Are Stablecoins Friend Or Foe? Do Fiat-Pegged Tokens Jeopardize Crypto’s Trustless Feature
Stablecoins May Be Dangerous As They Contradict Crypto’s Trustless Feature
While cryptocurrencies have been in a general slump this year, last month was the worst performing month, with multiple cryptos further dipping in price.
The most prominent and alarming being bitcoin. Bitcoin’s price dropped below $4000 last month, signaling the possible beginnings of a new era of even lower prices. This is bitcoin’s lowest price in about 18 months.
Unfortunately, some experts are predicting an even lower bottom for bitcoin, particularly now that it’s trading at between $3,000 and $3,500. This extreme volatility has got some traders and investors seeking out stablecoins, while financial and crypto experts are advocating for their increased prevalence.
They figure stablecoins can bring some sort of normalcy to the crypto sector and reduce –if not completely eliminate- its volatility issues.
While this sounds good in theory, some authority figures in the crypto sector have serious concerns about its effectiveness as well as its possible potential to negatively impact one of crypto’s pillars: its trustless feature.
Are Stablecoins A Real Solution Or Trouble?
Stablecoins is one of the few solutions that crypto experts are advocating to help put a pin the market’s volatility. They believe that these coins will act as the necessary stopgap, thanks in part to their value being pegged to real world assets.
Obviously, this quality is why some exchanges are taking a keen interest in them and listing them for trade and exchange. They have also been enjoying relatively stable growth, even in the face of rapidly plummeting prices occurring throughout the market.
The most popular stablecoin right now is Tether. At a point in the last month, it shot past ethereum and bitcoin cash to become the second most valuable crypto by market cap. Even though it’s lost some of that value, it’s been holding steady.
The appeal of stablecoins is quite understandable, seeing as it offers some sort of stability in an otherwise, highly volatile market. So, it is normal for investors with more conservative leanings –institutional investors particularly- to flock towards them.
However, they may not be appealing to traders who prefer more volatile instruments and enjoy the high risk, high reward nature of bitcoin and other highly volatile tokens.
Stablecoins serve as a more sensible bridge between the murky waters of cryptocurrency and the solid ground of established, traditional financial assets or currencies.
Stablecoins’ Use Cases
All smart investors and traders understand that you must examine a particular project’s use case –why it stands out and its unique offering- before investing in it.
Stablecoins’ particular use case is the ability to help individuals retain the value of their fiat currencies, making it an excellent alternative for cash. To help you understand what this means, here’s a good scenario.
Let’s assume that a liquidity service is owing you $900,000, and you need that money urgently for business or other purposes. Walking into a bank to withdraw that kind of money is virtually impossible, even if you and the service provider use the same institution. Approval for transactions like that take some time –time that you do not have.
But, instead of waiting for that and potentially forgoing what you need that money for, you can easily deploy your stablecoins to that purpose. These coins can stand for cash and used for the necessary transaction almost immediately.
They enjoy the instant availability that’s common to cryptos, but none of the extreme price swings. This is probably why they are called the best of both worlds. They can also be effective as Central Bank Digital Currencies (CBDC), thus helping the financial institution to combat financial crimes like money laundering and fraud.
Stablecoins And Proof Of Value
While the aforementioned use cases are appealing, it appears that there might be a real issue with their value. The reality is that the bulk of all stablecoins are issued by businesses and are essentially similar to loyalty points or rewards.
They don’t bring any tangible value to the table, apart from being similar to collaterals. They are more seen as tokenized versions of fiat currencies, which is why they are popularly traded on crypto exchanges with very minimal liquidity, and have restricted access to regular cash.
The Trustless Case Against Stablecoins
stablecoins violate one of crypto’s key commandments –trustless transactions. The reason cryptocurrency gained so much acceptance is because it eliminates the need to trust anyone or any entity.
In fact, this quality is why the bulk of traders and exchangers to actually use cryptocurrencies for their transactions avoid stablecoins. They are the antithesis of cryptocurrencies. Introducing more of them into the ecosystem, no matter how great or noble the idea, is probably not a good thing for the trustless feature that’s so crucial to crypto’s adoption and use.
According to bitcoin’s whitepaper, cryptocurrency provides a medium through which individuals and entities can “transact directly with each other without the need for a trusted third party”.
The idea of stablecoins goes against this very edict. Apart from the fact that they violate the trustless system, they also go against another key fabric of cryptocurrency –decentralization.
All stablecoins, regardless of how they are marketed, are centralized. One or more entities control the pool, thus providing hackers with a possible single point of failure. This goes against crypto’s own core principles.
All crypto enthusiasts are particular about moving away from centralized finance. So, even though stablecoins have their merits, allowing them thrive essentially undoes everything that the community has worked hard for till date.
With stablecoins, you would have to depend on third parties, trust –there’s that word again- the government, centralized financial institutions and every other traditional institution that most crypto aficionados dislike.
Stablecoins And Collateralization
Remember how we talked about them being synonymous with collaterals earlier? Well, there are three varying degrees of this:
- Fully collateralized
- Partly collateralized
The first two constitute the bulk of stablecoins, with the first being fully backed by fiat currency, and the second partially backed with the same. The third though, is very scarce in the space.
Maybe if there were more of such viable uncollateralized stablecoins, then we wouldn’t be talking about why they aren’t so good for the crypto space. At the end of the day, the modalities involved in the deployment of stablecoins are just fraught with more issues and questions, than solutions and answers.
Based on what you’ve read so far, it is probably becoming clear to you that stablecoins are no more different than a country’s central bank.
In fact, some antagonists have go so far as to say it’s just a digital version of central bank, designed to help the government of different countries gain more foothold in the cryptocurrency market. And this defeats the entire purpose of cryptocurrencies.
The idea of crypto implies less or zero governance, zero centralization, zero trust, zero permission, zero third parties. Stablecoins are zero for all five.
Traditional banking institutions and currencies are fine as they are. They serve a need; a purpose. They’re also quite secure, provide individuals with a sense of safety for their monies, and are even insured.
So, why in the world, would they be necessary in a crypto space that goes against everything they stand for? The answer is simple: control. The government fears the crypto revolution. And one of the best ways to keep track of or cripple it, is by being a part of it.
Stablecoins while laudable, defeat the purpose of cryptocurrencies. If they have to require more trust from the citizenry, then it’s not a “stable coin” really. It’s just another government and corporate finance tool. If they are to thrive and truly reach their potential, then their goal should be providing actual stability in the market, instead of creating more financial redundancy.