The Mintage War behind Stablecoins
0xed11
September 23rd, 2022

Author: @404 | @RealResearchDAO

Let’s first start off with an old story.

In 1929, an economic crisis swept across the world, including the old European empires. No one was spared, and countless people were unemployed, causing extreme depression in society, which finally led to the outbreak of World War II.

After two consecutive world wars, the decency of the European powers was torn to shreds, and the huge wealth they had seized before was burned away.

The United States, which is far away from the rest of the world, is also far away from disputes. Roosevelt's strong political wisdom brought the United States out of the economic crisis.

It is undeniable that the entry of the United States to the battleground has become deterministic to World War II to some extent. However, the huge military supply orders during the war and the huge reconstruction funding gap in Europe after the war made the United States the largest creditor country in the world.

The U.S is also undeniably become the most powerful spokesman in the West and even the world.

As a result, the era of US dollar hegemony for nearly a hundred years also began.

The U.S. dollar continues to painstakingly maintain its detached currency status, which is used by the U.S government to arbitrarily harvest wealth around the world.

Now, a series of USD stablecoins represented by USDT, USDC, and BUSD is helping the U.S. dollar to extend its hegemony in the crypto world. At the same time, there are fierce struggles between different stablecoins.

Dollar tides and minting rights

After World War II, in order to further consolidate its hegemony, the United States established the Bretton Woods system in 1944. U.S dollars were linked to gold, and the currencies of various countries were linked to U.S dollars. The "quasi-gold standard" was implemented, and the U.S dollar officially became the core currency in the global economy. 

Objectively speaking, the establishment of the Bretton Woods system played a vital role in the stable recovery of the world economy after WWII.

But as dollars continued to be lent out, the dollar in circulation in the U.S. fell sharply, leading to deflation.

In order to solve this problem, the United States announced that U.S dollars were decoupled from gold. Printing more dollars became a matter of natural course.

Here comes the question, if the dollar is not pegged to gold, what should be used as its measure of value?

The answer is on the horizon: debt. When the Bretton Woods system collapsed, the United States was still the largest creditor country in the world, and countries around the world still wanted to lend more dollars to develop their economies.

As a result, the logic of the narrative has undergone earth-shaking changes.

Bonds issued by the U.S. credit sovereign have become the benchmark for maintaining the hegemony of the U.S. dollar, and have also become an important weapon for harvesting the world’s wealth through the IMF and tidal activities in the future.

The Federal Reserve turned on the printing press for monetary expansion, the global economy began to surge, and the prices of risk assets continued to climb. If the Fed applied monetary contraction, the global economy will suffer. The prices of risk assets will collapse frequently, and the prices of safe-haven assets will skyrocket in an instant.

In this tide of rising and falling, the US dollar, on the one hand, bought the high-quality assets of developing countries at a low price, and at the same time cheated and discarded old debts through inflation: when US bonds are priced in the market, then U.S. debt is no longer strictly a debt certificate, but a commodity.

Stablecoins, the continuation of the U.S dollar hegemony

On September 10, 2018, the New York Department of Financial Services (NYDFS) simultaneously approved two "stablecoins" based on Ethereum’s ERC20 standard, namely "Gemini Dollar" (GUSD) issued by Gemini and "Paxos Standard" issued by Paxos. Both stablecoins guarantee that every coin they issue must maintain a reserve of one dollar.

As soon as the news came out, it caused a great shock in China, which still has a large impact to this day. Someone posted: "The GUSD stablecoin may be the beginning of a world-tier financial disaster", arguing that it will become a "digital dollar" and may destroy the multinational financial system. Another posted: "The United States approved the issuance of crypto digital currency, and emerging countries may suffer next-level economic strikes."

At that time, although the entire market panicked about the launch of USD stablecoins, on the other hand, the price of other cryptocurrencies pegged to Bitcoin was even more volatile. When investors want to convert cryptocurrency into fiat currency, they often need to convert it into mainstream cryptocurrencies such as Bitcoin first and then convert it into fiat currency. Under such a process, investors need to bear the risk costs caused by price fluctuations in order to obtain traditional fiat currencies. A wildly fluctuating price will be detrimental to the overall development of the market.

Therefore, different stablecoins that are pegged to the US dollar were born.

An Introduction to Stablecoins

A stablecoin is a relatively stable cryptocurrency that is pegged to a single fiat currency in the real world.

The introduction of the stablecoin concept quickly won the favor of cryptocurrency traders, and its advantages are obvious: it can bring down the barrier of entry for people to enter the cryptocurrency market while avoiding the high volatility of Bitcoin. From a utility perspective, stablecoins have become the most effective communication bridge in and out of the cryptocurrency market.

Stablecoins have become one of the largest and fastest-growing segments of the Crypto industry, with a combined market capitalization of over $180 billion — a figure that has grown 109% over the past year and 1,748% over the past two years.

A Virtual Representation of the US Dollar Hegemony

It stands to reason that the emergence of cryptocurrencies has siphoned away a certain amount of real-world wealth, and due to the nature of blockchain technology, this wealth will be difficult to be effectively regulated.

To a certain extent, it will cause the outflow of domestic wealth and the disorder of the financial market.

So why does the United States tolerate the emergence of USDT and USDC stablecoins? It even launched GUSD and Paxos at the official behest.

In fact, in the United States, where the flow of cryptocurrency talents is the largest, the entire society has a positive attitude towards blockchain technology from top to bottom.

In addition, the United States has in fact absorbed the most funds and talents in the world. The relatively relaxed innovation atmosphere and developed finance give American companies an innate advantage in developing dollar stablecoins.

In addition, the United States takes the lead in accepting the crypto world and encourages other countries to accept it. It seems that the currencies of various countries are on the same starting line as the US dollar. In fact, the US dollar is a big step ahead.

Even if any country issues legal digital currency on the blockchain with official endorsement, it will not be able to break through the proportion of legal currency in the real world. The market will always choose the US dollar, which has the highest adoption rate in the real economy, as the main reference.

The current status quo is that stablecoins are basically pegged to the U.S. dollar, which also enables U.S. dollar hegemony to better function in the crypto world through stablecoins, which is beneficial to the U.S. dollar.

Stablecoins, as the mapping of the US dollar in the real world, are themselves the best bridge for US dollar hegemony to exert influence on the cryptocurrency world. The use of stablecoins by US dollar hegemony can not only directly impact the entire crypto world, but almost all centralized stablecoin issuers are controlled by or located in the United States, which can freeze and sanction the stablecoins at will.

The reason why the United States chooses to accept the challenge of issuing rights to support the blockchain industry is that the dollar as a stablecoin can not only harvest the absolute advantage of dollar hegemony but also maintain the status of dollar hegemony while avoiding foundational risks of the existence of other countries in the crypto world. 

The Major Stablecoins at Current

The current stablecoins are divided into three major categories: centralized stablecoins, decentralized stablecoins, and algorithmic stablecoins.

Among them, algorithmic stablecoins are mainly represented by UST and OHM. Such stablecoins maintain stability through a floating minting and burning mechanism without any external collaterals as support. For example, when UST is trading above its peg (i.e. $1), market participants have an incentive to expand its supply and lower its price by minting new UST, and vice versa.

The decentralized stablecoin is represented by DAI, which is a decentralized, dollar-pegged stablecoin issued by Maker DAO. DAI is based on an over-collateralization mechanism, and users can deposit different forms of collateral (such as ETH) into the vault to mint the DAI stablecoin. Users must keep their collateralized positions overcollateralized because collateral can be liquidated when collateral falls below a set collateralization ratio (the collateralization ratio varies by collateral asset).

Although the above two forms of stablecoins are unique and innovative in concept and underlying structure, based on the highest market cap and convenience, centralized stablecoins are favored by most users.

USDC, USDT, and BUSD are currently the three largest centralized stablecoins. All three are issued by off-chain entities and claim to be backed 1:1 by fiat collateral (i.e. "real" US dollars).

While the design of this stablecoin is more opaque and fully centralized, it has proven to be the most scalable of s the three stablecoins, having a combined circulating supply of $144.2 billion, accounting for 80% of the entire industry. While these three stablecoins cannot be audited on-chain, they all issue their own proofs of reserves to varying degrees, such as USDC issuer Circle and USDT issuer Tether holding low-risk, short-term assets such as commercial paper.

The Fights among Stablecoins

As of now, the three stablecoins USDT, USDC, and BUSD have accounted for more than 80% of the entire stablecoin market.

According to Coinmarketcap data, USDT is still the well-deserved leader, with a market share of 45.6%; USDC is close behind with 35.31%; BUSD is 13.03%.

But it’s worth noting that although BUSD’s market cap is only about half that of USDC, its 24-hour trading volume is about twice that of USDC.

Behind this data is Binance’s ambition to gain more voice in the stablecoin market.

On Sept. 5, Binance announced through a new blog post that the exchange will no longer support the trading of crypto assets against USDC, USDP, and TUSD stablecoins.

According to the announcement, all the above stablecoins will be automatically converted to Binance stablecoin BUSD after September 29.

Plus, Wombat Exchange, a stablecoin mining protocol incubated by Binance Labs, recently launched on BNB Chain.

All kinds of signs show that Binance is planning a strategic move around BUSD.

Binance’s move also immediately ushered in the response of India’s largest exchange, WazirX, which delisted the USDC trading pair almost at the same time, and provided users with a choice of BUSD trading pairs.

Although the USDC owned by WazirX is negligible (Coingecko commented), the coordinated steps of the two exchanges seem to give a sense of BUSD launching an offense against USDC.

Interestingly, in the face of this news, the co-founder of Circle believes that Binance’s move is beneficial to USDC, and can snatch USDT’s market share together with USDC.

We have no way of knowing the true thoughts of the founders of USDC, nor can we predict how the pattern of the stablecoin market will be rewritten in the future. But one thing is certain, the fights among USD stablecoins highlight the game behind the capital and institutions of different forces. And this game, no matter what the outcome, is still the continuation and expression of dollar hegemony in the crypto world.

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