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By Alyze Sam and Tech & Authors

A primary argument presented by cryptocurrencies skeptics is that digital assets are excessively volatile to fulfill a crucial function of money. A successful fiat operates as a medium of exchange to purchase and sell while being a unit of account – the criterion for pricing. Stablecoins are the solution to crypto volatility. What are stablecoins and how do they protect assets in dark market times? 


Definition

A stablecoin is a cryptocurrency pegged to another asset of constant value or a digital currency tied to a fungible asset. Stablecoins have many use cases because they allow for secure and convenient transactions without the notorious volatility of traditional cryptocurrencies. 

History of Stablecoins

While Satoshi Nakamoto believed Bitcoin would become a form of electronic cash, one of the world’s first digital currencies is rarely used as a medium of exchange. Volatility and high fees make many cryptocurrencies impractical for daily transactions, confining them to remaining electronic stores of value rather than digital money. 

Stablecoins offer all the benefits of cryptocurrency, including:

The stablecoin concept officially appeared in the 2012 white paper for Mastercoin. The founders claimed their protocol would “allow the binding of cryptocurrency to a stable traditional asset.” The Brief History of Mastercoin is viewed on blog.omni.foundation. 

The original idea was to make a digital currency pegged to and backed by fiat money. 

Investopedia describes fiat money as “a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.” Controversy stirred in the crypto communities, but in 2014 Steem and EOS founder Dan Larimer, released BitShares, the first digital asset that provided investors with a safe hedge against the highly volatile cryptocurrency price swings. NuBits launched USNBT a few months later. 

RealCoin launched in 2015 and was later rebranded as Tether Limited. Tether is credited as the first full-fledged stablecoin. 

Tether or USDT is backed and pegged 1:1 to USD and was built on the OMNI blockchain but started migrating to Ethereum in 2019. USDT has been the stable digital asset leader since 2015.

In 2016, USNBT lost its peg to the U.S. Dollar, leading to the creation of a European analog called EURT. 

In January 2016, an Ethereum platform contributor decided to create the stablecoin, DigixDAO. DigixDAO had DGD tokens paying for different operations with DGX.

Steemit introduced SteemDollar (SBD) to stabilize the rewards system on the social blockchain platform Steemit. SBD pegged 1:1 to USD. In December 2017, SBD reached an all-time high of $13.81.

Allegations against Tether (USDT) started to surface in 2017 when rumors from one of their legal advisors suggested Tether was not fully backed 1:1 with the USD. Tether representatives clarified that only 74% of the coin was backed by USD, however, the remaining percent of USDT is supported by cash equivalents, giving it 100 percent backing.  

Stablecoins have become a mainstay of the financial industry, with a peak of 30 project launches in 2018. In March of that year, Tether was the only stablecoin in the market cap top 30. By 2019 there were over two hundred stablecoin projects, and in March 2019, ten percent of the top 30 cryptocurrencies were stablecoins. Many experts expect this trend to continue.

Purpose and Need

A stablecoin aims to: 

Stablecoin Advantages

Stablecoin Disadvantages

Stablecoin Protocol

Earlier, we dilated on the dream of Satoshi Nakamoto, impervious money with payment transactions anyone could afford. As we stated, today’s cryptocurrency community put Nakomato’s dream into action when they saw its potential. Although Financial technology is still in its infancy, it continues to evolve.

Here, we will delve further into “DeFi,” or Decentralized Finance also described as ‘Open Finance,’ which brings Nakamoto’s vision closer to fruition. 

Imagine a world of independent people effortlessly logging into an open alternative to every financial service available today; we are not asking anyone to bring to mind some imagined antipodes. Even now, blockchain users are accessing payment transactions and tools for savings, trading, insurance, escrow, loans, data storage, and more. 

An innovation Ethereum brought to the cryptosphere, an easily integrable smart contract system allows users in the forefront of financial technology to access these advantages. With this landmark achievement, Ethereum planted the seeds that would spring into a diverse array of prolific financial fauna that would mimic and innovate on the services we are accustomed to. 

According to Blockgeeks.com, “A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. “Smart Contracts allow the performance of credible transactions without third parties.”

A smart contract program operating on a blockchain can execute transactions automatically when coded conditions are met. This system lets developers construct functions that go well beyond digital assets. These programs are termed DApps or decentralized applications. DApps are applications built on decentralized technology instead of being built and controlled by a centralized entity. 

Technologists and economists imagined future financial ecosystems operating effortlessly with protocols like these, but it is no longer relegated to the realms of science fiction. One can witness automated loans negotiated directly between two unknown entities without a central banking system right now.

Among the seeds, Ethereum nurtured in the soil of its smart contract design was the potential for a whole host of ERC-20 stablecoins. Many groundbreaking platforms would harness the power and the beauty of the Ethereum network to create various stablecoins with unique attributes and unparalleled utility.

Examples

Stablecoins are tied to real-world assets like sovereign fiat, gold, corn, oil, sugar, diamonds, wheat, sugar, and other physical assets or goods. 

A stable asset-backed cryptocurrency makes a significant digital currency for everyday use. 

Use case examples may include: 

Blockimmo, a real estate company focused on tokenizing real estate, initiated an online property sale where investors could buy a piece of the building. Blockimmo used XCHF, a stablecoin tied to the Swiss Franc (CHF), as a payment option, to keep the price steady during the entire transaction process. The XCHF is pegged 1:1 to the Swiss Franc (CHF).

Use cases for stablecoins are multiplying as the public becomes more aware of their benefits, namely, the absence of sudden and unwanted price movements. Fluctuations among the stablecoins with the highest valuations do not exceed 3%.

Criticisms & Quotes

Vitalik Buterin stated in the 2014 Ethereum article, “Are stable-value assets necessary?” a rather visionary role for the future of stablecoins, declaring, “Given the high level of interest in blockchain technology’ coupled with disinterest in “Bitcoin the currency” that we see among so many in the mainstream world, perhaps the time is ripe for stable-currency or multi-currency systems to take over. There would then be multiple separate classes of crypto assets: stable assets for trading, speculative assets for investment, and Bitcoin itself may well serve as a unique Schelling point for a universal fallback asset, similar to the current and historical functioning of gold.“

UC Berkeley’s Computer Security Researcher, Nicholas Weaver, wrote that the stablecoin Tether is “the primary vehicle for hiding money flows by allowing customers to switch between different cryptocurrencies. In short, they represent a significant problem.”

Monax founder Preston Byrne writes, “Fiat-world examples of pegged assets form an object lesson in why you don’t try to peg currencies: because you are unable to hold the peg any longer than you can afford to subsidize your differences of opinion with the market.” Later stating that stablecoins are “the techno-magical idea that a cryptocurrency can tell the market what its price should be, rather than the market determining what a cryptocurrency’s price should be.”

“Distributed stablecoins aim to achieve both the characteristics of crypto-coins like Bitcoin (censorship-resistant digital transactions) and the price stability of traditional financial assets, such as the U.S. Dollar or gold. These systems are distinct from tokens such as Tether, where one entity controls a pool of U.S. Dollar collateral, ultimately making the system centralized and thus susceptible to being shut down by the authorities.” Preston Byrne

Nick Szabo believes central banks could soon turn to cryptocurrencies to shore up reserves, Finance Magnates reports, “There’s going to be some situations where a central bank can’t trust a foreign central bank or government with their bonds for example. One solution that’s been developed is to have the Swiss government hold it for you – that’s not a trust-minimized solution. The Swiss government itself is subject to political pressures and so a more trust-minimised solution is cryptocurrency.”

“Tyler and Cameron Winklevoss, Bitcoin (BTC) bulls and founders of the cryptocurrency trading platform Gemini, have said stablecoins and tokenized securities will usher in a bright future for the digital currency space. The twins made their remarks during an interview on Fortune’s crypto-focused news segment The Ledger on Jan 14, 2019… Cameron further noted that with at least 60 percent of $100 bills now held overseas, dollars on the blockchain are poised to significantly reshape the global currency market.” Released on CoinTelegraph 14, January 2019.

Adam Back is known for being among the first to work with Bitcoin and inventing the hashcash “proof of work” system. “I think that blockchains are more about permissionless, uncensorable usage and free-market money – separating money from the state – using a gold-like mined digital commodity money: Bitcoin. I think while it is possible and useful for some use cases, like crypto trading, to have stablecoins, they inherently fall short of Bitcoin as they have custody risk, and if there is a central bank underwriting traditional establishment interests reflected in the operation which may look unattractive to users… Companies after all do have a financial interest to reduce signup and usage friction experienced by users. Governments are more insulated from market competition- being policy monopolies. So, we’ll see how things develop in various countries, but I would think of today’s stablecoins as lacking much of the self-sovereignty properties of Bitcoin, and potential future central government-operated ones similarly.”

In Q4 2019, two members of the House Financial Services Committee, Reps. Sylvia Garcia, D-Tex, and Lance Gooden, R-Tex proposed the Managed Stablecoins are Securities Act Bill on the day of a committee hearing on the role of big data in financial services on November 20.

Garcia announced that managed stablecoins “are clearly securities under existing law.” Garcia proceeded, “Bringing clarity to the regulatory structure of these digital assets protects consumers and ensures proper government oversight going forward.”

Lance Gooden bestowed enlightenment upon the bill, as it was necessary to aid interested parties in comprehending the acquisition of these new digital assets. “In what are called ‘managed stablecoins’, we have trusted brands marketing digital assets to consumers as secure and stable… Every day investors need to know they can trust the issuers behind their financial assets. This bill would bring them the security they deserve by applying the laws we use to regulate financial securities to this new breed of digital currencies.”

Key Factors for Evaluating Stablecoins

Before obtaining a stablecoin, it is wise to consider a few key factors:

Where to Find Stability: Quantity Theory of Money 

Many stablecoin white papers claim that The Quantity Theory of Money inspires the foundation of cryptocurrency. 

Photo Source: https://marketbusinessnews.com/financial-glossary/quantity-theory-money-definition-meaning/

The infographic shown below is The Irving-Fisher Equation. 

Photo Source: https://www.slideserve.com/cutter/part-1-b

Irving Fisher and Milton Friedman developed this equation in the 20th century upon the popular orthodox theory of 17th-century classical economics, The Quantity Theory of Money.

Simply 

In practice, The Quantity Theory of Money recommends changing currency supply to maintain price stability. 

Money Supply multiplied by the Velocity of Circulation is equal to Price Level multiplied by Transaction Volume. (M x V = P x T )

If M doubles while V and T remain constant, then P theoretically will double, cutting the value of each unit of currency in half. 

The majority of economists accept The Fisher Equation as valid over the long run. This model suggests stablecoins will keep drastic price changes at bay by adjusting units in circulation. 

If a stablecoin’s value drops below a specific price point, the total number of tokens decreases to stabilize its value. If the token’s value rises beyond a specific price point, users incorporate more supply to keep it at the desired market value. 

Most economic models are imperfect. There are some problems with The Quantity Theory of Money. An example is that V and T are assumed to be constant in the long run. Consequently, M and P are perfectly proportional. 

This theory was generated based on a superior economic structure that assumes money velocity and transactions are proportional. 

Blockchain projects are swiftly evolving, and the technology is still in its infancy. Therefore, it is challenging to calculate token velocity and transaction volume, much less make assumptions about constancy.

Considering V and T as variables, it may be time, once again, to add more variables to The Fisher Equation.

Where to Find Stability: When Historically Stable Commodities Plummet  

Ancient History shares an economic nightmare caused by a single king with a thirst for wealth. 

“Mansa Musa I was the ruler of the Mali Empire in West Africa from 1312 to 1337 CE. Controlling territories rich in gold and copper, as well as monopolizing trade between the north and interior of the continent. The Mali elite grew extremely wealthy. A Muslim like his royal predecessors, Mansa Musa brought back architects and scholars from his pilgrimage to Mecca who would build mosques and universities that made such cities as Timbuktu internationally famous. Mansa Musa’s 1324 CE stopover in Cairo, though, would spread Mali’s fame even further and on to Europe where tall tales of this king’s fabulous wealth in gold began to stir the interest of traders and explorers. Mansa Musa, the Mali Empire’s greatest ever ruler, was said to have spent so much gold in the markets of the Egyptian city that its value plummeted.”

Photo Source: https://www.postnewsgroup.com/mansa-musa-king-of-mali-empire-was-the-richest-man-of-all-time/

Mansa Musa started a pilgrimage to Mecca in 1324 CE, “but when he arrived in Cairo in July of that year en route, he caused an absolute sensation. The Mali ruler’s camel caravan had crossed the Sahara and when he arrived in Egypt, even the Sultan was astounded by the wealth this West African king had brought with him. In some accounts, each of the 100 camels carried 135 kilos (300 pounds) of gold dust while 500 slaves each brandished a 2.7 kilo (6 pounds) gold staff. In addition, there were hundreds of other camels loaded down with foodstuffs and textiles, horse riders waving the huge red and gold banners of the king, and an impressive human entourage of servants and officials that numbered in the tens of thousands. In an extreme gesture of largesse, Mansa Musa would give away so much gold and his entourage spend so much shopping in the markets of the city that the value of the gold dinar in Cairo crashed by 20% (in relation to the silver dirham); it would take 12 years for the flooded gold market to recover.”

The crash continued to become more astonishing and damaging to those in the local economy.

“The merchants of Egypt, in particular, were delighted with all these naive tourists suddenly milling about their markets and they took full advantage, raising their prices and relieving the shoppers of their gold at any opportunity. Indeed, Mansa Musa and his people so overspent that they left the city in debt, a factor which contributed to later Egyptian investment within the Mali Empire so that the merchants could recoup some of the value of the goods they had given on credit.”

The wondrous concluding tale of one of the most mysterious kings led many to question if the crowned conquistador led generations to come on a destructive path for greed, gambling precious resources, illness, famine, family, and even death. Mansa Musa was the 12th richest man in recorded history; however, what price to the rest of the world? 

“An indication of the impression Mansa Musa had made is that news of his Cairo visit eventually reached Europe. In Spain, a mapmaker was inspired to create Europe’s first detailed map of West Africa. Created c. 1375 CE, the map, part of the Catalan Atlas, has Mansa Musa sitting regally on a throne, wearing an impressive gold crown, and holding a golden staff in one hand and, somewhat gleefully, a huge nugget or orb of gold in the other. It was such tales of gold that would inspire later European explorers to brave disease, warlike tribes, and inhospitable terrain to find the fabled riches of Timbuktu, the golden city of the desert that nobody quite knew where to place on the map even in the 18th century CE.” 

This account is not only a warning; it can sit as an inspiration for the financial technology realm. As technological advances emerge, originators, developers, economists, and regulators should consider economic crises such as these to formulate more effective currencies and protocols to prevent such calamitous events.

Where to Find Stability: The Gold Standard

Throughout history, periods existed where many agreed a single commodity retained value. Gold, historically speaking, has been highly favored. Observing a joined consensus that gold is valuable, the rationale behind the gold standard was presented.

A gold standard is a monetary system in which the standard economic unit of account was constructed on a fixed quantity of gold. The gold standard was extensively employed in the 19th and initial portions of the 20th century. Most nations deserted the gold standard as the cornerstone of their monetary systems at some point in the 20th century, although numerous entities still hold substantial gold reserves.

The appeal of a gold standard is that it wrestles control of issuance out of the hands of imperfect human beings. With the physical quantity of gold acting as a limit to that issuance, inflation can be curtailed. 

The intention of monetary policy is not to solely counter inflation but to surmount deflation while fostering a stable monetary environment. A brief history of the U.S. gold standard is enough to show that it is a way to avoid inflation; alas, strict adherence can create economic uncertainty.

Bitcoin is arguably a better investment asset than gold, as governments or banks cannot regulate it. Furthermore, it is capped, meaning only a set number will ever exist. Following the discovery of all 21 million Bitcoins, there will be no more to mine, and its value will increase as demand outstrips supply. 

Bitcoin is “backed” by technology and mathematics. Bitcoin operates by a social consensus implemented through an algorithm. The gold standard was often implemented as a monetary policy in the past. However, gold coins were no longer a circulating currency by the 1930s, and the world entirely abandoned the gold standard by 1971.

“The world consumption of new gold produced is about 50% in jewelry, 40% in investments, and 10% in industry. Gold’s high malleability, ductility, resistance to corrosion and most other chemical reactions, and conductivity of electricity have led to its continued use in corrosion-resistant electrical connectors in all types of computerized devices (its chief industrial use).”

Crypto zealots relish in their modern prospective gold standards on the horizon and the value of gold, itself:  “….continued use in corrosion-resistant electrical connectors in all types of computerized devices (its chief industrial use).” Therefore, ironically, gold can be melted and repurposed to power ASICs, used to mine and transfer Bitcoin, birthing a new digital gold rush. 

Where to Find Stability: Current Value in Gold

Gold is an accepted but a dated commodity. Practical uses aside, gold has kept its value primarily due to tradition. 

Traditionalists argue Bitcoin is far too volatile for investments and repeat their mantra: “gold is king.” 

Many affirm that gold is presently one of the most dependable investments during economic downfalls; regardless, take heed to the previous mention of Mansa Musa and allow the words of a contemporary historian to remind us that even the most stable commodities can suffer a significant impact by an individual event or entity. 

“Gold was at a high price in Egypt until they came in that year. The mithqal did not go below 25 dirhams and was generally above, but from that time, its value fell, and it cheapened in price and has remained cheap till now. The mithqal does not exceed 22 dirhams or less. This has been the state of affairs for about twelve years until this day by reason of the large amount of gold which they brought into Egypt and spent there….” Chihab Al-Umari, Kingdom of Mali 

When considering investing, look at this chart analysis of $BTC and $GOLD.

“This chart compares the performance of gold in the last 43 years and that of Bitcoin since its inception. Originally posted by Nunya Bizniz, who described the charts as having an ‘uncanny’ resemblance.”

Where to Find Stability: Current State and Future of Gold and Crypto

Many inquire, “What is more beneficial to invest in, Bitcoin or Gold?” 

Currently, this is not an either/or question. There are techniques to hinder investments from dropping, or as previously mentioned, that act as a conduit to obtaining both by investing in a legitimate gold-backed and pegged stablecoin. 

Bitcoin and gold are entirely diverse assets with different use cases. The first cryptocurrency cannot displace gold as a precious physical asset as Bitcoin will never be a tangible commodity. Consequently, volatility limits Bitcoin’s capacity to be the premier option for investors. Fear, as well as a general lack of knowledge, leaves Bitcoin in a complex transitional phase. 

Bitcoin maximalists and altcoin users alike have the motivation to be hopeful when comparing gold to cryptocurrencies. Bitcoin is in its infancy, yet retains a historical chart nearly identical to one of the world’s oldest and most trusted investments. Experts are wondering how these charts and assets will evolve as the world moves further into the digital age, especially after the economic turmoil from the COVID-19 pandemic. 

–Fin–

Check out more on the history of fiat, the history of crypto, the evolution of Stablecoins, and the future of digital assets in the number one new release on Amazon’s financial education and science and technology, Stablecoin Evolution, found here. Check out more of Alyze Sam‘s work at Tech and Authors or give us a follow on social media. We enjoy sharing unbiased poetic education as we build solutions. Sharing our work helps us educate. reach out to us if we can help serve your tech-for-good project or produce award-winning copy for you or your science, medical, or technical projects. 

Author

Alyze Sam is a refreshing blockchain strategist, a novel educator, a multi-award-winning author, a serial co-founder, and a vehemently driven advocate. Sam wrote the first crypto dictionary and published the first books on stablecoins. Don Tapscott published her book ‘Stablecoin Economy’ at The Blockchain Research Institute in January 2021. Sam’s newest book, ‘Stablecoin Evolution’ is currently the number one new release on Amazon in Computers & Technology. The Bad Crypto Podcast developed a Blockchain Hero NFT inspired by her work: Mz. Stability. After nearly losing her life a few times, Sam is a retired nurse and owns Tech & Authors with her best friends, where they spend their days joyfully producing unbiased poetic technical education. The Tech & Authors team also builds and launches state-of-the-art technical solutions with other top FinTech experts. 

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