Can Facebook give 2.7 billion people access to stable coins?

Facebook giant entered the stable currency, stable currency again.

Original title: "Facebook encrypted currency, a blockchain change of 2.7 billion people | BlockVC study" original author: BlockVC

Original title: "Facebook encrypted currency, a blockchain change of 2.7 billion people | BlockVC study" original author: BlockVCFacebook 能让 27 亿人用上稳定币吗?

Important news

Recently, Facebook decided to launch a global payment block chain project Project Libra, and released its website and white paper on June 18, 2019. the global payment function is mainly realized by a stable currency with a package of low-volatility assets as reserves (such as creditworthy French currency, government bonds, etc.).

Commercial Ecology of Libra Project

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Specifically, Facebook's new project, Libra, aims to build a truly world-class financial system infrastructure that contains a range of low-volatility assets (such as creditworthy French dollars, government bonds, etc.). Although the project will not have an immediate and substantial direct impact on the world financial and encrypted digital money markets, if successful, it will lead to the following revolutionary significance: for the first time to provide billions of people around the world with a borderless, stable and simple means of payment and intelligent contract platform;

  • The first cooperation framework and organization of the new international financial system based on encrypted digital currency launched by world-class Internet giants;
  • For the first time, the user base of encrypted digital money was expanded explosively, affecting a population of more than 2 billion.
  • Start the world's Internet giants to embrace encrypted digital currency, into the "blockchain +" the first shot.
  • Comments on Libra Project by Zhao Changpeng, founder of Binance

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    Clearly, the Libra project demonstrates Facebook's determination and foresight to embrace encrypted digital currency assets and enter the blockchain. The reason is that for Internet giant Facebook, which started out with Internet social software, its product matrix (including Facebook, WhatsApp, Instagram and Messenger) achieved 2.7 billion monthly active users (MAU) and 2.1 billion daily active users (DAU),) in 2019. Facebook alone achieved the number of users of MAU 2.38 billion, DAU 1.56 billion.

    For the Internet social software giant, which has expanded to the number of users around the world, how to fully tap the value hidden among billions of users will be the key to its next revenue growth. However, because the users of Facebook are distributed in various countries and regions around the world, the payment behavior of users is cut by the financial system of various countries, so it is difficult to activate user consumption effectively. In this sense, the stable currency scheme based on block chain will be able to bypass the financial payment system of countries all over the world, so as to activate the transnational payment desire of users and release the consumption potential of users. The following will be a systematic introduction and analysis of the stable currency.

    Stable currency origin

    According to Wikipedia, "stable currency" refers to "a kind of encrypted digital currency whose price fluctuates least relative to the price of a certain or a package of assets." that is, the reference of stable currency comes from outside the world of encrypted digital assets, and the price stability of French currency world assets is projected into the world of encrypted digital assets through some mechanism. Typical references include renminbi, dollars or gold.

    Before we talk about stable currency, we need to briefly introduce the connection and difference between the encrypted digital currency world and the legal currency world. This will help us understand the importance of stabilizing the currency. Generally speaking, the encrypted digital currency world refers to the overall economy of goods and services priced by all kinds of encrypted digital currencies (at present, it is mainly composed of a series of assets and peripheral services based on the block chain). The legal currency world is the overall economy of goods and services based on the legal currency pricing system.

    The goods and services of the objective world are real and objective, and the main difference between the encrypted digital money world and the legal currency world is only the two faces of the objective world dressed in the cloak of different economic systems. The two are parallel worlds, but they are still inextricably linked with each other. The legal currency economy has a long history. For example, the US dollar-based economy has a history of more than 200 years, and the encrypted digital currency represented by Bitcoin has been born only a decade ago. Encrypted digital currency is still regarded as a commodity or collectibles rather than a currency with real purchasing power.

    At present, encrypted digital money is obtained mainly through the trading market, rather than through the exchange of goods or services. In the process of obtaining encrypted digital money, it is necessary to involve the transfer process from legal currency assets to encrypted digital currency assets. However, the biggest drawback of this trading model is that digital monetary assets are assets on the chain, have no national boundaries, and the transfer of assets is open and transparent, but the French currency itself is a non-block chain asset, which has national and regional restrictions, and is naturally vulnerable to geographical location, national policy and other factors, and is not easy to track assets openly and transparently.

    In addition, the encrypted digital currency price fluctuates greatly, and the relatively stable risk hedge tool is rigid demand. To sum up, the encrypted digital currency world needs a blockchain-based issuance to facilitate borderless transfer transactions, but at the same time maintain relatively stable prices of assets on the chain, which is the initial demand for stable currencies.

    It may be difficult for people living in the world of French currency to understand the significance of stable money in the world of encrypted digital money, just as it is difficult for people living on the ground to really experience the discomfort of astronauts in space after the loss of gravity.

    It may be difficult for people living in the world of French currency to understand the significance of stable money in the world of encrypted digital money, just as it is difficult for people living on the ground to really experience the discomfort of astronauts in space after the loss of gravity.

    Today, one of the resistance to the goal of "becoming a means of daily payment" of encrypted digital currency is the huge price volatility of digital currency. For investors in encrypted digital currencies, huge price swings are both honey and poison. High volatility means richer trading opportunities, but it is also not good for investors to lock in profits and hedge market risk; for users of the global transfer payment system, high volatility means that users have to bear additional asset volatility risks in transfer transactions. Obviously, encrypted digital currency, which can meet the characteristics of risk hedge and facilitate transaction query, has become the urgent need of investors and blockchain payment users. Therefore, all kinds of stable currency solutions designed to become the antidote of high volatility emerge as the times require.

    In the early stage of development, the advantage of stable currency over French currency is not obvious, because it needs an additional payment link between stable currency and French currency, which increases the transaction flow, and has not been popularized and applied on a large scale. Subsequently, with the gradual globalization of the digital currency trading market in the world, some major countries (such as China) have closed the encrypted digital currency exchange based on the legal currency, banning the direct trading between the legal currency and the encrypted digital currency. The stable currency, as the shadow and substitute of the legal currency in the encrypted digital currency world, has become popular.

    Overview of stable currency

    Global stable currency layout

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    Up to now, there are three different types of stable currency designs in the whole encrypted digital currency world:

    The basic principle of this kind of stable currency is: after obtaining the real demand of the market for the stable currency through the prophecy machine, the money is issued or recovered by adjusting the algorithm of money supply and demand, so as to ensure that the stable money supply meets the real demand of the market all the time. The advantage of this method is that it can achieve complete decentralization, but the disadvantage is that it is difficult to have an algorithm to accurately estimate the real demand for stable currency, and this demand is dynamic and needs to adjust the balance of supply and demand at any time. The algorithm central bank stable currency is difficult to recover or destroy the currency quickly and effectively in the event of inflation. So far, there has been no landing case of algorithmic stable currency.

    Such stable currency mainly through the mainstream digital assets (such as BTC, ETH or other monetized assets) locked in smart contracts, in a high mortgage rate to produce stable currency anchored to the French currency, to ensure a stable supply of money. Typical examples are MakerDAO, which mortgages the ETH loan on the chain at a high mortgage rate and a stable currency DAI anchored to the dollar at 1:1.

    Such stable currencies are generally entrusted by centralized issuers to third-party institutions with assets (such as legal currency assets and gold, etc.) and, after strict audit, stable currencies that anchor the value of legal currencies, such as USDT, PAX, TUSD, USDC and GUSD, which anchor US dollars, and DGX that anchor gold. The essence of this type of stable currency is the IOU (financial claim) issued by the issuer, and the main difference between similar products lies in compliance, security and transparency of assets (taking compliance as an example, the compliance path of TUSD and USDC is MoneyTransmitter, and GUSD, PAX is Trust Company). However, stable currencies issued based on physical assets (such as gold) have not been widely promoted because although there is a stronger consensus on the value of physical assets, it is difficult to ensure price stability, so it is divorced from the requirement of low currency volatility.

    In fact, in addition to the above categories, there is a real stable currency issued by the central bank. From the point of view of the issuer, this no longer belongs to the category of stable currency, but through the block chain to issue the real legal currency itself, that is, the central bank digital currency. Central bank digital currency refers to the legal currency issued by the National Central Bank, with the block chain as the carrier, which has all the characteristics of stable currency, at the same time, there is no weak link in the credit of the issuing subject. This kind of central bank digital currency will be included in the unified planning and management of the central bank as well as paper money and electronic money.

    Market share of mainstream stable currencies (ranking by market capitalization, data source: stablecoinindex.com)

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    Among the above three stable currency solutions, because there is no effective algorithm to predict market demand, the stable currency based on algorithm central bank stays in the conceptual design stage and has not been really implemented. The mortgage stable currency scheme based on out-of-chain assets has been widely promoted because of its simple operation and strong realizability. for example, the USDT market share issued by Tether is as high as 84% (from coingecko.com real-time data on June 10, 2019).

    However, it is criticized for the transparency of asset audit, the centralization of issuers and the fragility of credit endorsement. The ultimate form of this type of stable currency is the central bank digital currency endorsed by national credit. Therefore, the mortgage stable currency based on assets on the chain is highly expected by the trustors of the blockchain, which can not only ensure the relative stability of the currency price, but also effectively avoid the shortcomings of centralization.

    However, there are unavoidable risks in the mortgage-based stable currency based on the assets in the chain, such as the risk of explosion caused by the high volatility of the assets in the chain used for mortgage. Because the overall encrypted digital money market share is small, less than 1/4 of Amazon's market value, and its ability to resist malicious financial shorting is limited, in extreme cases, the assets on the chain used for collateral (such as ETH) may have 50 per cent or more black swan events over a period of time. In this extreme black swan case, the stable currency model based on the asset mortgage on the chain will cause the stable currency to sell off because it is too late to replenish the mortgage. Whether this kind of stable currency mechanism can deal with extreme events timely, accurately and effectively remains to be verified.

    Schematic comparison of the market value of encrypted digital currencies with the mainstream physical assets of the world (data source: howmuch.net)

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    Although the ultimate pursuit of a stable currency is to achieve an absolutely stable monetary system, because the nature of money is to measure service or value, and the amount of value is the product of people's thinking. In economic activities, even for the same object (such as services or goods), under different conditions of consumer and market supply and demand, there will always be dynamic differences in the perception of their value, which will lead to price fluctuations. Therefore, in fact, there can be no absolute unit of value similar to the physical unit. In this sense, a stable currency should actually pursue a minimum fluctuation relative to a reference, such as a legal coin, gold, or abstract purchasing power, rather than an absolute minimum fluctuation in value.

    The future of stable currency

    According to Occam's razor principle, the simplest solutions are often the most effective.

    Applied to the solution of stable currency, because the stable currency scheme based on legal currency or other low volatility assets has the characteristics of simple link and strong verifiability, therefore, it will have the greatest chance of success in the practical application (especially in the field of global payment). In terms of specific feasible implementation, there will be two most likely organizational forms of stable currency payment schemes that are truly used in real business scenarios:

    First, the central bank digital currency, strong credit countries can actively embrace encrypted digital currency, the legal currency will be "encrypted digital monetization", so as to directly bypass the time-consuming and laborious traditional "SDR" path, with the help of the characteristics of the block chain to achieve low-cost to become the goal of the global settlement currency;

    Second, for multinational giants with a large user base (such as Internet social giants, etc.), they can introduce stable currency-based payment systems to their main business through multilateral organizations, create a "global version of WeChat Pay", strengthen payment applications through user scale, and further activate more consumption scenarios through global low-cost frictionless payment means, so as to achieve the growth of enterprise size and profits.

    In the former, the stable currency acts as the global extension medium of national credit, while the latter belongs to the commercial payment alliance initiated by non-governmental organizations, which can effectively reduce the payment and settlement costs in the global business scene. It is worth noting that the two forms of stable currency organization are difficult to avoid communication and docking with regulators around the world, otherwise they will encounter great regulatory resistance in the actual landing.

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