Cointime

What’s the Point of Stablecoins?

Alberto Guerrero· 7 min read

Stablecoins are booming. Out of the top ten crypto assets, three are currencies pegged to the US dollar.

Tether, USDC, and BUSD are basically digital crypto dollars that keep their value as close as possible to $1 and this is achieved by maintaining reserve assets as collateral.

The first time I came across this concept I was surprised that stablecoins actually exist, let alone the huge demand they have provoked. But obviously, there is a market for it. Why would people want to buy a synthetic dollar when you can buy the real thing?

Markets often react in unexpected ways and new technologies create unexpected demand and use cases that nobody thought possible.

Let’s explore the reasons why these digital dollars are so popular and what are the implications for the crypto world.

Global Money

80% of the world population agrees that the dollar is a better currency than their local equivalent. If you live in Somalia, South Sudan, or Lebanon, you do whatever it takes to earn dollars instead of an inflationary shitcoin.

Since dollars are not so readily available in many areas, especially for those who lack access to a bank, the closest thing they can get is Tether, USDC, or some digital equivalent valued at $1 exactly.

Just with a mobile phone, you can transfer and store value without the need for direct intermediaries such as banks or currency exchanges.

Your boss or customer can then transfer you some tokens and you go to the shop and buy food.

I get it. It is clearly an improvement on the status quo but it is also half a job.

By transferring your wealth into a “stable” currency you are at the mercy of the FED, the company issuing the token, and the US Government monetary policy.

Since the global south is trying to get rid of the monopoly of money in their own regions, they might as well go all the way and transfer to a decentralized system that is not controlled, manipulated, or censored by anyone.

But, I guess this will take time. Humans tend to hold on to the familiar and postpone change until it becomes inevitable.

Legacy

We are creatures of habit. There are certain relics that become pervasive despite coming from a legacy world that is no longer practical.

We still use the QWERTY keyboard even though is clearly not the most efficient.

Anglosaxon countries still use the imperial system of measurement despite being totally inconvenient.

Most European cars still have manual gears despite the fact that automatic gears are easier, safer, and more reliable.

Habits die hard and money is no different. If you grew up with a fiat currency printed by the government, you are going to try to keep as close to it as possible.

My father still uses cash only, for him electronic money is a scam. He might have a point though.

We are fiat victims. We’ve been brainwashed by our governments. As the proverbial prisoner who suffers from Stockholm syndrome, we have fallen in love with our captors despite them being the cause and origin of most of our suffering.

Fiat money was created by mistake as a temporary measure. Then it became the norm and now, no one question it anymore.

But this wasn’t always the case. Some survivors still remember when money was backed by gold and they have never really trusted a currency that is basically paper with dead presidents printed on it.

Sometimes legacy is good, and sometimes preserving traditions can be positive but in general, if something is broken, better to throw it away and start from scratch.

Perception

We have been sold the idea that price stability is a good thing and fiat money is the best way to achieve it.

Certainly, the fiat system has mechanisms to adjust supply and demand and achieve the illusion of stability.

But when looking at long periods, it’s easy to see how much of that stability is just a mirage.

The so-called stable dollar has lost 98% of its value in the last 100 years, you could call this a steady decline but certainly not stability.

The temptation from central bankers to solve any problem by printing money pushes us into inflation and the devaluation of the currency. I would understand the need for a truly stable currency but it certainly ain’t the dollar.

The Alternative

While a digital dollar that can be acquired by anyone anywhere with a smartphone is certainly useful, there are other alternatives that offer more possibilities, features, and potential.

Bitcoin is certainly volatile on the way up but it’s also deflationary. Today it might buy you a small car but in 5 years it’ll probably buy you a big mansion.

And what is wrong with that exactly?

Bitcoin is money that goes up in value over time instead of melting like an ice cube in your hands.

Some might argue about the dangers of deflation — people won’t spend it because it constantly appreciates in value. This is mostly BS.

Technology is deflationary and yet you buy a phone, a computer, or a camera when you need it despite the fact that next year those will be better, faster, and cheaper.

This is exactly what is happening with Bitcoin today, everything gets cheaper over a long enough period. An iPhone cost 100 BTC 10 years ago, now you can buy the latest model for 0.04 BTC.

The idea of price stability is a fallacy even when paying in dollars. Give me a form of money that appreciates over time (instead of going to zero) and I will handle the volatility.

Besides, if you earn your income in Bitcoin and use it to pay day-to-day expenses the volatility is minimal and certainly less than the figures we see in Argentina, Lebanon, or Vietnam with their respective currencies.

True Stability

The idea of a stable salary has more to do with purchasing power than a fixed figure that due to inflation might not mean anything. Are 1 million pesos a stable salary in Argentina? Who knows!

One way to adjust salaries and purchasing power can be done on the supply side. By adjusting income levels and volatility, true purchasing power can be maintained through a floating mechanism.

This is what CPI-adjusted salary schemes try to achieve (but fail) and with Bitcoin would be much easier to implement in real-time.

For example, if your monthly salary is 0.5 BTC and this money allows you to pay for the cost of living, those expenses can be algorithmically recalculated every month and the salary adjusted accordingly.

This could be a much better system than we have now where CPI is not properly calculated and on top of that, incomes are not adjusted proportionally. This is why purchasing power has been steadily declining for the last 50 years making us poorer than our parents.

Conclusion

We crave stability, we aim for it, we sacrifice our lives for it and yet, we don’t achieve it.

The fiat system we have in place is not stable at all, it’s a deadly spiral of debt, inflation, and devaluation. Stability can only be achieved if purchasing power is maintained. If you can afford a dozen of eggs today but only half a dozen in 5 years, your wealth has been cut in half.

You should not worry about a fixed amount of money, you should be concerned about what you can buy with it.

Stablecoins provide that illusion of stability but all that is a mirage.

What you want is money that:

  1. Goes up in value in the long run
  2. Maintains purchasing power for everyday expenses

Both targets can be achieved with Bitcoin in cold storage plus payments through the lightning network.

Bitcoin on-chain is an asset that will keep appreciating forever while the lightning network is perfect for small payments that can be automated, adjusted, and programmed to maintain living standards.

I understand that this is not as straightforward as it might sound but surely is a better solution than the fiat scam we have now in place.

People work harder than ever and keep losing value through hidden inflation. Governments generate infinite debt. Banks and politicians are ineffective and corrupt.

What can we do about this?

Certainly, stablecoins won’t solve any of the above, only postpone the pain until it becomes unbearable.

The system needs a reset and for the first time in history, we have the perfect tool.

Decentralized money that is outside the control of central banks. An asset that is uncosfiscatable, censorship-resistant, transparent, and immutable.

A proof of work mechanism that ensures openness and fairness.

Everything fiat lacks Bitcoin has. Scarcity, consensus, decentralization, transparency, predictability, and durability.

When you have all that why bother with a bad copy of a collapsing fiat currency?

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