunities, and the stablecoins of debt or stock separation makes the bond system effective when deflation occurs. The equity system generates incentives when inflation occurs. Imitating the central bank's macro-control model has become the focus of the market. The third generation of algorithmic stablecoins realize the problem of unstable prices found with previous algorithmic stablecoins It adopts a compromise scheme between algorithm generation and mortgage generation to enhance the value and confidence support of the currency. The competition in the stablecoin market is fierce. The fourth generation stablecoins, either tries to change the common underlying logic of DeFi, adopts novel liquidity control measures to adjust the stablecoin supply, or changes the anchored target. Apart from that, the goal is to achieve stability and low volatility.

2. STABILITY MECHANISM OF ALGORITHMIC STABLECOINS

The previous chapter briefly mentioned the iterative process of the algorithm to stabilize currencies The discussion on how to find currency price stability and the effect of stability, is the research focus of this chapter. Generally speaking, the current stability mechanisms of algorithmic stablecoins include the first generation of Rebase mechanism where the full supply is determined by pure algorithm, the stability mechanism is determined by seigniorage or price arbitrage, and the mortgage-type mechanism combines other innovative mechanisms.


2.1 REBASE STABILITY MECHANISM OF FULL SUPPLY BY PURE ALGORITHM

The design logic of this kind of algorithmic stablecoin mechanism is the simplest. It adopts a single token mode. It can be considered as the "integration of coin, stock and debt.” The internal algorithm maintains the price around the target price by increasing or reducing the number of stablecoins of the holder. Taking AMPL as an example, it adopts the currency price stabilization mechanism of flexible supply. The AMPL smart contract Rebases at 2:00 (UTC) a.m. Beijing time every day. It increases or decreases the APML supply according to the stablecoin price. The balance of all coin wallets is adjusted proportionally. After the Rebase, the holders' holdings change and the value of their holdings remain unchanged.

AMPL created a new concept, Rebase, to stabilize the currency world. The easiest way to understand the mechanism is by analysing its advantages and disadvantages. AMPL is essentially a stablecoin created by an algorithm, without the support of authoritative entities, actual economic value, or mandatory guarantees. The simple mechanism of game theory of a single token and pure algorithm supply regulation makes AMPL prone to frequent sharp volatility. When the price continues to fall, investors will inevitably sell when they see the reduction of the number of stablecoins in their wallets, even if the proportion of money held remains unchanged. Once this emotion spreads, the lack of confidence in the future price will lead to liquidity shortage and even form a serious death spiral. The price decline is due to currency deflation. This is the continuous decline of prices caused by selling in big quantities.


2.2 SEIGNIORAGE OR PRICE ARBITRAGE STABILITY MECHANISM


2.2.1 SEIGNIORAGE STABILITY MECHANISM OF DEBT SYSTEM

The second generation stablecoins represented by ESD is introduced into the "debt system" in the form of bonds issued by the Federal Reserve. The reason bonds are introduced is to avoid the death spiral caused by the long-term deflation of the first generation of stablecoin, AMPL.
- When 1 ESD ＜ 1 USDC (regarded as $1), the debt system will be initiated and the coupons (i.e. discount bonds) will be launched. Investors buy the bonds in order to obtain profits when redeemed in the future. In this situation, ESD will recov and the price will rise;
- When 1 ESD ＞ 1 USDC (regarded as $1), the system will issue additional ESD. Users participating in pledging ESD and providing liquidity in the pool will be rewarded. In this situation, the price will fall.

The game theory of new bonds from the second generation of algorithmic stablecoins is that some price fluctuations are absorbed by bond price arbitrage. However, this form of "integration of coins and debt" still has the hidden danger of a death spiral. Some industry experts said that this kind of bond is essentially more like a longing futures or options. Investors buy bonds to bet based on their confidence that the future stablecoin price will rise to the target price. Investors are encouraged by the bond price arbitrage to participate in the balance process of currency price stability. Under this background, bonds only have the function of arbitrage between price differentials without the basic function of repaying capital with interest like with of traditional bonds. This means that full principal recovery is not guaranteed for investors. When the price is difficult to bring back to the anchor price, the value of such bonds will be greatly reduced. This Is especially evident when the market investors lack confidence in the project, or there is no new capital to enter. This often results in the continuous downturn of the price of the stablecoins. If there's a lack of motivation for bond purchases, the stability mechanism will lose its foundation.

2.2.2 SEIGNIORAGE STABILITY MECHANISM OF THE EQUITY SYSTEM

Taking Terra as an example, its stablecoins is forged and redeemed through the arbitrage exchange process of the seigniorage share LUNA. It provides economic arbitrage incentives to market investors according to the deviation between the stablecoins and the anchor price. It compensates the long-term income of users participating in the balanced price through fee income distribution and Seigniorage share. For example; 0.1% ~ 1% of the fee charged for Terra trades will be allocated to users participating in the pledge.

- When 1 UST (dollar stablecoins of LUNA) ＞ $1, the user can send LUNA worth $1 with the agreement to gain 1 UST. The supply of UST increases and the price decreases. The users participating in stacking can also be rewarded; In this situation, the destruction of LUNA leads to a decrease in supply and an increase in LUNA price. Arbitrageurs can make profits after trading back LUNA (i.e. enjoy seigniorage tax), which also drives Terra's ecolosystem development;
- When 1 UST ＜ $1, the user can send 1 UST to the contract in exchange for LUNA worth $1. The supply of UST decreases and the price increases. In this situation, LUNA holders or miners absorb price fluctuations and can sell for profit after the UST price rises.

Compared with the seigniorage stablecoins of the bond system, LUNA is an asset with inherent value. On the Terra blockchain, it generates cash flow through equity incentives and Terra exchange fees, so its value is supported. Terra's value support comes from LUNA’s reserve. This derives from the income expectation of Terra's handling fee. Therefore, the more people that use Terra, the higher the value of LUNA.

2.2.3 SEIGNIORAGE STABILITY MECHANISM WITH DEBT OR STOCK SEPARATION

Basis created the "third generation of currency model" to simulate the central bank's regulation of currency issuance. "Basis Cash (BAC) + Basis share (BAS) + Basis Bond (BAB)" correspond to "US dollar + stocks + bonds". It separates the stablecoins, bond currency, and equity currency to enrich the elements of the stability mechanism and overcome the pain point of weak liquidity that could be faced by a single token. This enables investors and speculators to invest and trade BAS and BAB through the arbitrage mechanism, so as to achieve price stability. The users of the stablecoins carry out daily payment and trading activities.

- When 1 BAC ＜ $1, investors can buy BAB at a discount (BAB price = square of BAC price) and encourage the burning of BAC through arbitrage after future price corrections;
- When 1 BAC ＞ $1, the smart contract will issue additional stablecoins and distribute them to BAS holders after meeting the demand for bond redemption. It means that the BAS hloders can benefit from the additonal stablecoins in the phase of inflation, while BAB holders can benefit from arbittrage in phase of deflation.

Similar to the second generation of algorithmic stablecoin ESD, the bond system of BASIS in the third generation of currency mode is also at risk. In particular, Basis Cash does not set a maturity date, making it more difficult for the price to reach the target price of $1. Although the new equity system enriches means of incentive, it is more conducive to early token participants. There is a problem of centralized supply expansion rewards, and the unfair distribution mechanism reduces the latecomers' interest in participation. In addition, once a large number of giant whales holding equity tokens withdraw without more funds entering, it will further reduce the liquidity of the stablecoins.

2.3 STABILITY MECHANISM OF MORTGAGE HYBRID

In order to overcome the defects of stability mechanisms and the reflexivity of network effects and price stability, algorithm generation and mortgage generation is an idea that has gained traction. Frax chooses the idea of partial mortgage guarantee, adopts a dynamic fractional reserve system, and supports currency price stability through a built-in equity system and external collateral. In order to mint a FRAX, a certain amount of FXS (Frax Share) and other US $1 collateral (USDC/USDT) need to be deposited. The ratio of the two is dynamically adjusted according to the demand for FRAX stablecoins.

- When 1 FRAX < $1, investors buy FRAX, redeem USDC and FXS in FRAX, and sell FXS for profit. In this situation, FRAX demand increases and the price increases;
- When 1 FRAX ＞ $1, investors send USDC and FXS to the contract to mint FRAX and sell FRAX for profit. In this situation, the demand for FRAX decreases and the price decreases. It can also be seen that the contract adopts the seigniorage incentive mechanism.

2.4 OTHER INNOVATIVE STABILITY MECHANISMS

2.4.1 ALGORITHMIC STABLECOINS OF PCV MODE

When providing liquidity incentives, most DeFi projects adopt the total value locked TVL (Total Value Locked) model. The frequent outflow of capital flows and the low cost for users' to transfer of funds inevitably brings strong uncertainty to the amount of funds available. In particular, when a large number of platform currencies are sold off or the project funds are withdrawn, it causes panic and a large number of disloyal holders sell and quickly abandon the project, The survival rate of these projects is getting worse and worse. FEI proposes the protocol controlled value (PCV) model, in which the protocol directly owns the user's assets in the contract. Users input ETH as liquidity and send it to Uniswap to form ETH / FEI liquidity pools to support the price stability of FEI. The total amount of ETH determines the number of FEI. In addition, Fei Protocol deploys PCV to create a secondary market in which users can exchange FEI back into ETH, which is more like a "transaction generated stablecoins".

FEI adopts the stabilization mechanism that offers direct incentives to pull the stablecoin price back to the linked level through dynamic minting and burning. This punishes the transactions that deviate from the anchor pricing and reward the transactions close to the anchor pricing. If FEI is sold when it is lower than the target price, it will lead to greater losses (bear the cost of deflation). In contrast, buying can obtain direct benefits, Therefore, the price can be stable within a certain range.


As it is similar to Dai's use of ETH as collateral to generate stable currencies, the stability of FEI will inevitably still be affected by the fluctuation of ETH price. Therefore, investors need to be vigilant against collateral risk. FEI Dao also provides solutions for dangerous situations, such as access to the joint curve of stable assets like DAI and RAI to diversify PCV, or generate income by building other DeFi projects to provide a certain mortgage buffer for extreme situations.


2.4.2 ALGORITHMIC STABLECOINS FOR ANCHORING PHYSICAL ASSETS

In essence, the ultimate goal of algorithmic stablecoins is stability. The most important thing is to find a stable value point of reference and how the stability mechanism works. In addition to the traditional form of anchoring legal tender, some teams began to think about weakening the common stability form by using an arbitrage mechanism and exploring and measuring the real stable value point of reference. Meter is a prime example of this.

Meter (MTR) is a stable encrypted virtual currency. According to their official statement, it’s currency has all three functions. Unit of account, medium of exchange and store of value, which is realized on the premise that it can ensure price stability. Meter is based on an independent economic system which believes that increasing the supply of coins through mining in a POW (Proof of Work) system is the best way forward. According to microeconomic theory, competitive activities can promote the equilibrium state of MR = MC (marginal income = marginal cost) in mining activities. In short, the price of an asset on the chain can be measured by the production cost. This is determined by the calculation cost, and the calculation cost can be measured by the power cost. Therefore, the price of the on=chain stablecoin on chain can be measured by the power consumption cost of its production. In the design of the stablecoins, Meter stabilizes the price by adjusting the network’s computing power. When the MTR price rises, more computing power will be deployed to mine MTR. When the price falls, the computing power will be transferred to the production of other encrypted assets. The price stability of MTR is decided by the market.

Meter is not linked to legal currencies such as the US dollar. It provides a stable value reference for cryptocurrency by linking to the value of the physical world, aiming to create a currency with real long-term equilibrium value.

3. DEVELOPMENT status OF FIAT STABLECOINS AND ALGORITHMIC STABLECOINS

3.1 MARKET status

Stablecoins have an important role to play in the field of DeFi. It has gained a lot of tracking in the DeFi space. In terms of overall market value, it ranks fourth after DeFi with $100 Billion riding on its back.


By sampling and researching representative projects from the classification of algorithmic stablecoins, it can be found that among the algorithmic stablecoins of Rebase, debt mechanism, equity mechanism, debt-equity separation mechanism, partial mortgage and PCV model, Rebase, debt mechanism and The market share of stablecoins under the debt-equity separation mechanism has shrunk significantly, The dual-token mechanism of equity mechanism and the partial mortgage model have made considerable progress. The FEI of the PCV model became very popular once it went online, and then experienced market tests.
3.2 ONCHAIN status

From the data point of view, the fiat stable coins USDT, USDC and BUSD are in the top three in terms of market value and supply. The absolute leading position of USDT and USDC in the industry is currently unmatched by other stablecoins. BUSD relies on the advantages of the platform to create more widely accepted stablecoins, but the relatively low number of currency holding addresses and transaction addresses reveals the potential centralized holding risks that have to be paid attention to. This can be obtained from the distribution of currency holdings. It is verified that 91.76% of its TOP5 addresses hold a much higher proportion of coins than other stablecoins.

The data on the chain shows that among the representative algorithmic stablecoins, AMPL, UST and CUSD with more than 10,000 person times of currency holding addresses are distributed in Rebase type and dual token equity mechanism algorithmic stablecoins; The trading address number data also has a similar phenomenon, and the three are also the most active algorithmic currencies in the market. AMPL’s considerable currency holding and trading data is largely because its algorithm stabilizes the identity of the pioneer of currency and the market enters earlier, so it is more well known. The algorithm of dual token seigniorage mechanism comes from behind, indicating that this kind of stability mechanism is more recognized by the market.

3.3 STABLE SITUATION

The essence of algorithmic stablecoins is to use a set of established rules to replace the discretionary currency issuance system, so stability or low volatility is the most concerned factor.

The data show that the US dollar pegged stablecoins occupies the majority of the stablecoin market, and various projects compete fiercely to hoard the most of it. From the price trend of stablecoins per unit and the root mean square error data of US $1 with the target, it can be observed that pegging the stablecoin is the best option. The root mean square error of such a stablecoin is about 0.05. The chain asset backed stablecoin DAI and some mortgage-based stablecoins FRAX have also shown strong performance. In contrast, the stablecoins with root mean square error of about 0.14 still have room for improvement, and the difference of the same type is small.


However, the effect of price anchoring on the stablecoins price history has been quite uneven. Compared with the above results, it can be preliminarily observed that the "stability" of stablecoins not only depends on the technical architecture, but also depends on the trading volume. From the data, Rebase type and debt-base dsingle token have the worst price stability, especially the latter one, and there is time when the latter has been in the state of death deflation for a long time. Such a type of token has been gradually eliminated from the market, and the three-token model with debt and stock separation has also come to an end. On the contrary, the anchoring effect of dual-token seigniorage, partial mortgage and PCV algorithmic stablecoins is better, which provides the benign development direction of algorithmic stablecoins to a certain extent: actual economic value supported, trust guaranteed, or excellent balance mechanism between algorithm and market game.

4. VALUE OF FIAT STABLECOIN AND REGULATORY RISK

4.1 VALUE AND SUPERVISION OF FIAT STABLECOIN

Fiat currency pegged stablecoin is the most dominant coin in the stablecoin market. It is being backed with 100% physical assets that are pegged with fiat currency. It is more and more widely used as a means of payment in the cryptocurrency world. Randal K. Quarles, vice chairman of the Federal Reserve's supervision, once said that the dollar pegged stablecoin can bring support to the dollar in the global economy because it can make cross-border payments faster and cheaper to encourage the use of the dollar. He also stressed on the fact that its transfer speed is faster and has fewer disadvantages compared with CBDC. In short, this view gives out a clear sign that the US dollar pegged stablecoin acts like a bridge between the two financial wealth systems. The stablecoin is a "converter" of US dollar value expression. The traditional central bank is still an independent actor of monetary policy, and the liquidity control is still in the hands of legal currency providers. From the perspective of someone who has just entered in the crypto world, the stablecoin can be positioned as the "US dollar in cryptocurrency", and other cryptocurrency assets are being pushed into the "dollarization" process, which can essentially be considered as the booster of US dollar liquidity.

Although the core function of fiat stablecoin is to bridge the circulation value of legal currency to cryptocurrencies, the volatility in the price of cryptocurrencies is very strong. The high volumes in the cryptocurrencies might not just be because of the value the project creates but also due to the repeated wash tradings. It is assumed that the uncertain value of "dollarization of encrypted assets" must be undertaken by the traditional central bank, and the new value or new liquidity demand of on-chain assets shall be borne by the new dollar appropriately. But this liquidity matching is difficult for the central bank to capture, and the difficulty of regulation is greatly increasing. It is also getting very difficult for the central bank to charge or tax the crypto market.. In fact, the central bank does not seem to be interested in the growth of blockchain ecosystems such as bitcoin and Ethereum. Therefore, the idea of purely treating a stablecoin as a US dollar medium may be too simple, especially due to the difficulty of liquidity control caused by the strong volatility in the crypto world.

"Dollarization of encrypted assets" is a very pure idea, which may be an ideal scheme for most of the investors trading crypto assets. However, for those who really embrace the vision of blockchain decentralization, it is a temporary compromise because they want to build a financial and monetary system independent of the current centralized setup. Moreover, at present, the mainstream fiat pegged stablecoin still has issues such as regulatory turmoil and opaque reserves. Although Tether claims that it has sufficient reserves for cashing USDT and USD, the authenticity of their claim is difficult to digest and its price fluctuation, random additional issuance and mine explosion risks increase potential safety hazards.

Regulatory issues have always been a headache for the fiat pegged stablecoin. On one hand, it is whether it can realize the commitment of having enough real asset reserves for cashing them out. On the other hand, the question is whether these stablecoins have brought a stability crisis to the existing financial system, including money laundering, underground trades, etc. To create a larger and more complete financial ecosystem, the entry of professional players like financial institutions or institutional investors is indispensable. For them, they must consider the capital security under supervision. For the existing financial system, the central bank's regulatory framework for bank deposits and monetary funds is relatively clear. Whereas there is no final conclusion on the regulation of stablecoin. Federal Reserve Chairman Powell once said that the current stablecoin in the market is similar to the "Monetary Fund". If so, the stablecoin must be subjected to the supervision of the SEC. The regulated stablecoin market will inevitably affect the whole crypto world. No one knows whether the current "free land" will bring a shock or the regulated market norms. From the perspective of financial stability, the fiat-backed stablecoin is used as a monetary instrument in crypto finance but it can not provide the same level of investor protection compared with the existing fiat currency. It is an unregulated money market mutual fund. Once the cryptocurrency encounters a serious collapse and the liquidity demand takes a sharp hit, the fall is inevitable. At this time, the vulnerability of the crypto market generated by such schemes will be exposed, and the financial stability will be heavily impacted, which is something the regulators in various countries worry about.

At present, the supervision of fiat stablecoin is still under discussion, and the regulatory framework has not yet taken shape. A tight regulatory audit on such stablecoins in the future is one of the major obstacle that stablecoins have to dodge for their future developemts. A SHOCK TO USDT’S DOMINANCE DUE TO REGULATORY FACTORS

Regulations are one of the biggest problems in the stablecoin market. A fiat stablecoin with compliance advantages may be more widely recognized in the future. For most investors, the centralized cryptocurrency exchange is the preferred place to participate in cryptocurrency trading. USDT has captured the majority of the stablecoin market by making the first mover advantage.