Cryptocurrencies exhibit transaction immutability and censorship resistance, and
in these ways are a better form of money; but their adoption has been hindered
by the volatility inherent in their static monetary policies. Users cannot engage
with such systems as a medium of exchange if the purchasing power fluctuates.
Stability continues to be one of the most valuable yet elusive characteristics for
the technology.
Stablecoins are cryptocurrencies designed for price stability. They should ideally
be as effective at making payments as fiat currencies like the US Dollar, while
retaining their other desirable properties. A decentralised payment network built
on a stablecoin would be able to capture all the benefits of a permissionless system,
while also eliminating volatility. One approach to achieving price stability
is to produce a token whose price targets the value of a fiat currency. Targeting
stability against fiat currencies obviates the need to respond to macroeconomic
conditions, as the token then benefits from the stabilisation efforts of large institutions
acting in fiat markets. Furthermore, if a token’s price can be maintained
at $1, then it can serve as an interface between fiat money and cryptocurrency.
If such a stablecoin does not require an account in a traditional bank, then it
can be effectively used for settlement and purchasing, without the centralisation
and counterparty risk involved in fiat transactions. Thus it can be expected that
by using stablecoins, exchanges that trade fiat for crypto will be able to rapidly
reduce their transactional costs, reducing the barriers for new users to enter the
market.
Distributed CollateralToday’s fiat money is not backed by an asset; its stability is derived from the
authority of the governments which issue it. These governments require that tax
obligations are denominated in the currencies they control, which are then used
to fund active stabilisation efforts. However, with government control comes the
risk of tyranny and debasement. Decentralised monetary systems don’t have
these powers, and so they must use collateral to provide confidence in the value
of their tokens. A decentralised system cannot use collateral assets that exist
outside the blockchain, as interfacing with these assets necessitates centralisation
with the aforementioned failure modes. Meanwhile, cryptoasset prices have been
dominated by speculative volatility. So whether a system uses real-world assets
or cryptoassets to back a stable token, if the value of the collateral is uncorrelated
with the demand for the token, then the system is vulnerable to external price
shocks. Large corrections can destroy the value of collateral without any change
in the demand for the token issued against it. Clearly then, in designing an
asset-backed stablecoin it is important to select the collateral asset carefully, but
no existing asset perfectly serves the purpose.
Cryptocurrency such as BitUSD or NuBits have failed in the past, and now there is Tether (USDT, EURT). Tether for each currency it distributes holds an equivalent amount in the reserve (there is no evidence in this respect), but in a centralized company.
How do you think do we need stable coins?
