Founder Stably: "Decentralized stablecoins have synthetic stability"

Interlock had an interview with Kory Hoang, co-founder of Stably. Before founding Stably, Kory worked at the financial analysis company Pitchbook with a high salary. While working in the banking industry, Kory recognized the weaknesses of traditional finance and the prospects of the blockchain space.

Therefore, in 2017, he left his job and founded Stably. The major product of the project is USDS, a stablecoin with a 1:1 exchange rate with USD. In May, Stably launched a stablecoin called Stable USD (#USD), marking the first BRC-20 token-based stablecoin on the Bitcoin network. The reason Stably chose stablecoin as its guiding principle was that the crypto market, especially stablecoin, was still very young with many development opportunities.

Besides, the number of crypto users is around 400 million people. As a result, Kory believes that stablecoin projects only tap about 10% of the market potential.

Commenting on centralized and decentralized stablecoins, Kory stated that centralized stablecoins were backed by fiat and kept in banking institutions. While centralized stablecoins had organic stability, decentralized stablecoins only maintained synthetic stability.

He mentioned Terra's UST coin, the prime example of a decentralized stablecoin that rocked the crypto community back in May 2022. For UST to always held the 1 USD mark, all price movements would be converted to the LUNA token. If the UST price was higher than 1 USD, the project would mint more UST. If the price of UST was below 1 USD, the protocol would sell LUNA to buy back UST.

As the supply of UST increased, the supply of LUNA decreased, keeping the value of UST around 1 USD. However, when the UST lost the peg, the LUNA-UST price equilibrium model just worsened the situation. The developers proposed to raise the amount of redeemable UST to LUNA to reduce the selling pressure of UST. However, the price of LUNA fell from 10 USD to nearly 0 USD, but UST could not revive from the death spiral.

Citing infamous stablecoins like Terra, Kory believed that fiat-backed, centralized stablecoins would have the potential to grow, expand, and provide fiat-to-cryptocurrency conversions. According to Kory, decentralized stablecoins can never become a bridge for seamless fiat-crypto conversion because they have no reserve assets.

He likens decentralized stablecoins to "beef” in vegetarian restaurants in Vietnam. Despite its beef-like appearance and delicious taste, this dish is just tofu, not beef.

In addition to algorithmic stablecoins, decentralized stablecoins also have other models such as over-collateralized stablecoins (DAI, MIM), semi-algorithmic stablecoins (FRAX, LUSD), non-pegged stablecoins (RAI). Since the algorithm adjusts the supply based on the source of price data, one of the main risks of these stablecoins is attacks on Oracle or smart contracts.

Moreover, algorithmic stablecoins mainly operate on trust, not reserves. If the ecosystem weakens, participants switch to the network may cause a sudden increase or decrease in supply, and UST history will repeat.

Meanwhile, centralized stablecoins are problematic because they have to depend on third parties to keep their reserves. In March, Silicon Valley Bank was closed by California authorities. With Circle having more than 3.3 billion USD stuck in the bank, stablecoin USDC dropped to 0.88 USD in a few hours. The USDC price can only recover the 1 USD mark after Circle commits to take out its own money and raise more investment capital to compensate for the shortfall.

For Tether, the largest stablecoin in the market, the transparency of its audit reports is questionable. CZ, the founder of Binance, also shared the same viewpoint during the AMA evening on July 31. CZ compared USDT to a “black box” as he had never seen any audit reports on USDT even though it was the largest stablecoin by market capitalization.

Despite the controversy, the two decentralized stablecoin projects - USDT and USDC - still account for 86% of the stablecoin market share, most of which have USD exchange rates and reserves. On the one hand, the overwhelming dominance of the USD stablecoin shows that other stablecoins still have a chance to break into the market. On the other hand, the stablecoin market is dominated by USD.

With the dominance of USD, many countries such as Japan, South Korea, and France are also experimenting with CBDC. Sharing with Interlock, Kory does not see CBDCs as a threat to stablecoins. In the future, Kory believes that the community will have stablecoins supported by CBDC instead of fiat currency. In other words, fiat currency will be tokenized, bringing the popularity of stablecoins to new heights.

Stably understands that once the USD loses its position as the dominant currency, stablecoins backed by USD will also be affected and lose users. Kory acknowledges that the weakening USD strategy by countries like Russia and China has the potential to be successful.

However, Kory emphasized that the current position of the USD remained strong as it was both the primary international payment currency and dominated global foreign exchange reserves. He pointed out that most stablecoins were currently supported and pegged to the USD, demonstrating the dominance of the USD in both the overall currency market and the cryptocurrency market.

At the same time, Kory believed that the US economy holds a trump card in the form of the extensive global military presence of the United States. According to Politico, the US controls around 750 military bases in at least 80 countries. Despite spending billions of dollars on these operations yearly, maintaining a military presence in many countries helps the US gain political, military, and economic benefits.

In addition to support from allied countries, Kory reckoned the US possessed human resources and businesses that may contribute to growing its economy. Furthermore, certain regions hold abundant resources while having sparse populations. It indicates that the US still has many opportunities and potential.

These factors have been solidifying the strength of the USD. Therefore, according to Kory, the USD would only fall apart when the public loses trust in the US government, the Federal Reserve, the US military, the US socio-economic system, and the American dream. "But I don't think this will happen soon," commented Kory Hoang.

Recently, the BRICS alliance, which includes Russia and China, has caused a stir in the world by vowing to change the economic balance and usher in a new era. In 2009, BRICS initially had four member countries: Brazil, Russia, India, and China. The goal was to elevate emerging economies as counterparts to the West.

In 2010, South Africa became the fifth member to join the alliance. According to a report by Acorn Macro Consulting, BRICS accounts for 41% of the world's population, nearly 31.5% of global GDP, and over 16% of world trade market share.

More and more countries are expressing interest in becoming members of the bloc. On July 20th, Anil Sooklal, the Ambassador to Asia and BRICS of South Africa, stated that over 40 countries have shown interest in BRICS, including Argentina, Iran, Saudi Arabia, the United Arab Emirates, Cuba, the Democratic Republic of the Congo, Comoros, Gabon, and Kazakhstan.

What has BRICS done to challenge the dominance of the USD?

In March, the member countries jointly announced an initiative to create a new type of stablecoin backed by gold and rare earth elements. Since August, Russia has begun implementing CBDC (Central Bank Digital Currency) laws, encouraging Russian to use the digital ruble for payments and transfers. Russia also plans to use CBDC in settlements with China in 2023.

On the other hand, China has been at the forefront of CBDC adoption. With the government support, the digital yuan (e-CNY) has been widely used in various aspects of Chinese people's lives, including bus fares, shopping at stores, medical expenses, and salaries.

The efforts of the BRICS countries may have yielded some results. At the 2023 Global Conference of the Milken Institute, Kristalina Georgieva, CEO of the International Monetary Fund (IMF), revealed that the USD used to account for 70% of global financial reserves but has now decreased to below 60%. Additionally, data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) shows that international payment transactions in USD have decreased from 51.3% in 2013 to just over 40% at the beginning of this year.