CBDC and Stablecoin : A Comparative Analysis

The results of the analysis allows for identifying two main conditions contributing to the potential of investing in stablecoin:

  • the ability to conduct transactions in the presence and increasing constraints on a seamless, technologically and price-optimal basis;

  • support for the entire ecosystem of cryptocurrency trading, assuming and actually accompanying the circumvention of the contours of the traditional banking system (TradFi).

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Central bank digital currencies (CBDCs) and stablecoins are both digital currencies that have gained significant attention in recent years. However, there are some key differences between these two types of digital currencies.

CBDCs are digital versions of a country’s fiat currency, issued and backed by the central bank of that country. They are designed to be used as a means of payment and store of value, and can be used by individuals, businesses, and financial institutions. CBDCs are issued and regulated by central banks, which means that they are subject to the same level of oversight as traditional fiat currencies.

Stablecoins, on the other hand, are digital currencies that are pegged to the value of a specific asset, such as a fiat currency or commodity. They are designed to maintain a stable value, even if the value of the underlying asset fluctuates. Stablecoins can be issued by a variety of entities, including centralized organizations, decentralized autonomous organizations (DAOs), and even individuals.

There are several key differences between CBDCs and stablecoins. One of the main differences is that CBDCs are issued and backed by central banks, while stablecoins can be issued by a variety of entities. This means that CBDCs are subject to the same level of oversight and regulation as traditional fiat currencies, while stablecoins may have a more decentralized structure and may be less regulated.
Another key difference is that CBDCs are intended to be used as a means of payment and store of value, while stablecoins are primarily used as a means of exchange. This means that CBDCs are intended to be used in a similar way to traditional fiat currencies, while stablecoins are primarily used to facilitate transactions between different assets.

Overall, CBDCs and stablecoins are both important developments in the world of digital currencies, and they have the potential to revolutionize the way that we use money and make payments. However, they have different characteristics and are intended to serve different purposes, so it is important to understand the differences between them.

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@Progrezz

To further answer your question “Do you think I think the two currencies (CBDC and Stablecoin) will compete, or will the government ban stablecoin?”

It is difficult to predict with certainty how CBDCs and stablecoins will evolve and interact in the future. However, it is likely that both types of digital currencies will coexist and may even complement each other in some cases.

CBDCs are issued and regulated by central banks, and are intended to be used as a means of payment and store of value. They are designed to be used in a similar way to traditional fiat currencies, and are intended to serve as a safe and reliable means of exchange.

Stablecoins, on the other hand, are digital currencies that are pegged to the value of a specific asset, such as a fiat currency or commodity. They are designed to maintain a stable value, even if the value of the underlying asset fluctuates. Stablecoins can be issued by a variety of entities, including centralized organizations, decentralized autonomous organizations (DAOs), and even individuals.

It is possible that CBDCs and stablecoins will compete with each other in some cases, as they are both designed to serve as digital currencies. However, they may also complement each other in other cases, as they serve different purposes and may be used in different contexts. For example, stablecoins may be used to facilitate transactions between different assets, while CBDCs may be used as a means of payment and store of value.

As for the possibility of governments banning stablecoins, it is worth noting that governments have the power to regulate and oversee the use of digital currencies within their borders. However, it is unlikely that governments would completely ban stablecoins, as they have the potential to offer a number of benefits, such as increased efficiency, reduced transaction costs, and greater financial inclusion. Instead, it is more likely that governments will put in place regulatory frameworks to ensure that stablecoins are used in a safe and responsible manner.

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Exchanges are platforms that allow individuals and organizations to buy and sell a variety of assets, including digital currencies. Stablecoins are digital currencies that are pegged to the value of a specific asset, such as a fiat currency or commodity, and are designed to maintain a stable value.

Exchanges exist to facilitate the buying and selling of assets, and they can be used to facilitate the exchange of stablecoins as well as other types of digital currencies. In fact, stablecoins are often used on exchanges as a means of facilitating transactions between different assets. For example, stablecoins may be used to transfer value between different digital currencies or between digital currencies and fiat currencies.

That being said, it is worth noting that exchanges can exist without stablecoins. Exchanges can be used to facilitate the exchange of other types of digital currencies, such as Bitcoin and Ethereum, as well as traditional assets such as stocks, bonds, and commodities.

Overall, stablecoins are an important part of the ecosystem of digital currencies, and they have the potential to offer a number of benefits, such as increased efficiency, reduced transaction costs, and greater financial inclusion. However, exchanges can continue to operate and facilitate the exchange of other types of assets even if stablecoins are not used.

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Very interesting set of Digital currencies.
When you look at both CBDC and Stablecoins, the much difference between them is the mode in which their financial system works. CBDC is centralized to the uptimum where as Stablecoins depend on the open source technology and decentralized ecosystem.
I don’t see the two currencies in any competition as one being a digital form of a Fiat currency which Can’t be used between two different nations While the other is a crypto tethered to another fiat/Crypto asset valued at ratio 1:1.
I think some national government in future might decide to ban stablecoin because of its decentralized nature, non-Regulatory, lesser security when compared to CBDC and non-taxation.

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CBDCs have some limitations compared to stablecoins like USDT:

  1. Limited use: CBDCs are only usable within the country of issuance, while stablecoins like USDT have global use.
  2. Purchasing power: Stablecoins like USDT are often pegged to a strong, widely-used currency like the US dollar, which gives them more purchasing power compared to CBDCs.
  3. Control: CBDCs are issued and controlled by central banks, while stablecoins are decentralized and controlled by market forces.
  4. Proprietary code: CBDCs may use proprietary code, while stablecoins like USDT operate on open-source software.
  5. Competition: Stablecoins have the advantage of being able to operate on multiple blockchains, while CBDCs are limited to operating on their own proprietary blockchain.

This gives stablecoins an advantage in terms of flexibility and adaptability.

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Your points of analysis are epic and clear to comprehend. This is one of the reasons why Nigerians uses stablecoin despite their eNaira. The naira purchasing power is depreciating on daily basis, pegging it to the enaira makes no sense to users. Due to this people prefer to use stable coins because it has a better purchasing power

Talking about the number of blockchains that stable coin and CBDC can operate on, i think it depends on the design. The reason why the government will prefer an independent blockchain is to own autonomy over the blockchain. The same is applicable to owning a proprietary software or code. I think the government would like to control its software and as such would not want the public to have access to the code.

Imagine we have exchanges without stablecoins. How doe you think the profit made by investors and traders would be stabilized? Imagine there is no stablecoin, how do you think people could implement stop loss strategies? Assuming there is no stablecoin, the marketcap of crypto and individual projects would have declined further than this.

So, stablecoin is an essential part of exchanges and the entire crypto.

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Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. Stablecoins’ purpose is to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made crypto investments less suitable for common transactions.

What Is the Purpose of Stablecoin?

Stablecoins’ purpose is to provide an alternative to the high volatility of popular cryptocurrencies, including Bitcoin (BTC), which can make cryptocurrency less suitable for common transactions.

Say you were a Chinese business owner who wanted to pay an invoice to a client in Japan who also had subcontractors in Europe.

“You’d need to have a Chinese bank account, a Japanese bank account, and a European bank account,” explains William Quigley, co-founder of the WAX blockchain and one of the founders of USDT issuer Tether. “If somebody wants to send you euros or yen or RMB, the intermediaries who can hold those accounts swap out those currencies for the currency you can hold and send it to your bank. And along the way, they’ve skimmed a lot of money off the top for that.”

We can’t all have 50 different bank accounts in 50 different countries, says Quigley. But with stablecoins, there’s no need.

How do stablecoins work?

Stablecoins generally work the same across the board: They are cryptocurrencies minted on a blockchain that users can buy, sell and trade on an exchange just like any other crypto coin.

To have integrity, most stablecoins are linked to a reserve of external assets of some kind, whether it be a stash of fiat currency, commodities like gold, or debt instruments like commercial paper. In most cases, the company or entity that develops the stablecoin owns reserves equal to the number of stablecoins it has in circulation. This is such that any stablecoin holder should be able to redeem one stablecoin token for one dollar at any time.

The four types of stablecoins

There are four different types of stablecoins, each with its way of fixing the value of the tokens to a stable figure.

  • Fiat-backed
  • Cryptocurrency-backed
  • Commodity-backed
  • Algorithmic

Fiat-backed stablecoins

The most popular stablecoins in the market are ones backed by fiat currency. USD coin (USDC), for instance, is fiat-backed and pegged to the U.S. dollar (USD) at a 1:1 ratio. Other stablecoins are linked to the euro, the British pound, the Japanese yen, and the Chinese RMB.

Cryptocurrency-backed stablecoins

Without getting too meta, crypto-backed stablecoins are cryptocurrencies pegged to the value of another more established cryptocurrency. For instance, MakerDAO is one of the most popular crypto-backed stablecoins. It uses a smart contract – a type of self-executing, code-based contract – alongside the Ethereum blockchain to pool enough ether (ETH) to use as collateral for its stablecoin. Then, once the amount of collateral reaches a certain level in the smart contract, users can mint DAI – the MakerDAO stablecoin.

Commodity-backed stablecoins

As the name describes, commodity-backed stablecoins are pegged to the value of commodities like precious metals, industrial metals, oil, or real estate. Commodity investors love the option of commodity-backed stablecoins because it allows them to invest in gold without the hassle of sourcing and storing it. Tether gold (XAUT) is an example of a commodity-backed stablecoin. The currency is backed by a reserve of gold kept inside a vault in Switzerland. One ounce of gold is equal to one XAUT.

Algorithmic stablecoins

Not backed by any “real-world” commodities, you can think of an algorithmic stablecoin as a bucket of water left outside with a water level marked on the inside. To keep the water inside the bucket at the same level, you set up a mechanism that adds or removes water depending on how far the water level has deviated from the mark. This is controlled by a computer algorithm such that if it rains and the bucket begins to fill up, the algorithm instructs the mechanism to release water out of the bottom of the bucket until it reaches the water level mark. Conversely, if it’s a hot day and water evaporates out of the bucket, the computer algorithm would instruct the mechanism to add more water to the bucket until the correct level is regained.

There’s been a lot of trial and error in the quest to successfully introduce algorithmic stablecoins to the crypto ecosystem, and the failure of Terra’s UST stablecoin shows just how badly things can go if the algorithm isn’t able to keep up with dramatic swings.

Conclusively, stablecoin plays an important role in exchanges, though exchanges can exist without stablecoins by trading with other digital assets, but it will come with many demerits and risks.

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Lets have this mind, that stablecoins come in form of Cryptocurrency it can be banned anytime the country chooses or even taxed as the country wants, but the CBDC does not face such as the Stablecoins.
As you said that in your writing that the Stablecoins is pegged on a 1:1 ratio to a more recognised or should i say trusted fiat currency like the USD, EURO etc, lets not fogey that it can loose its peg one day, because it’s owned and manage by private firms. Lets use that of Terra as an instance.
I want to ask @Progrezz as the Stablecoins and CBDC have some certain things in common, is it Prone to hack as the two are both digital assets?

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Both stablecoin and CBDC are software. While one is open source the other is a priorietery software. Cybersecurity is not unique to only open source software but to all all form of software

“Given that the eNaira is a journey, the unveiling marks the first step in that journey, which will
continue with a series of further modifications, capabilities and enhancements to the
platforms. The CBN will continue to work with relevant partners to ensure a seamless process
that will benefit every user, particularly those in the rural areas and the unbanked population

You see that in the launching document of the eNaira the CBN proposed that the eNaira will enhance financial inclusion for the unbanked and those in the rural areas. To me there are many other reasons why the eNaira cannot solve the problem of inclusion. Some of the reasons include lack of internet connection and lack of smartphone.

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@Progrezz I think that the purpose of launching the eNaira can be accomplished, but it’ll take lots of years before the accomplishments can happen.

  1. It’ll need that those leaving in the rural areas will have to know about the eNaira and how it works, before thinking :thinking: of getting a smartphone and a network connection.

  2. The government can make provision of smartphones for those leaving in the rural areas, having the eNaira app installed in them, before giving them.

  3. Making provision for an Internet connection in the rural areas in order to be able to access the eNaira app.

I believe this’ll take a lot of time, but it can help to take down the purpose of launching the eNaira to the rural areas.

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Thanks Progress

The world keeps adjusting and learning about Crypto. Currently we can see the SEC bans on BUSD and crypto services…