Why Do Stable Assets Matter?
Since Satoshi’s key bitcoin innovation in 2009, the vision for a decentralized world without greedy middlemen has been front and center. In the current economic landscape, corrupt actors are siphoning money behind the scenes because banks are the sole authenticator of transaction information. Understanding this, we see how decentralized measures and blockchain technology are changing everything. They’re enabling authentication at the level of source code.
Cryptocurrencies Struggle for Widespread Adoption
Cryptocurrency has undoubtedly experienced mainstream publicity, like when El Salvador adopted bitcoin as legal tender. Yet amidst the attention, crypto struggles to reach mainstream adoption. One of the core reasons for this is the fact that the prices of cryptocurrencies are still volatile. Crypto like Bitcoin and Ethereum are fueled by speculation and trading. Even Bitcoin is down a shocking 70% from its peak just late last year. Ethereum has also tanked 75%+ during the same period. It doesn’t make sense to utilize these volatile currencies for practical day-to-day transactions.
In short, its purchasing power is unreliable. We can think of purchasing power as the quantity of goods that can be purchased with a single unit of currency. To illustrate this point, let’s say Bruce wants to buy a cup of coffee. Today he can purchase a cup of coffee for $3 (USD) at his local coffee shop. Tomorrow he wants to be able to buy the same coffee for $3. If the purchasing power of his currency changed dramatically, then he may try to purchase the coffee tomorrow only to find that it costs $7 instead of $3.
Blockchain-based modern financial systems require a steady means of exchange and a currency that’s price is rock solid, which is where stable assets come into play.
Stable Assets Solidify Purchasing Power
Stable assets are the innovation that solves this problem of variable purchasing power. We’ve already gone over the varying risks of each type of stable asset. Although they aren’t without risks, various over-collateralized methods have reduced risks immensely.
If cryptocurrencies are going to become the financial system of the future, as we hope, stable assets will become the foundation. With a once-again solidified purchasing power, anyone can make everyday transactions without worrying about the volatility of the currency. Simply enough, fiat currencies like the USD are extremely stable, so stable assets peg their price to the USD (or another rigid fiat of choice.)
Yes, being able to make everyday transactions with crypto is nice. But when we broaden the context a bit, stable assets can empower people in the crossfire of tragic deflationary circumstances.
Stable Assets Supports Citizens of Deinflating Economies
The problem is double-sided. Not only do cryptocurrencies struggle from volatility and uncertain purchasing power, but so do fiat currencies in countries with unstable governments. Take Argentina, for example. The Argentinian Peso devalued by more than 95% in a matter of 2 years. If you held 100 Pesos in 2017, it would be worth less than 5 pesos today.
Stable assets solve this problem as well. Argentinians that kept portions of their net worth in stable assets maintained value as their company’s currency depreciated in value. We can think of stable assets as the global currency of the future. No matter where you live in the world, you can transact with the same stable currency without corrupt entities manipulating exchange rates and taking absurd fees. All you need is an internet connection.
Ultimately, this empowers the economies of developing countries.
Conclusion
As we’ve seen, the innovations of the crypto market are obstructed their volatility. In order for crypto to see widespread adoption, the purchasing power of the currencies needs to remain fixed. Stable assets do just that. And on top of that, they empower citizens of developing countries suffering from deflationary economic circumstances. They let citizens withdraw volatile fiat into stable assets pegged to the value of more unwavering currencies like the USD.
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Disclaimer: Although we use the terminology “stablecoin,” we don’t claim that these assets will always hold their peg. We call SIKKA a stable asset, reflecting that it’s over-collateralization price stability has a few days lag time.
