Monday, December 16, 2019

Stablecoin and its DeFi Use - USDQ Provides a Possible Solution

 Jack Huang
Consultant for the United Nations; Advisor for QDAO; Freelancer

Blockchain innovation has significantly changed the way we thought in
traditional financial sector. All of those concepts and business models, such as
decentralization, cryptographic tokens, and digital ledger, also brought us more
imaginations toward the future forms of money. Although we are still facing the
disorder from 2017-2018 ICO chaos and increasing strict regulatory frameworks,
the overall trend of cryptolization should be irreversible. The development of
financial digitalization and proper use of technologies can empower our economy,
even provide great opportunity to overcome those development challenges. The
concerns, therefore, can be argued that how we can bring awareness and build trust
to consumers, and how to monitor and eliminate those crypto risks for the financial
institutes and regulators?

The stablecoin may be a possible solution in a world that fiat is in flux while
the innovation has the possibility to transform the landscape of financing and
banking. By definition, stablecoin is a cryptocurrency - an internet-based medium
of exchange, backed by valuable assets in the real economy. If you take US
dollars in between 1945 - 1970 as an example, each USD should be equivalent to
1/35 of an ounce of gold (however President Nixon tore apart the Bretton Woods
Agreement in 1971 but that’s another story). In crypto world, stablecoin services in a very similar function, it can be traded as the medium in any transaction because
the stablecoin itself pegs its market value to some external reference, for example,
USD, other fiat currencies, or commodities such as gold. Indeed, the most common
style of stablecoin is backed by fiat currency at the 1:1 ratio, like USTD and
Tether - both are backed by USD. Ideally, the stablecoin requires sufficient reserve
assets to keep volatility-free valuation of that “coin”, then it can be used in daily
exchange - from trading other cryptocurrencies in exchanges to buying food in a
physical shop.

Another interesting private project is QDAO - a fully decentralized stablecoin
backed by crypto assets, which brings discussion to the next level. While other
stablecoins pledge to assets such as US dollar or gold, QDAO choses to accept
Bitcoin (or potentially other crypto assets) as the fundamental collateral (it needs
to deposit or lock up certain amount of his crypto asset) and the user can decide if
he wants to create any fiat-based stablecoin for further use. For example, the term
“USDQ” represents fully USD-backed token while another term “JPYQ” means
the token is supported by Japanese Yen or “CNYQ” with Chinese Yen as the target.
Of course, according to the basic rule, the reserve assets should always exceed the
value in circulation, PLATINUM ENGINEERING (the team initiated this idea)
has designed algorithms, deposit & settlement mechanisms and smart contractdriven
ecosystem for supporting such stablecoin creations. The way that stablecoin
is still pegged to the fiat at a 1:1 ratio but take BTC as the underlying collateral
has become more popular and flexible for business cases in recent years. Actually,
many decentralized finance (DeFi) projects (include QDAO) already applied this
“over-collateralization” principle to develop their lending models. It’s believed
that the proper stablecoin mechanism should not only defence against malicious
actions/speculations, but also it should provide price stability and security for
transaction, payment, and further utilities in financial market.

Besides those brilliant private sectors, government and public sectors also
start paying more attention on crypto solution, especially the stablecoin (due to
conservative governments may not be in favor of anything “unstable”), and how
to optimize our banking and even the monetary policy. The synthetic central bank
digital currency (as known as “sCBDC”) has been introduced by the World Bank
Group since the beginning of 2019. The framework aims at offering a possible path
that trustable private sectors could work with central bank and inject digital money
to the market, or we can even call it the fintech public-private partnership for the
future economy. If you are a believer in free market, the sCBDC should be an
exciting approach that unlock the last economic power from sovereign government
- the seigniorage (note that it assumes most of commercial & financial activities
have been privatized in the modern democratic nations, but the seigniorage is
still solely and completely controlled by the central bank). Indeed, the idea of
“decentralization” or “reconstruction of power” is not new, 40 years ago the Anglo-
Austrian economist, Friedrich Hayek, already argued something similar in his book
“The Denationalization of Money”. But of course, at that moment, the word “digital”
was not yet brought to public attention.

Blockchain technology, cryptocurrency and stablecoin should be regarded
as the disruption for the financial landscape, and the monetary value can be
electronically stored and pegged to a safe and liquid asset also sheds light on new
payment and the accessibility to financial services. We have more than 2.5 billion
individuals and 200 million SMEs lacking access to basic credit and financial
support (World Bank, 2014), thus it’s persuasive that digital finance, or in more
specific mean - the stablecoin, should be able to create more opportunities to not
only advanced markets, but for people in developing regions. The government and
central bank might move slowly in this unfamiliar territory, however, the private
sector can actively act as the infrastructure builder and service provider.

As Mr. Jin-Young Cai, the CEO of International Finance Corporation (IFC),
pointed out in the CGAP event speech that “the benefits of digital finance extends
well beyond conventional financial services; it can also be a powerful tool and
an engine for job creation in developing countries”, it’s foreseeable that the role
of stablecoin, digital money and DeFi solution will become more important,
especially for SME businesses and eventually be adopted by the general public.
The following regulatory complexities and impacts on other fields shall be the nest
essential topics to everyone.

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