(UN)Stablecoins
By Diana Pires ₿ on ALTCOIN MAGAZINE
The emergence of the ‘stablecoin’, as we know it, is somewhat of a misnomer in my opinion. We have hoards of people calling for a new global currency, others seeking fresh liquidity, and some calling for an outright abolishment of currency, namely fiat, as we know it.
And yet, somehow in the process, as cryptocurrencies have matured we’ve ended up embracing fiat-type, government-backed coins. The most widely used stablecoin is essentially an IOU issuance — 1:1 digital currency that is a digital replica, in value at least, of 1 USD / EUR / GBP. Makes sense, right? Real-world collateral offers us the comfort of stability in such a volatile market.
But… how stable can a stablecoin truly be if it trades at different prices on different venues? Fragmented markets and regulatory disparities throughout regions naturally give rise to these types of phenomena, while the evolving market structure also bears risks. Despite the rise of algorithms and more sophisticated mechanisms of price discovery, flash crashes are still prevalent across a slew of traditional markets. Liquidity providers pull their orders from lit venues upon the first sign of stress or shock to the system, and within crypto, stablecoins are arguably the group most prone to experience jump-to-default-type events.
Perhaps more importantly, how does a fiat-backed stablecoin resolve issues of hyperinflation or poor fiscal discipline in an age where the major central banks turn to currency debasement at the first sign of soft economic numbers? Arguably one of Bitcoin’s most attractive properties is its hard-capped supply — the perfect theoretical antidote to a world of endless monetarism.
We’ve come to trust a centralized digital coin subject to the same geopolitical, counterparty risks and high transaction fees as the exact system that backs it. How truly stable will such a stablecoin really be?!
True to form, the first controversy to taint the stablecoin world was none other than USDT/Tether and its under-collateralization. When dealing with stablecoins such as USDT, True USD and Digix we are functioning on the basis of trust — trust that the issuer is collateralizing the coin as promised and performing audits on said indemnity. All of which is due to a lack of transparency, the very issue the crypto space seeks to eliminate.
In the case of Tether, the firm refused numerous calls for audits. Tether, of course, claims that it is backed 100% by USD but limited evidence or balances have been provided to support such claims. From the ashes of the Tether controversy, True USD was born — performing routine audits and publishing its balances. Still, neither coin is truly trustless and both are plagued by all the risks bred by centralization (human corruption, regulatory, etc…).
Digix, on the other hand, is backed by Gold: one DGX = 1 gram of Gold. If you’ve read my previous ‘Crypto Bit’ on recent controversies surrounding Gold you may agree that this is neither safe nor secure — or you may disagree as Gold is traditionally regarded as the safe investment we’re all familiar with.
So we have essentially witnessed the launch of an arguably illiquid coin due to its backing by the very currencies we sought to escape… right?
Stablecoins are not limited to the aforementioned centralized fiat-backed coins — we have two other categories that may or may not provide better solutions. Crypto-collateralized on-chain stablecoins (cryptocurrencies locked into smart contracts) and algorithmic stablecoins are both alternatives to fiat-backed coins. Their pros and cons are a discussion for a later date.
That said, there’s no denying the “value” such coins bring to the cryptocurrency markets, mostly in the form of adoption. Most crypto-only exchanges depend on Tether as an on/off-ramp. At the time of writing, Tether is ranked four on Coinmarketcap at $4,140,455,497 in volume. Most pairs on exchanges are against BTC, ETH and/or USDT, which has cemented Tether’s position in the crypto markets — vulnerabilities aside.
In the same way that governments have ingrained themselves in our day to day spending, transacting and saving, stablecoins backed by the very same currencies we are supposedly trying to avoid are doing the same thing. The ease of use of a stablecoin like Tether is undeniable, even when faced with looming concerns around the firm behind it.
The same can be said for emerging global digital currencies like Facebook’s Libra — when faced with the ease of transacting across borders via one easy platform such as WhatsApp (hypothetically), many will ignore the complete trust they’re placing upon a single firm, entity or government. Take WeChat and WeChat Pay which at one point weakened the PBOC’s full control over the Chinese money supply, empowering Tencent instead.
If we can infer anything from public behavior in this space, we can most definitely presume that we are creatures of habit drawn to convenience despite any red flags looming.
So while stablecoins offer investors a sense of security and familiarity — as an investor I believe my stablecoin is minted on an exchange for fiat and can, in turn, be redeemed for fiat, much like a demand note or swap — how many of us have successfully tried to redeem the IOUs in our pocket?
In fact, stablecoins pegged to rapidly inflating fiat currencies are anything but stable. What we really need is a digital coin whose valuation is based on more than a wing and a prayer; a coin with a limited and fixed supply rather than minted at will…oh wait…
So, let me wrap up with the words of Wu-Tang — Cash Rules Everything Around Me, albeit centralized and uncollateralized for now.
Diana Pires — Head of OTC Sales, B2C2
