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How Bitcoin Could Become The Collateral Layer For The Digital Asset Economy

Bitcoin is now a reserve asset for Terra’s UST. But, what does this portend for the $186 billion stablecoins markets? And how can it help the Collateral Layer For The Digital Asset Economy? 

We have just witnessed a game-changing moment in the stablecoin sector. It presents enormous implications for the broader digital asset industry. 

Bitcoin is taking on additional utility as a  reserve asset for Terra’s stablecoin (UST) in a move led by the Luna Foundation Guard. 

It is the first sizable stablecoin of its kind to make such a  move, but it won’t be the last. While this could positively affect UST’s stability during times of increased volatility, that alone is not the whole story.!

Using Bitcoin as a reserve asset backing stablecoins addresses some of the regulatory concerns. These concerns are regarding the reserves of other leading stablecoins.

It embeds Bitcoin in the broader digital asset ecosystem. Moreover, the new collateral layer is supporting decentralized finance, metaverse economies, and new terrain yet to be explored. 

But before we get into that, there is an interesting parallel between what is happening in the stablecoin sector and the changes potentially taking place in the global monetary rules of engagement, and more specifically, the increased demand for bearer reserve assets regardless of the Collateral Layer.

Bretton Woods III: greater demand for ‘outside money with the Collateral Layer

Credit Suisse money markets and rates strategist Zoltan Pozsar recently published a research piece. He suggested that as a result of the sanctions imposed on Russia for the war in  Ukraine, so-called “inside money” will be replaced by “outside money” to back the value of fiat currency. Inside Money is a monetary instrument that exists as a liability on another entity’s balance sheet, such as government bonds. Outside Money is not a liability on another entity’s balance sheet. These are bearer assets like gold and Bitcoin.  

Rethinking how to build stablecoins 

To build a successful stablecoin, you need two things: demand for the currency and reserves that back it. The latter has been addressed in several ways, with top stablecoins such as USDT  and USDC. They are holding a basket of assets in reserve, usually cash, government debt or commercial paper (Inside Money). But this model is now facing regulatory uncertainties as financial regulators. It’s increasingly recognizing that stablecoins are exposing to similar vulnerabilities just like the money market funds. There is a lack of transparency regarding reserve assets. 

Algorithmic stablecoins: decentralized reserve assets using smart contracts

Algorithmic stablecoins use intelligent contracts to maintain the peg automated and programmable, typically with digital assets as the collateral. The digital asset industry has long been waiting for the perfect algorithmic stablecoin to take over from all the others. If we create one that works reliably during intense, volatile market conditions, it could scale infinitely to whatever size the digital asset economy demands. 



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