UC Berkeley Economist Talks USDT and GUSD Stablecoins for Bitcoin’s Volatility

Stablecoins Are not the Solution to Solve Bitcoin’s Volatility

According to Prof. Barry Eichengreen, stablecoins such as Tether (USDT) are stable in value but have several flaws. Prof. Eichengreen is an economics professor at UC Berkeley. His comments about Stablecoins come some days after the approval by the regulatory authorities of the Gemini Dollar (GUSD) presented by the Winklevoss Twins.

Stablecoins May Help But Are Not The Solution For Crypto Instability

In an op-ed published in The Guardian, Prof. Barry Eichengreen gives a clear explanation why stablecoins are not the best solution for cryptocurrency volatility. Holding a stablecoin could be a good investment. Users are able to easily transact it for any virtual currency and at the same time for another fiat currency such as US dollars.

But there are some investors that think that stablecoins as an investment are not the best idea. For those individuals, the coin might hold its value over time, but it is unlikely it will trade at a premium for another cryptocurrency.

Eichengreen provided some information about why stablecoins are not practical to solve one of the main problems in the cryptocurrency space: volatility.

He explained that one of the major problems related to fully collateralized stablecoins is related to the expense. The operator needs reserves equal or larger than the value of the coins in circulation. This is a problem because most organizations are not able to deal with an increased demand or with the necessary amount to sustain it it in the long run.

He says that these stablecoins make him doubt about the scalability of the model they use. Moreover, he thinks that there is uncertainty about how governments will regulate them.

One of the best examples related to a fully collateralized coin is Tether (USDT). This stablecoin is pegged 1:1 to the dollar. However, the parent company has been involved in different controversies saying that it does not hold reserves equal to the value in circulation.

The second group of stablecoins are those partly collateralized. The platform, in general, holds 50 percent of the value of the coin in circulation. But there is a big problem. If there is FUD surrounding this stablecoin, then, the company may not be able to purchase the coins back with the reserves it has. That means that the currency could start a free-fall and investors would not be able to get out.

But there are even worse stablecoins. He says that uncollateralized cryptocurrencies such as Basis, are the worst. Eichengreen believes that these are very dangerous coins. The platform does not hold fiat currencies or dollars to back up the token they have issued. Here, the platform tries to control the token supply relative to the demand, and in this way it is possible to keep the value of the asset.

In this kind of schemes, the platform issues coins, crypto-bonds and crypto-shares. In this case, the bonds are used in contracting supply. Users can spend their coins in exchange for interest to bondholders.

However, there are difficulties for companies to find an equilibrium in this model. Eichengreen says that there is a chicken-and-egg problem. Issuers can only service bonds as long as the platform grows. But if this does not happen, the issuance of more bonds could lead to a free-fall in bond price.

This analysis made by Eichengreen is very useful, since the Winklevoss brothers launched the Gemini dollar. The GUSD wants to be a reliable and ‘trusted and regulated digital representation’ of the US dollar.

The GUSD could be a strong competitor of the Tether stablecoin which has not the best reputation in the cryptocurrency space. With the GUSD, users could have a regulated and compliant option to hedge against volatility in the crypto market.

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