Stablecoins have been all the rage this year with currently dozens in circulation bearing names like Tether, Basis, Sagacoin, TrueUSD, Dai and Carbon. Just this month, two more came onto the market, the Paxos Standard token and the Gemini Dollar, which both received regulatory approval from the New York Department of Financial Services.
Stablecoins are designed to maintain a consistent value, either because they are backed 1:1 with fiat currency, utilize collateral or employ an algorithm that adjusts supply accordingly based on activity.
The appeal here is obvious: stablecoins have the technological features of cryptocurrencies but unlike traditional cryptocurrencies which trade at wildly fluctuating prices, the value of a stablecoin is stable (hence the name) in terms of dollars or their equivalent, making these attractive as units of account and stores of value.
“Tokenized money has clear advantages over traditional money: forgery is essentially impossible, better traceability improves regulatory functions like AML and makes monetary policy easier to set, and transactions become more efficient through reduced reliance on middlemen”, Daniel Mason, vice president of strategy and operations at Spring Labs, a startup developing a blockchain network to securely share beliefs about credit and identity data, told CoinJournal. These represent “a huge opportunity within the cryptocurrency space”, he said.
Like Mason, Kain Warwick, founder of Havven, a decentralized autonomous organization overseen a stablecoin called nUSD, agrees that there’s a bright future ahead for the new type of cryptocurrencies, which he believes will be key to the growth of the broader blockchain ecosystem.
“If the blockchain ecosystem is to continue expanding, the friction of only being able to transact with volatile currencies must be resolved”, Warwick noted.
“Payments should be the core of the ecosystem, but as long as transacting with crypto isn’t a frictionless experience, apps and platforms that could be adding to and building out the space can’t reach the audience they should be reaching. Basically, once we have a decentralized and scalable stablecoin with good liquidity, this will encourage other aspects of the space to grow.”
In his views, stablecoins solve many of the issues inherent to traditional cryptocurrencies. Citing the example of initial coin offerings (ICOs) which have mostly been raising funding in ether, a cryptocurrency that’s seen its value plummet by more than 80% since the beginning of the year, Warwick said:
“Many blockchain projects raised funds in ether while it had a much higher value than it currently does. If those projects had raised money in a stablecoin rather than in ether, they wouldn’t have seen the major loss in the total value of their funds, thus supplying them with longer runway and a far greater ability to execute on their roadmap.”
While the opportunities related to stablecoins are clear, many challenges still need to be addressed. Barry Eichengreen, a professor of economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund, argues that the fact that a stablecoin’s value is pegged 1:1 to the dollar doesn’t make it necessarily viable.
In an article published earlier this month, Eichengreen detailed the flaws and limits of each type of stablecoins, which comprise the fully collateralized stablecoins, the partly collateralized stablecoins and the uncollateralized stablecoins, noting that in some cases these could facilitate money laundering and tax evasion, and in others, were prone to systemic risk.
But for Ken Lang, a member of the ndau Collective and the CTO of COSIMO Ventures, it is the many unanswered questions in regards to USD-pegged stablecoins, the most popular type, that’s got him the most worried.
“USD-pegged stablecoins ultimately need to be able to answer a few questions about their dependability. For example, if all holders of their coin wanted to exchange them for USD tomorrow, is there an orderly process set up so they can be assured they could make that exchange, without uncertainty? Where would those funds come from if it’s not 100% backed by actual US dollars? If the coin design is dependent on future holders having confidence in the coin’s value in the future, at what point does confidence in future value of the coin by some become insufficient to provide liquidity to current holders of the coin?”, Lang said.
“While the popularity around stablecoins is an understandable phenomenon, the lack of answers we have for these questions is concerning, and there are two potential solutions that could address this.”
Lang’s venture capital (VC) firm COSIMO Ventures is backing a startup called Oneiro that’s just launched a “buoyant” cryptocurrency called ndau. Being “buoyant” essentially means that ndau is stable on market downsides and good on the increases. The company claims it is the world’s first cryptocurrency that is untethered to any fiat, and which self-regulates using digitally built-in mechanisms, monetary policy and governance.
“While stablecoins can be useful in particular cases, they are not the best choice for an investor looking for a cryptocurrency that can hold and increase in value over the long term”, Lang said.
“Any cryptocurrency that is pegged to a fiat currency is subject to its inflationary qualities, meaning that it can decrease in value (by about 2%) every year as the dollar does. Stablecoins that are pegged to other currencies are also impacted by their local economies and monetary policy, interfering with the coin’s ability to rise in value independently over time.”
For hardcore blockchain and cryptocurrency believers, the problem with fiat-pegged stablecoins is that the concept comes in opposition to some of the key values behind cryptocurrencies including decentralization and freedom.
It was found earlier this month that the Ethereum-based Gemini Dollar has code that enables the company to “freeze any account or make all tokens non-transferrable.” This week, it was unveiled that the new PAX stablecoin has a function called “setLawEnforcementRole”, granting government officials (or anyone for that matter) the ability to tamper with wallets and affect the money supply.
“The most prominent stablecoins at the moment are backed by fiat and thus centralized, including Tether, TrueUSD, and such recently-announced projects as Gemini Dollar and Paxos Standard”, Warwick said.
“The danger with fiat-backed stablecoins is that their collateral needs to be stored in a centralized bank, which always run the risk of interference or censorship from institutions or governments … because governments have motive and opportunity to shut them down, just like the US government shut down eGold.”
“The optimal stablecoin is stable, scalable and decentralized”, Warwick said, the latter characteristic linking back to the foundational purpose of blockchain technology.