Exploring Stablecoins: The Bridge Connecting the Real and the Encryption Worlds

Recently, news about central banks researching legal digital currencies has frequently appeared in major media outlets, and the term "stablecoin" has also been mentioned often. So, what exactly is a stablecoin? Is it the same as the legal digital currency or electronic currency issued by central banks? Let's delve into the relevant content of stablecoins.

Definition of Stablecoin

A stablecoin is a type of cryptocurrency that maintains a fixed exchange rate with a specific underlying asset. In the blockchain space, the most well-known stablecoins are tokens pegged to the US dollar, maintaining a 1:1 exchange rate. Besides US dollar-pegged stablecoins, there are also stablecoins linked to other currencies, such as the Chinese Yuan.

It is worth noting that the funds in common electronic payment methods (such as mobile payment platforms) are also maintained at a 1:1 ratio with fiat currency, but these can only be referred to as electronic money, not stablecoins. Stablecoins are not just an electronic form of currency; they are also a programmable encryption coin and a product of the development of blockchain technology.

The Stability Mechanism of Stablecoins

Stablecoins maintain their stability through various methods:

1. Fiat currency collateral: The issuing institution promises to provide an equivalent reserve of fiat currency for each issued token.

2. Digital Asset Collateral: Users can obtain stablecoin by collateralizing other encryption assets. The system will adjust based on the value fluctuations of the collateralized assets to maintain stability.

3. Algorithmic Adjustment: Automatically adjust the supply of the stablecoin through smart contracts to maintain its stability with the target price.

The Role and Limitations of Stablecoins

Although the application scenarios of stablecoins are limited in daily life, they play an important role in the cryptocurrency field:

• Act as a measure of value
• Provide hedging functionality
• Connect traditional finance with encryption economy

However, the current stablecoin system still has some issues:

• Fiat-collateralized stablecoins may face questions of insufficient transparency.
• Digital asset collateralized stablecoins may trigger a chain reaction during severe market fluctuations.
• The reliability and stability of algorithmic stablecoins are still in question.

Looking to the Future

As countries actively research national digital currencies, central bank digital currencies, as an officially recognized stablecoin, are expected to play an important role in the future. China is at the forefront of research in the field of digital currencies, and the introduction of a central bank digital currency could have a profound impact on the financial system.

In the future, central bank digital currencies may play a role in improving payment efficiency, promoting inclusive finance, and enhancing the transmission of monetary policy. However, their specific applications and impacts still need further observation and research.