Where Stablecoins Fall Short and How ndau Could be a Solution

Stablecoins are considered by many to be cryptocurrency’s answer to market volatility. True to their name, this new kind of digital asset has gained international notoriety for having its price pegged to the value of a fiat currency, such as the U.S. dollar, mitigating market volatility by tethering its value to a known, relatively stable asset. Faced with a comparatively uncertain crypto market, providing these price assurances is no small feat; making cryptocurrency less risky and more closely aligned with the comforts of the general public. Stablecoins are an important evolution to help break through to the mainstream. However, while undoubtedly successful, it’s important that we recognize that stablecoins are only an interim solution to the long-term goal of reducing crypto volatility. If we are truly going to move toward a future where digital assets are both a long-term store of value and a viable medium of exchange, we must be willing to move away from the influence of centralized infrastructures. Below, I’d like to discuss the roles and limitations of stablecoins in the modern cryptocurrency landscape, as well as how a new cryptocurrency I happened upon in early 2018 at the suggestion of the Dean of the UCD College of Business, Tony Brabazon — called ndau — might fit into the mix.

Stablecoins function in a number of ways. While some might use algorithms to create price convergence with a fiat counterpart, others might rely on collateralization to successfully attain price stability. In either instance, stablecoins are created by using protocols to prevent erratic fluctuations in market value. Should a dramatic devaluation in the market capitalization of cryptocurrencies occur, stablecoins institute precautionary measures to stay pegged to their fixed fiat counterpart, providing buyers and sellers with greater confidence in their inherent value. For many people, this peace of mind is a crucial step toward providing long-term legitimacy of cryptocurrencies as a viable medium of exchange. The general public, for example, may be reticent to buy and sell products using bitcoin given its tendency to fluctuate in value before the recipient can exchange it. However, they are far more likely to use stablecoins if they can trust their ability to live up to its intended purpose. And because of this trust, even the most skeptical cryptocurrency users might be willing to consider using a stablecoin as a viable method of payment.

However, all current stablecoins are limited by one crucial fact: They are unable to serve as a long-term store of value. While many in the cryptocurrency community herald stablecoins as a viable medium of exchange, they are quick to overlook their dependence on fiat markets. Stablecoins are a gateway to the decentralized economy. They’re pegged to centralized entities (i.e., the U.S. Federal Reserve) and are heavily dependent on the continued health of their fixed fiat counterpart. The U.S. dollar, depreciates approximately two percent every year, while other fiat currencies depreciate at even higher rates during unanticipated periods of hyperinflation. Consequently, the same protocols embedded to help stablecoins maintain their value would ultimately contribute to their devaluation. Unfortunately, at least in their current state, stablecoins don’t present themselves as a long-term store of value. And as we in the cryptocurrency community continue to search for a new cryptocurrency that can be stored as well as spent, stablecoins provide an incremental step towards providing price stability and a long-term store of value.

But if stablecoins aren’t the answer, then what is? Following up on Tony’s suggestion I found out about ndau in early 2018 and I believe it holds tremendous promise in protecting against price volatility, while still remaining independent of centralized infrastructures. ndau labels itself as a buoyant digital asset, meaning that it has the freedom to increase in value as demand warrants, while economically incentivizing users to support its market price at key distress levels. If, for example, the price of ndau cryptocurrency were to drop, ndau’s inherent structural mechanisms would dissuade users to panic and sell, furthering its price stability. Users are also rewarded for continuing to hold ndau — using what’s known as ecosystem incentive alignments — bolstering its potential for long-term storage. The longer the asset is held, the more potential to earn these economic incentive alignments. In the pursuit of lasting value, it will be cryptocurrencies that can not only protect against rampant fluctuations in the market, but can also protect against our current dependence on the fiat market that will be the most successful at gaining mainstream attention.

In many ways, progress in cryptocurrency has been stymied by the search for a digital asset that can do it all. Popular digital assets like bitcoin, ethereum, and ripple are undoubtedly promising for their large market capitalizations and international name recognition, but currently fluctuate too much to be able to be reliably used to conduct everyday transactions. Stablecoins like Tether, USDC and Gemini can successfully function, at least in the short term, as a viable medium of exchange, but can’t operate independently of centralized markets and are susceptible to the characteristics of their fiat counterpart. Even for a cryptocurrency like ndau, which is gaining increasing momentum for its long-term store of value, gray areas exist in how practically it can be used as a medium of exchange. For this reason, both these kinds of digital assets might be used in combination to allowing an individual or institution to both transact and store value.

The cryptocurrency community has been searching for a holy grail digital asset with the potential to transform society as we know it. In pursuit of this unknown, unfortunately, many of us have overlooked the fact that there is room for more than one transformative digital asset in the cryptocurrency ecosystem. In truth, the crypto industry encapsulates more than 2,100 projects — each of which exist in the space with their own unique function and value proposition. With such a diverse pool of projects, some promising and some less so, users should be able to make informed decisions based on the projects that work best for them and their needs. Imagine using a stablecoin to transact value from a retailer in a clothing store, while simultaneously saving for your children’s college tuition — all without needing to fear market crashes or inflationary pressure. The industry was built upon a foundation of diverse products with for varying use cases, and users should be able to celebrate the many options that are presented before them. The future is bright with the acceleration of crypto innovation and new novel concepts that challenge the status quo.