PwC & Loopring: Stablecoin Report
Emergence of Stable Value Coins and A Trust Framework For Fiat-Backed Versions
A few months ago, the Loopring Foundation and PwC China began working together to explore some of the greatest opportunities and challenges facing the blockchain and cryptocurrency ecosystem, as well as traditional corporations who are navigating its effects on their industries.
Our first order of business was to dig deep on the topic of stablecoins — one of the most active areas of 2018, and potentially 2019.
We are pleased to release this comprehensive 29 page report which should provide a most thorough overview of the matter, with a particular focus on use cases, usage, and the regulatory considerations facing compliant fiat-backed models. We also present a ‘Trust Framework’ for fiat-backed coins.
You can read or download the full report here: https://loopring.org/resources/pwc-loopring-stablecoin-paper.pdf
For something that is designed to be stable (and to some, ‘boring’), it is truly a broad and exciting topic. We’ve seen so many themes occur even in the past few months: from a flood of regulated fiatcoins challenging Tether’s dominance (albeit slowly), to MakerDAO’s DAI becoming so foundational to Ethereum’s decentralized financial movement with seemingly nothing able to escape its gravitational pull (now holding 2% of all ETH in CDPs), to Basis shutting down and the algorithmic model remaining ever so elusive — stablecoins are surprisingly riveting!
It is our view that stablecoins are complementary to ‘normal’ (non- pegged) cryptocurrencies, at least — or especially — in the short to medium term. With reduced volatility, much of the latent demand and use cases have the opportunity to engage with a new tokenised economy, and see firsthand the benefits afforded.
In the long term, normal cryptocurrencies — specifically the ‘payment’ variety such as BTC — seek to become an alternate monetary asset in parallel — or in lieu of — fiat currencies. For that goal, pegging price to fiat currency, or any value index, would defeat the purpose. To reach that reality, however — where new forms of money may proliferate — price-stable cryptocurrencies may represent the single best hope, bridge and educational tool.
Moving forward, we’ll monitor how these themes continue to play out, how crypto and traditional businesses may use them as strategic tools, and how the stablecoin may very well be the first mass adopted blockchain ‘product’.
We’ll end with the paper’s conclusion, which provides a bit of insight into how we have come to view this part of the ecosystem following our research.
The currencies we care about are the ones we see all around us — the ones that denominate our lives. Our affinity for any currency depends on its relative stability to however we buy, earn, and save. This, in turn, is derived from our peers, nation, and society at large feeling similarly confident and comfortable in the same.
Currency is the quantifier of our wealth and its purchasing power, and, crucially, rests on the reasonable expectation that tomorrow will not be too different than today. Failing to satisfy this credible commitment to straightforwardness simply precludes people from making rational decisions and long-term investment.
In some sense, stable currencies are the equivalent of a commonly spoken language; compulsory for coordination and cooperation.
What should be clear is that no matter the mechanism, confidence is the key ingredient in maintaining stability. The underlying means are of course important, but from a theoretical perspective, everyone’s belief that a stablecoin should be worth 1 USD — and their subsequent willingness to buy/sell/convert for 1 USD — is a sufficiently self- perpetuating phenomenon to keep it stable. In fact, confidence is what keeps fiat currencies ‘stable’ in the first place: confidence in monetary policy, or at least confidence in the credible commitment to pursue the policy that a central bank has signalled.
For fiatcoins, the confidence is most basically a testament that there is limited counterparty risk from the issuer (or the issuer’s banks). For the on-chain and algorithmic methods, it is mostly a testament to faith in the smart contracts and to users’ rationality and self-interest.
No matter the mechanism, it’s exceedingly important for these issuers or developers to take their roles and stablecoins seriously; these assets may hold users’ savings, not an allocation to long-shot speculation. Failure — be it fiduciary, legal, technical — could have catastrophic repercussions for token holders and the cryptoasset industry at large.
To some, there is a sentiment of saturation in the stablecoin market. It’s fair to question the point of another coin worth USD$1 or HK$1. However, we believe there are useful reasons for why more can be expected, and why that’s a good thing.
Chief among them is that more coins likely means reaching more people. Issuers have idiosyncrasies in pegs, geographies, platforms, compliance and marketing. Any onboarding of users into a blockchain-based world is unambiguously good for the ecosystem, especially considering the comprehension barrier. It may also mean reaching the people who need it most.
The market will also likely see many more fiatcoins in particular, for the simple reason that it makes business- sense for their issuers. Given that fiatcoins have zero or negligible fees for creation/redemption, the real value it provides issuers is the ability to aggregate users, amass data, and feed them into an ecosystem of ancillary products/services such as wallets, exchanges, etc. Just like in Web2.0, aggregation theory, for better or worse, may still be a winning strategy. With this in mind, we may see a different sort of centralised issuer in 2019; already pervasively popular platforms, such as Facebook or Amazon.
Secondly — pertaining only to the decentralised varieties — given its difficulty, a trustless stablecoin has near mythical meaning. Designing decentralised price-stable cryptocurrencies are hard problems, and there is no reason to believe that we will get it right the first or fiftieth time; the likelihood of any solution’s mid-to-long term success is probabilistically low.
Finally, the greatest argument for more stablecoins is the same argument for more of anything related to building on blockchains: experimentation, especially with new forms of money. The unknown unknowns are plentiful, but the design space is much more fertile with stable units of value.
We welcome and appreciate all feedback; please reach out to any of us on the Loopring or PwC China teams. Contact info can be seen above. Thank you.
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