Op-Ed: Is USDT a Stable Coin?
Note: Yu Xiaojian, author of this article, is a blockchain entrepreneur in China. He is the founder of coinfix and owner of several blockchain patents.
While USDT has had some market impact over the past few days, it is not a truly stable coin as it does not meet the basic criteria for a stable digital currency.
On November 21, the news of ” the theft of USDT worth $ 30.95 million” sparked a buzz in the industry and made USDT once again the center of social media following the “Bitfinex manipulates BTC price through USDT” scandal. At the same time, the two news also sparked heated discussions on the issue of stable coins on the levels of security, redemption and circulation.
As a blockchain veteran, stable coin has been one of my top priorities. While USDT has gained some market impact over the past few days, it is not a truly stable coin as it does not meet the basic criteria for a stable digital currency.
Stringent 1:1 pegging to Fiat Currency
To figure out the nature of USDT, we want to return to the essence of things in the first place, namely, what “stable coin” is.
Simply speaking, stable digital currency refers to the currency pegged 1:1 to a certain fiat currency. It is a new type of encrypted digital asset strictly abiding by the 1 to 1 exchange rate. “issuance”, “circulation”, “redemption” and “destruction” constitute the complete life cycle of a stable coin, allowing it to be freely traded in a P2P, anonymous, secure and decentralized environment.
In the meantime, maximum power should be kept in a cage in order to avoid the risk of human malice. During the entire lifecycle of the stable coin, it is necessary to introduce a decentralized audit mode to ensure its benign operation in an open and transparent environment.
Five standards constitute the perquisites for a stable coin
Based on the above definition, I think there are five major criteria for stable coin – “issuance standard”, “circulation standard”, “redemption standard”, “destruction standard” and “audit standard”.
First, the issuance standard – “decentralized.” Decentralized issuance standard is the cornerstone to make sure that “power” is locked into the cage of the “system”. Issuance of the stable coin has to be based on blockchain technology in accordance with a predetermined agreement or smart contract and in strict accordance with the provisions of on a 1:1 basis, in order to stabilize the basic value of the stable coin.
Second, circulation standard – “convenient and efficient.” Free and easy circulation is the core value for the existence of a stable coin. Therefore, in the circulation process, instant transfer and low fee is the key to create an ultimate smooth user experience. Imagine each transfer fee exceeds the transfer amount itself and costs more than an hour, the liquidity of the stable coin would be greatly reduced.
Third, redemption standard – “rigid redemption”. rigid redemption is the cornerstone of ensuring the security of the value of stable coin assets. It means the issuer of stable coin must have a 100% guaranteed reserve to ensure a 1:1 rigid redemption with the pegged currency. Regardless of when and where the holder of a stable coin offers redemption needs, the issuer must complete the redemption of users in a short period of time in order to ensure the safety of user assets. Otherwise, the construction of the stable coin is illusory.
Fourth, destruction standard – “permanent destruction.” Permanent destruction is the key to keeping a stable digital currency truly stable. It is also the most effective way to avoid the risk of “over-issuance.” Therefore, the stable coin held by users is to be destroyed once recovered by the issuer on redemption and can not be restored once it is destroyed. Only in this way can we ensure that the price of a stable coin always strictly maintains a 1: 1 exchange rate with the price of a fiat currency, and it also makes it possible to avoid the risk of “over-issuance.”
Fifth, audit standard – “open and transparent.” Credit is the key to a stable coin with a focus on “power delegation”. Therefore, in order to minimize the risk, it is necessary to introduce an open and transparent audit standard to release the power. This occurs mainly in two stages: issuance and redemption. In the issuance stage, a stable coin issuance agreement or smart contract is needed in which it stipulates the issuance of a stable coin requires a certain approval proportion from a certain number of institutions or individuals. On the redemption level, bank accounts prepared by the issuer shall be audited by a third party accounting firm to support real-time checking of account balances and joint supervision. Technically, the issuer is not allowed to issue a stable coin without the standards being met.
With reference to the five major standards, it is not difficult for us to find that USDT is not a stable digital currency in real sense, which is also the source of its current problem. Therefore, I would like to remind the blockchain enthusiasts to carefully choose the USDT for trading, because in essence it has a huge difference from the stable coin, and the risk behind it is undoubtedly huge. However, I have always believed that a true stable coin, with its convenience, efficiency and security features, will bring a whole new experience to the entire blockchain industry and even to all those in need.