The Matter With StableCoins – Experts Give Their Insights
Cryptocurrencies have been a sensation all across this year and a couple before it, but among them, Stable coins have not been left out of the conversations either, and have been part of the wider rage as well. Currently, there are dozens in circulation with names like Tether, Basis, SagaCoin, TrueUSD, Carbon and Dai. Over the course of this month, there were two more that entered the market, these being the Paxos Standard Token and the Gemini Dollar, which both recieved regulatory approval from the New York Department of Financial Services.
Stablecoins, as opposed to their more mainstream counterparts, are designed with the . ability to maintain a consistent value, either becuase they . have a 1-1 backing with a particular Fiat currency, utilize some form of collateral, or employ some form of algorithm which adjusts the supply depending on user activity.
There is a very clear appeal the stablecoins offer to users that other cryptos don't provide: StableCoins offer all of the technological features of cryptocurrencies, but unlike traditional cryptocurrencies, which trade with a certain, often significantly fluctuating level, the value of stablecoins remains stable relative to their counterparts, in terms of dollars or otherwise, making these highly attractive as units of account and stores of value.
“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,” Daniel Mason, vice president of strategy and operations at Spring Labs, a startup developing a blockchain network to securely share beliefs about credit and identity data, told CoinJournal. These represent “a huge opportunity within the cryptocurrency space,” he said.
Much like Mason, the founder of Havven, Kain Warwick, the company operates as a decentralized autonomous organization oversaw the development and use of a stablecoin called nUSD. Warwick agrees that there is a very bright future ahead for this new type of cryptocurrencies. He goes on to state that he believes they will be pivotal to the growth of the broader blockchain ecosystem.
“If the blockchain ecosystem is to continue expanding, the friction of only being able to transact with volatile currencies must be resolved,” Warwick highlighted.
“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.”
In Warwicks's perspective, Stablecoins solve many of the underlying issues inherent to traditional cryptocurrencies. He cites the example of Initial Coin Offerings (ICOs) which have mostly been raising funding in Ether, a cryptocurrency that's seen its value plummet by more than 80% since the beginning of the year, Warwick also stated:
“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.”
While there are a great deal of opportunities which are related to stablecoins, there are a number of challenges that still need to be addressed. Working as a professor of economics at the University of California in Berkeley, Barry Eichengreen has previously been a senior policy advisor at . the International Monetary fund, and argues that the fact that a Stablecoin's value is pegged at a . 1:1 ratio with the dollar doesn't make it fully viable.
In a published article from earlier in September, Eichengreen went over the various flaws and limitations of each type of stablecoin, which compromise the fully collaterized stablecoins. Those stablecoins that are collaterized or oncollateralized, highlighting that in some cases, these could facilitate money laundering and some level of tax evasion, and in others, they were prone to systemic risks.
But for the likes of Kne Lang, who is a member of the ndau Collective, and the current CTO for COSIMO Ventures, he addresses the fact that it's down to the many unanswered questions in regards to USD-Pegged stablecoins, the most popular type, and that's got him considerably worried.
“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.
“While the popularity around stablecoins is an understandable phenomenon, the lack of answers we have for these questions is concerning, and there are two potential solutions that could address this.”
Lang's own Venture Capital Firm, COSIMO Ventures is currently supporting and financially backing a startup company called Oneiro, which has just launched its own ‘Buoyant' Cryptocurrency referred to as ndau.
Effectively, being buoyant essentially means that ndau is stable on market downslides and good on the increases. The company itself has claimed that it is the world's first cryptocurrency which is untethered to any fiat currency and which self-regulates using digitally built-in mechanisms, monetary policy and governance.
“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,” Lang said.
“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 the likes of hardcore blockchain and cryptocurrency supporters, they see the problem with fiat backed stablecoins is that the concept comes in opposition to some of the key values behind cryptocurrencies including the aspects of decentralization and freedom.
It was discovered earlier this month that the Gemini Dollar, which is a stablecoin based on Ethereum has code which enables the company to “freeze any account or make all tokens non-transferrable.” Earlier this week, it was also revealed that the new PAX Stablecoin also has a function referred to as “setLawEnforcementRole”, which grants government officials (or anyone) the ability to tamper with wallets and affect the money supply.
“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,” Warwick said.
“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,” Warwick said, the latter characteristic linking back to the foundational purpose of blockchain technology.