PYMNTS Cryptocurrency Glossary: ​​Stablecoins |  PYMNTS.com

PYMNTS Cryptocurrency Glossary: ​​Stablecoins | PYMNTS.com

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Cryptocurrency is a confusing business with a language all its own, partly because it’s a genuinely new way of doing business and partly because it was created largely by programmers and cryptographers, who should never be allowed to name anything. use.

Cryptocurrencies have many uses as an investment, as a currency of payment, as a store of value, as well as others. Like any investment, it’s essential to know what you’re talking about and, more importantly, what the person trying to sell you something is really saying. And like any other area of ​​finance, industry, art, or basically any human endeavor, it has its own jargon, acronyms, and definitions.

See also: Dai or Die: ‘Payment Stablecoins’ and Why Crypto Taxonomy Matters

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In this series of articles, we are creating a number of glossaries for various parts of the crypto industry, which we will combine into a larger reference tool. Today we’re talking about one of the biggest and most controversial parts of the cryptocurrency industry: Stablecoins, the privately-issued currencies that could change the way people pay for goods. and services in a way that makes central bankers and regulators fear they are doing it. lose control of their economy.

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Algorithmic stablecoin: Also called unsecured stablecoins, these tokens maintain their peg to the dollar through means other than a one-to-one backing pool of fiat currency or treasury bills. These include arbitrage incentives controlled by smart contracts with a partner coin and over-collateralized reserves of other digital assets (i.e. bitcoin). This backing is far less secure than a fiat — and more likely to run, as demonstrated by the $48 billion one-week collapse of stablecoin TerraUSD in May 2022.

Break the ball: When a loss of confidence causes the value of a dollar-pegged stablecoin to fall below one dollar. This will often lead to panic and flight.

Collateralized (or Reserve-Backed) Stablecoin: A collateralized stablecoin is individually backed by a reserve of fiat currency and other highly liquid investments. Although there is not much clarity on the latter, in the United States it is defined as short-term Treasuries and will likely be codified that way by 2023. A previously popular supporting investment , short-term corporate paper is being phased out because it is not sufficiently liquid or secure

Commercial paper: Short-term corporate debt used by a number of top stablecoins – until they reveal the composition of their reserves. Commercial paper is on the way out.

Digital Asset: A digital asset in crypto is any cryptocurrency, token, stablecoins or even NFT. More broadly, it’s anything digital that has value and established ownership.

FDIC: The Federal Deposit Insurance Corp. can play an important role in secured stablecoins, as the Biden administration pushes to require that all stablecoin issuers be federally insured, FDIC-backed banks.

Fiat currency: Currency issued by the government backed by the physical assets of the issuing government, but by that government. The backing of the dollar is the “full faith and credit” of the United States.

Free banking services: Usually an arrangement in which banks can issue their own currency. In the United States, the era of free banking refers to the period from 1837 to 1863 when there was no national central bank and no federally chartered banks. State-chartered banks issued notes for silver and gold, but their value varied widely from face value depending on the reputation of the issuing bank – which failed with alarming regularity. It is widely mentioned by opponents of the stablecoin.

Legal tender: Anything that, according to the law, can be used to settle a public or private debt. Generally the national currency, but El Salvador, for example, recognizes the US dollar and bitcoin as legal tender which merchants and other organizations are required to accept.

Balance/Diem: Libra was a global stablecoin project launched by Meta (then Facebook) in 2019. It was to be backed by a basket of fiat currencies and would be usable by anyone, but most notably Facebook’s 2.3 billion customers. in the world. This terrified and enraged central bankers, government regulators and elected officials, who feared it would allow people to circumvent national currencies and weaken their ability to control economies during financial crises. She and the other businesses supporting her were immediately attacked and many were scared off.

Eventually, the project was scaled down and renamed Diem. It would be a series of stablecoins backed and pegged to individual national currencies. This also failed and the project was completely abandoned in January 2022.

But it brought stablecoins – and to some extent cryptocurrencies in general – which had until then mainly been a crypto-industry phenomenon, a much higher public profile, with the intervention of presidents and prime ministers. . This has also led to the movement to create the digital central bank. currencies as a way to combat the influence of stablecoin.

Struck : When you give a stablecoin issuer a fiat dollar (or other currency), a new stablecoin is minted – created – and can be used like any other. When exchanged for fiat, a coin is burned – destroyed.

Stablecoin payments: The nomenclature of a reserve-backed stablecoin turns into several bills to regulate stablecoins.

Ankle: A peg is a fixed exchange rate between two currencies. Thus, a stablecoin should always be exactly equal to one dollar.

Redemption rights: Stablecoin owners are – or at least should be – able to exchange a token for a unit of fiat that backs it with the issuer. This will likely be codified in legislation that will require issuers to do so. User confidence in their ability to redeem on demand is what ensures that stablecoins maintain their peg (see above).

Reserve: The account(s) holding the assets backing a collateralized stablecoin.

Reserve assets: Dollars, treasuries, and anything that backs the peg of a collateralized stablecoin.

To run: When stablecoin owners lose confidence that they will be able to redeem fiat from the issuer on demand, a panic can ensue which works much like a bank run, except the digital nature of stablecoins means this can happen. faster and is more difficult to control.

Real-time payments: Payments settled instantly. Stablecoins have been touted as a way to provide real-time payments.

Systemic risk: The possibility that the failure of a stablecoin (or other cryptocurrency) could have effects that would cause contagion in the traditional economy.

TerraUSD: An algorithmic stablecoin that failed after a week of operation in May 2022. About $48 billion was lost by investors, sparking a sense of urgency in the drive to regulate stablecoins even before other cryptocurrencies.

Attached: The issuer of the largest and oldest stablecoin, USDT. The company’s opacity regarding its backup reserves has led to several significant settlements with regulators, as well as speculation about the size and existence of its reserves.

Wallet: A digital wallet is a software application capable of storing, sending, and receiving digital assets, including cryptocurrencies and stablecoins. They come in two types: continuous online hot wallets which are more convenient but less secure, and offline cold wallets, which must be collected from the internet for use but are otherwise inaccessible to hackers.

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