Stablecoins: Will We Repeat Mistakes From The Past?
By sanneh_si on ALTCOIN MAGAZINE
You know what a Stablecoin is right?
I’m talking about a form of Digital Currency, of course. Stablecoins are cryptocurrency tokens, to be precise, and they’re backed by paper money; most commonly the US Dollar.
So, the only logical conclusion is that their value is what?
No, not: “nothing, because they’re not real — it’s all made up money”.
The value of one Stablecoin token is the same as the value of one unit of the asset that is backing it. In our case, it would be $1 US. In a way, it takes FIAT money and brings it over to the “blockchain”; into the digital world.
But of course, it’s not all roses and flowers wherever money and people are involved, right? Stablecoins are issued by people, who are responsible for issuing and maintaining it. They use a blockchain network and run sophisticated programs on them that let them create a number of tokens. And that’s where the pickle gets sour.
But first, let’s focus on the bright side of life, shall we?
The thing about Stablecoins is that they’re genuinely a good idea. Their introduction and use in the cryptocurrency world(mainly trading and speculation) has helped alleviate quite a few worrisome souls. From troubled traders and elusive alley cats, Stablecoins allow for quick back and forth transfers between the Crypto and the real World.
Pros:
- Stablecoins reduce volatility
- Allow for hedging against losses in cryptocurrency trading and investing
- Instant transfers and ease of access
Because they’re digital and cryptocurrency tokens, their reach is fast and wide. People from all over the world can buy and own a dollar backed Stablecoin, even if their native currency is different. They can send and spend these tokens to willing participants at the speed of the network they’re issued on. On Ethereum, for example, a transaction of any amount of USD backed
Stablecoins would only take seconds and cost cents. The recipient could be anywhere in the world and there is no intermediary involved, meaning the transfers would be cleared the same day, versus days that it would take banks to do the same thing.
Some Of The Biggest And Most Common Stablecoin Issuers Include:
- Tether, responsible for a token called USDT or USD Tether.
- Coinbase and Circle, who partnered up to issue the USD Coin aka USDC
- TrueUSD, another company behind TUSD.
- Paxos Standard who issues the dollar pegged PAX token
These companies are responsible for keeping every token issued backed by the same number of US dollars. If that was not enough, to ensure trust and accountability, third-party auditors regularly check up on their reserves and
keep them accounted for.
You can see the flawed logic here and room for, well let’s just say “error”, to be modestly discrete.
In reality, no one really knows what’s going on. As these reserves grow larger and larger, it becomes harder and harder to keep up with the changes and verifying their integrity.
The financial world will know what I mean when I say:
Paxos Standard and other “fully collateralized” 1:1 USD tokens are an entry point for financial scammers and crooked regulators to bring inflation and instability to crypto markets”
Remember, Stablecoin issuers have the power to influence the crypto markets with the introduction of bad and illegal practices.
It is perfectly within their power to issue as many Stablecoins as they wish, certainly more than they can afford to back-up at any moment in time. With this discrepancy and ill-conceived act, the market has no way of being appraised of the situation until the next audit report. In the meantime, Stablecoin issuers like Tether are free to roam in the wild.
The economic consequences of entailed are simple. If you increase the supply of something valuable and use it to buy let’s say Bitcoin, you will have effectively made something from nothing. The surplus of the supply you made for yourself should be worth nothing in reality, but since the market has no way of knowing this in the short term, opportunities for quick and dubious turnarounds become possible. My mind cannot fathom the rest of the schemes a twisted mind can hatch to gain a financial advantage for itself.
Do not be so shocked, Tether, the leading issuer of the biggest Stablecoin has already been caught with their pants down:
- Tether Lawyer Admits Stablecoin Now 74% Backed by Cash and Equivalents — Coindesk
- Tether Says Its USDT Stablecoin May Not Be Backed By Fiat Alone — Coindesk
Tether is also practicing “money making up techniques”, used by notorious wall street tricksters that ruined everything in the first place.
Assets backing up Tether are now not only US dollars, but intricate financial instruments, like loans, investments and other often hard to verify and track investment techniques.
Bottom line is that they do not guarantee that the USDT token issued is 100% backed and accounted for at any point in time. Which it should be, we learned that when we got off the Gold Standard.
Stablecoins should not require explicit trust. If only there was a way to issue a form of Stablecoin, without having to worry about physical reserves for every token issued. Well, there is!
It’s called DAI.
A Stablecoin issued on Ethereum. It’s a programmed Stablecoin that takes Ethereum as collateral and pegs its value to the US dollar instead. DAI is issued only when you need it. In what they call a collateralized Debt position or CDP, you stake your ETH holdings and get DAI in return.
A 1$ USD token equivalent. Stability of the token is secured by paying a small stability fee with every issuance. Effectively you borrow DAI, whenever you stake your ETH and you get your ETH back when you return the DAI. The DAI is then burned.
It all happens automatically. The process has been programmed by MakerDAO, a decentralized autonomous organization, and has been running safely and without problems for years. Governance decisions such as the percentage of the stability fee are decided by stakeholders’ votes, another automatic process, where the holder of MKR tokens can vote for their desired outcome.
If you ever wanted a cool, programmable, safe, and SOUND Stablecoin, then Dai is the answer. And do not fret, much of Ethereum’s ecosystem is building around DAI and not some other Stablecoin, already.
Libra For Liberty?
The case of Libra as a Stablecoin falls in the former category as well, as there are practices within the organization behind it, that begs the question if your money is really your money, and given some extraordinary situation, will it remain yours to do with as you wish? Not to mention other malicious strings, a disreputable company like Facebook, will attach to it.
Not to mention the potential for “minting” Libra tokens without assets to back them with.
It goes on and on and on, and we all know how it ends. Economic -grey area-practices with dubious intentions should be fully transparent, disclosed and controllable.
Programming our economy is the best way forward. Ethereum and Dai can help us with that.
