Dozens of stablecoins already trade: Tether, Basis, Sagacoin, TrueUSD, Dai, and Carbon. Two more joined exchanges this month with approval from New York regulators, the Paxos Standard and Gemini Dolla
Dozens of stablecoins already trade: Tether, Basis, Sagacoin, TrueUSD, Dai, and Carbon. Two more joined exchanges this month with approval from New York regulators, the Paxos Standard and Gemini Dollar.
Three designs exist. Some maintain value through 1:1 backing in government money. Others rely on collateral. A third uses algorithms that adjust supply based on transaction volume. The draw here is clear. These coins offer the technical benefits of cryptocurrency without the wild price movements that plague Bitcoin and Ether as stores of value.
Daniel Mason is vice president of strategy and operations at Spring Labs, which builds blockchain infrastructure for credit and identity data. "Tokenized money has clear advantages over traditional money: forgery is essentially impossible, better traceability improves regulatory functions like AML and makes monetary policy easier to set, and transactions become more efficient through reduced reliance on middlemen," Mason told MiningPool. He called stablecoins "a huge opportunity within the cryptocurrency space."
Kain Warwick created Havven, overseeing the nUSD stablecoin. He agrees stablecoins matter for the ecosystem's growth. "If the blockchain ecosystem is to continue expanding, the friction of only being able to transact with volatile currencies must be resolved," Warwick said. "Payments should be the core of the ecosystem, but as long as transacting with crypto isn't a frictionless experience, apps and platforms that could be adding to and building out the space can't reach the audience they should be reaching. Basically, once we have a decentralized and scalable stablecoin with good liquidity, this will encourage other aspects of the space to grow," he added.
Many blockchain startups financed themselves in ether through initial coin offerings. Ether has collapsed 80% since January. Warwick illustrated the problem: "Many blockchain projects raised funds in ether while it had a much higher value than it currently does. If those projects had raised money in a stablecoin rather than in ether, they wouldn't have seen the major loss in the total value of their funds, thus supplying them with longer runway and a far greater ability to execute on their roadmap."
Serious obstacles remain. Barry Eichengreen teaches economics at UC Berkeley and served as a senior policy adviser at the International Monetary Fund. This month, Eichengreen examined why a 1:1 dollar peg doesn't ensure stability. He broke down three designs: fully collateralized, partially collateralized, and algorithmic stablecoins. Each presents problems. Some enable money laundering and tax evasion. Others carry systemic risk.
Ken Lang works with the ndau Collective and leads technology at COSIMO Ventures. He questions whether USD-pegged coins can answer fundamental dependability questions. "USD-pegged stablecoins ultimately need to be able to answer a few questions about their dependability. For example, if all holders of their coin wanted to exchange them for USD tomorrow, is there an orderly process set up so they can be assured they could make that exchange, without uncertainty? Where would those funds come from if it's not 100% backed by actual US dollars? If the coin design is dependent on future holders having confidence in the coin's value in the future, at what point does confidence in future value of the coin by some become insufficient to provide liquidity to current holders of the coin?" Lang said.
COSIMO Ventures finances Oneiro, which released ndau, a "buoyant" coin that stays stable during downturns and gains during rallies. The company positions ndau as "the world's first cryptocurrency that is untethered to any fiat, and which self-regulates using digitally built-in mechanisms, monetary policy and governance." Lang sees limits to pegged stablecoins: "While stablecoins can be useful in particular cases, they are not the best choice for an investor looking for a cryptocurrency that can hold and increase in value over the long term. Any cryptocurrency that is pegged to a fiat currency is subject to its inflationary qualities, meaning that it can decrease in value (by about 2%) every year as the dollar does. Stablecoins that are pegged to other currencies are also impacted by their local economies and monetary policy, interfering with the coin's ability to rise in value independently over time."
For crypto purists, fiat-pegged coins run counter to the philosophy of decentralization and user control. The Ethereum-based Gemini Dollar contains code that enables Gemini to "freeze any account or make all tokens non-transferrable." The newly released PAX stablecoin has a function named "setLawEnforcementRole" that gives government actors (or anyone) the ability to control wallets and manage the money supply.
Warwick cautions against the centralized designs of major stablecoins: "The most prominent stablecoins at the moment are backed by fiat and thus centralized, including Tether, TrueUSD, and such recently-announced projects as Gemini Dollar and Paxos Standard. The danger with fiat-backed stablecoins is that their collateral needs to be stored in a centralized bank, which always run the risk of interference or censorship from institutions or governments, because governments have motive and opportunity to shut them down, just like the US government shut down eGold. The optimal stablecoin is stable, scalable and decentralized."
