Stablecoins becoming Collateral Silos ?
Stablecoins have risen to prominence in the world of cryptocurrency and blockchain, transforming the way we perceive and utilize digital assets. These digital currencies are pegged to real-world assets like the U.S. dollar, offering stability and trust in a volatile market. What sets stablecoins apart from their traditional counterparts is the concept of velocity, which is reshaping the financial landscape in ways we’ve never seen before.
The Power of Stablecoin Velocity
Velocity refers to the speed at which a currency circulates within an economy. In the case of stablecoins, their velocity is astonishingly high compared to traditional forms of currency. This high velocity is attributed to several key characteristics:
- Fast Settlement: Transactions with stablecoins settle rapidly, reducing the time it takes to complete financial transactions.
- Settlement Finality: Once a stablecoin transaction is recorded on a blockchain, it is final and cannot be reversed, providing a higher level of trust and security.
- Traceability: Every stablecoin transaction is traceable on a blockchain, ensuring transparency and security.
- Public, Open-Source Protocols: Stablecoins are built on open-source protocols, allowing anyone to participate and innovate.
- Programmability: Stablecoins are not just a form of currency; they are programmable, making them faster, more efficient, and cost-effective.
The combination of these characteristics gives stablecoins a high natural velocity, creating liquidity without the need for traditional forms of leverage. Historically, monetary policy relied on leverage to generate liquidity, but stablecoins achieve this through technology alone.
Stablecoins and Liquidity
Liquidity is the lifeblood of any economy, and it must flow seamlessly through the financial system. Higher velocity of stablecoins can serve as a tool in lieu of leverage to support monetary policy. By enhancing the velocity of stablecoins, you can potentially manage liquidity without the need for conventional leverage.
However, the high velocity of stablecoins brings about a unique set of challenges. Consider that the annualized trading volume of stablecoins is a staggering $16 trillion. This figure is substantial when compared to the U.S. B2B payment volume of $25 trillion (Mastercard, 2018). How is this $16 trillion trading volume possible with a base of only $22 billion of underlying assets? The answer is velocity.
One stablecoin, for instance, has an astonishing turnover rate of 914 times per year. Another stands at 158 times, and another at 70 times. On average, U.S. dollar stablecoins have a velocity of 109 times — confirmed data that highlights the immense difference between stablecoins and traditional currencies.
The Challenge of Collateral Silos
While high velocity is advantageous in creating liquidity, it also poses challenges. Stablecoins become “collateral silos” that wall off high-quality liquid assets for issuers like Tether and crypto-native assets for decentralized issuers like DAI. This creates a scarcity of collateral available for reuse in pledged collateral markets and other financial activities. Managing stablecoin cash collateral presents significant liquidity risk.
Stablecoin deposits are considered “volatile money deposits,” as they can be withdrawn in large sums within minutes. This liquidity risk could lead to payment system risk if not managed effectively. Therefore, a solution is needed to tackle this issue and ensure the stability of stablecoin issuers.
Autonomint’s Time-Bounded Liquidity Mechanism
At Autonomint, we recognize the liquidity risk faced by stablecoin issuers. In response, we’ve introduced a Time-Bounded Liquidity Mechanism designed to address this challenge while generating yield-bearing time assets for users who borrow or mint stablecoins through our protocol.
Users who hold these time-bound assets have the flexibility to redeem or end the maturity of these assets at predefined regular intervals. Not only does this mechanism mitigate the risk of a mass redemption of stablecoins, but it also contributes to interest rate discovery in the DeFi landscape, essential for building a crypto yield curve.
The Time-Bounded Liquidity Mechanism ensures that our protocol can handle the risk of all stablecoins being redeemed simultaneously, whether due to a prisoner’s dilemma, systemic risks, or volatile market conditions. By introducing time-bound liquidity, users are less likely to hoard stablecoins for immediate redemption, reducing selling pressure and the potential for significant peg deviation.
Moreover, we aim to avoid becoming a collateral silo by replicating collateral with our yield-bearing assets, ensuring that it remains accessible and generating regular yields for its holders.
Stablecoins are revolutionizing the financial world, and their velocity is a crucial element in the transformation. Autonomint is committed to addressing the liquidity risks associated with high stablecoin velocity while fostering stability and growth in the world of digital assets. With innovative solutions like the Time-Bounded Liquidity Mechanism, we aim to lead the way in optimizing the utility of stablecoins in the modern financial ecosystem.
