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Decentralised Finance > 04_Stablecoins and CBDCs > Flashcards

04_Stablecoins and CBDCs Flashcards

1
Q

3 primary functions of money

A
  • medium of exchange
  • store of value
  • unit of account
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2
Q

7 Secondary Functions of Money

A
  • portability
  • divisibility
  • no double spending
  • anti-counterfeiting (Fälschungssicher)
  • price stability
  • acceptance (network effect)
  • fungibility (mutually subtitutable)
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3
Q

Type of Money

3 items

A
  • commodity money (good that has agreed value e.g gold)
  • covered money (such as gold and silver coins as legal tender (metal standard e.g. bimetallic))
  • Fiat money (notes and coins backed by government)
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4
Q

Currency Definition

A
  • money or monetary system which has widespread (but mostly local) use and which is usugally designated by the state as legal tender

legal tender
- money or currency that is required by law to legally fulfill a debt
- determining the legal tender is the sovereign task of the state or government

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5
Q

Properties of Currency

in practice

A
  • unpegged currencies (free floating) vs pegged currencies
  • mostly only local usage
  • “international” leading currencies e.g. USD
  • state supervision of the currency (legal tender) normally through minstry of finance or central bank (FED, ECB)
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6
Q

Bitcoin Transaction time
Problem

A
  • around crypto hype long transaction confirmation duration (up to 25 minutes around peaks)
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7
Q

Is Bitcoin money or even a currency?

Hypothesis 1

A
  • Bitcoin and Alctoins are neither money nor a currency

3 Primary Functions of money
- Store of Value (yes and no due to extreme volatility)
- but not unit of account
- medium of exchange (yes and no)

Secondary Functions of money
- **divisibility, no double spending, anti counterfeiting ** met
- but not fungible: eg. clean coins tend to be worth more since they haven’t been linke to any particular wallet (such as dark web, ransomware) -> transparency prevents fungibility
- no price stability: extreme volatility
- portability, acceptance (yes and no)

exception apply: e.g. El Salvador accounted Bitcoin as legal tender (ie.

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8
Q

Unit of Account

primary function of money

A
  • standard numerical monetary unit that can be used to value goods and services, record debts, and make calculations
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9
Q

Transaction volume
Transaction costs
# of transactions

over time in context of bitcoin

A

Transaction volume over time
- average transaction amount in BTC has gone done as value has increased
- average tranasction amount in USD has increased rapidly

Transaction Costs over time
- average transaction fee in USD peaked in 2018 the highest and in 2021 in last bull phase (but overall has decreased to around 20 USD per transaction)
- avg. transaction fee in % of transaction volume has decreased to 0,1% (peaked in 2017/18 around 0,35%

# of transactions
- volatile but highest volume around bull cycles in 2017 and 2021
- roughly 300k transactions now

-> medium of exchange yes and no

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10
Q

Bitcoin as money

summary of debate

A
  • functions of money only partially fulfilled
  • particularly unit of account and medium of exchange are problematic
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11
Q

Bitcoin as digital gold? Argument

A
  • bitcoin supply/reserves are limited (comparable to gold)
  • but high price volatility as an argument against digital gold
  • bitcoin has no fundamental value
  • has no hedge against inflation

Crypto currencies are solely an object of speculation

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12
Q

Bitcoin as an inflation hedge? Argument

A
  • some argue bitcoin could be in demand in high interest rate environment bc it could serve as store of value
  • Bitcoin’s market value tanked even though inflation was high
  • **increase in inflation expectation has failed to lift crypto market valuations **
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13
Q

Definition Stable Coin

A
  • crypto token whose value is linked/pegged to the value of other assets, such as currency, a basket of currencies or bonds and which is exchangeable into that asset at a fixed exchange rate
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14
Q

Goal of Stablecoins

A
  • keep the price (eg USD) as stable as possible (comparable to ensuring price stability as the main task of ECB)
  • to avoid Bitcoin’s problem of volatility which prevents Bitcoin being used as means of payment
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15
Q

Approaches to Achieve Price Stability of Stablecoins

A

1. 1-to-1 deposit with corresponding fiat currency (anchor currency) to guarantee fixed exchange rate (comparable to gold standard)
- eg. Tether, Digix (pegged to gold)

2. Alrogithmic money supply control to always keep supply and demand in balance(algorithmically conttrolled central bank)
- avoiding maintaining reserve asset (under-collateralized) through relying on an on-chain algorithm or smart contract to maintain peg
- e.g. TerraUSD

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16
Q

Reserves Breakdown of USD-Tether

A
  • 78.85% Cash & Cash equivalents & other short term Deposits & Commercial Paper
  • 12.55% secured loans (none to affiliated entities)
  • 9.96% Corporate Bonds, Funds & Previous Metals
  • 1.62% Other Investments (including digital tokens)
17
Q

USD-Tether
Reserve Breakdown of Cash and Cash equivalents

A
  • 65.39% Commercial Paper (drafts and notes: short term debt instrument issued by corporations and financial institutions)
  • 25.20% Fiduciary Deposit
  • 3.60% Cash
  • 2.94%: Treasury Bills
18
Q

Functioning of Algorithmic supply control of stablecoins
TerraUSDT (UST)

A
  • maintained its peg through algorithmic relationship with LUNA
  • whenever UST would lose its peg to $1 arbitrage opportunity would present itself
  • complete collapseunravelled when $85 million swap from UST to USDC in a curve pool

Example
- if UST supply was low-> high demand, price would go above $1
- users on the network could trade USD $1 of LUNA for 1 UST
- trade would burn $1 of LUNA and mint 1 UST which traders could sell for USD $1.01 - pocketing profit of 1 cent

  • if UST supply was too large-> price below $1
  • users could buy 1 UST for USD $0.99
  • then trade 1 UST for 1 USD $1 LUNA
  • trade would burn 1 UST and mint USD $1 LUNA -> net profit of 0.1
19
Q

3 key observations of Terra’s UST crash

A
  1. Episode was triggered by a particular sequence of trade in the UST/3CRV Curve Pool on Saturday, May 7th
  2. Anchor outflows from Saturday May 7 until Monday May 9 - in particular from a small set of large traders - put substantial pressure on the UST peg
  3. strong crypto market sellof on Monday May 9 added addtional pressure, which finally pushed UST materailly off the peg
20
Q

Effect of SVB bankcruptcy on crupto market

A
  • instability on USD Coin
  • no stablecoin is absolutely stable -> trust plays significant role
  • stablecoins are in the end comparable with risky, but non-regulated money market funds
21
Q

Hypothesis 2: Are Stablecoins really stable?

A

Stablecoins are not as stable & trustless as they pretend to be

22
Q

CBDCs - Digital central bank money
Definition

A
  • form of legal tender (also referred to as central bank money) which can be issued in digital form by the central bank
  • CBDC can, but does not have to, be based on blockchain technology or distributed ledger technology (DLT)
23
Q

Are CBDCs the money of the future?

A
  • introduction of CBDC is not an economic but a political decision
24
Q

Goal of CBDC

A
  • create a digital alternative to cash that unlike digital bank money (deposit accounts) fulfills function of legal tender

3 possible configurations
1. Wholesale CBDCB (indirect) [txs between banks and other financial institutions]
2. Retail CBDC (direct) [general public]
3. Hybrid CBDC

Examples of planned CBDCs
- Sand-dollar (Central Bank of Bahamas)
- eNaira (Central Bank of Nigeria)
- digitual yuan (Peoples bank of china)
- Digitaler Euro (EZB, Bundesregierung)

25
Q

Indirect CBD - Wholesale CBDC

Architecture

A
  • synthetic, two-tier, multi-cell
  • ICBDC is a claim on an intermediary
  • intermediaries onboard (KYC) and handle retail payments (real time)
  • central bank handles wholesale payments (deferred)
26
Q

Direct CBDC - Retail CBDC

Architecture

A
  • digital banknotes / central bank accounts/ single-cell / central bank cryptocurrency
  • CBDC is a claim on central bank
  • intermediaries or central bank onboard (KYC)
  • central bank handles retail payments (real time)
27
Q

Hybrid CBDC

A
  • CBDC is a claim on central bank
  • intermediaries onboard (KYC) and handle retail payments (real time)
  • central bank periodically records retail balances (deferred)
28
Q

Further dimensions of CBDC

6 items

A
  • token or account based
  • access from private people and institutions
  • anonymity
  • interest bearing
  • access form (wallet)
  • process of emission
29
Q

Opportunities CBDC

A
  • access to central bank money for households, despite declining use of cash
  • basic infrastructure for possible machine-to-machine (M2M) payment
  • conceivable extension of the method kit for central banks
  • > extended negative interest rate policy
    -> programmable money (eg time-limited helicopter money)
30
Q

Risks associated with CBDC

A
  • structure of CBDC still largely unclear
  • is there a need for CBDC?
  • disintermediation of the financial/banking sector
  • > narrow banking / Vollgeld-system
  • > danger of (systematic) “bank runs”
31
Q

Engagement of Central Bank
1. Engagement in CBDC work over time
2. Focus of Work
3. Type of work in addition to research

A
  1. Increasing Engagement in CBDC work over time
  2. Focus of work on both wholesale and general purpose
  3. Mostly experiments / proofs of concept rather than development / pilot arrangement
32
Q

CBDC Tracker
Global Overview

A
  • Pilot in China and Canada
  • nowhere launched
  • Most countries engaged in research and proof of concept

Decentralised Finance (11 decks)

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