Last month, a friend and I stood at discussing our benefit returns on the multi-months crypto bull run.
It was always clear about our common goal: we simply desire to make more fiat money out of the bitcoin global growth.
Exchanging our wage money for crypto to earn great yields then sell our gains back to earn more fiat cash is appetizing.
Staking, holding or trading digital coins also constitute a good strategy to defeat or repel inflation and the bank system void or negative yields on deposits.
What remains unclear is for what purpose?
After all, the classic crypto hoarding approach defeats the original objective of cryptocurrency that remains to utilize it as real money, not as a speculative asset (only).
Even if you make more of your fiat money thanks to cryptocurrency, it ends up as fiat.
History taught us that even a million Deutsche mark could not be enough to buy bread. And there is more chance that history will repeat itself at some points because humans simply do not learn about it.
After all, democracy freed Barabas ("the son of the father" in Hebrew!) and crucify Jesus Christ. Why would we believe we have "improved" and reconciled our lives since then? We still let the assassin go away yet the innocent are afflicted by a heavy burden.
Ten years ago, I would not have enjoyed seeing Euro or Dollar plunge into the abyss. We are not yet in that scenario but the fiat Titanic is heading towards an economic collapse. Each wave of quantitative easing (QE) is another way of capping our hard-earned money and a direct attack on common people's pockets.
To tell the truth, there is less chance of finding weapons of mass destruction in Iran than of avoiding the collapse of traditional currencies. Since 2002, Iran failed to deliver on the WMD field but the US debt clock (and world debt clock) kept its downwards pace. In spite of all, the rhetoric in Washington continues to blame other countries for global issues but fails to look in the mirror.
It is noteworthy that the US Federal debt to GDP ratio stands at 127.73% officially. In contrast, Russia's public debt to GDP ratio equals 18.46% and its economy is in growth. Even China does better than America with a public debt to GDP ratio of 54.12% and a growing economy as well.
What we need is an economic failsafe, an emergency vessel, a crypto arch, towards which we can all gather and prepare the next round that is the demise of the government's money.
Let's take an eagle-eye perspective on this matter. What best alternative does the crypto galaxy offer to journey out of this morass?
Bitcoin (BTC) and Ether (ETH) come first to mind.
The more scalable ETH is attractive because it provides functions other than making payments. Its smart contracts allow decentralized applications to be run on its Ethereum blockchain and it is improving years after years.
As wonderful as they appear, both still cannot currently overcome the necessities for real cash.
Both coins remain too volatile and gas fees, transaction speeds, scalability problems (especially for BTC) make them improper to be used for online payments to buy bread or coffee.
Altcoins
The current candidates to fulfill Sathosi's whitepaper (A Peer-to-Peer Electronic Cash System) are BTC forks or coin projects that kept the original objective in the reticule. These altcoins thrive to follow the roadmap initially outlined by the anonymous entity that first proposed the technology behind cryptocurrency.
Here are a few major contenders for electronic, open-source, peer-to-peer money:
Bitcoin Cash (BCH): A fork of Bitcoin split into Bitcoin Cash and Bitcoin SV. Also limited to 21 million coins like BTC, it aims at allowing many more transactions per block at a lower price than BTC. Alerted by the seizing of capital from account holders in Cyprus, BCH wants to bring back full control to the fund's owner and enable access from anywhere in the world. BCH is also more private and secure than traditional payment systems like bank transfers and credit card payments. And one does not need permission to make transactions instantly in the desired amount. For the community, due to its inherent scaling problems, Bitcoin layered the foundation for an enhanced version that produces Bitcoin Cash. The block size increase of BCH significantly improves its processing capabilities and sets it apart from Bitcoin. Yet both employ the same Proof-of-Work consensus mechanism, SHA256 algorithm and planned reward halving. Purist digital money or not, BCH exists and provides a tangible service that Bitcoin cannot provide anymore.
Bitcoin SV (BSV): BSV stands for Bitcoin Satoshi Vision. It is a fork of BCH ironically due to the size of the block size. Bitcoin SV community wanted it to increase to 132 MB while Bitcoin Cash camp prefers to stay with the 32 MB size. The irreconcilable views led to Bitcoin SV. The massive network payment process of BSV repulses the scale ceiling further than BCH and BTC. The four pillars of BSV are Stability, Security, Scalability and Safe Instant Transactions (SIT).
Litecoin (LTC): Designed to be the “digital silver” to Bitcoin “digital gold,” LTC is the second oldest cryptocurrency. It is an open-source, decentralized and global payment network with low transaction fees. It runs more frequent block generation than Bitcoin and manages higher transaction volume. Litecoin confirms transactions much faster than Bitcoin as it processes a block every 2.5 minutes, rather than Bitcoin's 10 minutes. LTC also uses a different hashing algorithm (script, instead of SHA-256). Litecoin can be mined individually or through pools. The currency's issuance rate follows a geometric series that halves every 840,000 blocks, which occurs roughly every four years until it reaches a total supply of 84 million LTC (4 times as many currency units as Bitcoin).
Dash (DASH): Based on the Bitcoin project, Dash is a derivative of Litecoin that uses a mix of miners and masternodes to validate transactions. It features instant and private transactions, near-zero fees, a swift governance structure permitted by the masternodes voting on proposals for improving Dash's ecosystem,... Coins are mined using a proof of work algorithm with a hash function called "X11" (mapping data of arbitrary size to fixed-size values). As explained on their website, "Dash gives you the freedom to move your money any way you want. Grab a coffee, split a check, or pay your phone bill. Dash moves money anywhere, to anyone, instantly, for less than a cent".
Those altcoins seek to add more transaction capacity in order to be useful for everyday payments anonymously and permissionless.
Yet these coins are also sensitive to extreme price swings although they represent an improvement compared with BTC and ETH. As long as their prices do not stabilize, there are unfit to fill in the original purpose either.
It is true that a global or regional crypto regulatory crackdown cannot be ruled out.
As cryptocurrency exchanges are often required by law to collect the personal information of their users, and all transactions are publicly available in the blockchain, it is theoretically not so difficult for governments to identify anyone who owns cryptocurrency. All good reasons to own your keys and avoid custodian exchanges.
In that field, it would still be complicated for states to censor the above altcoins list as these operate globally. These altcoins are not ideal but they offer an alternative for systematic money protection against states.
Here I agree with globalists that a great reset is necessary but it has to be the opposite of what they forcibly envision for our common good.
Stablecoins
To discard the volatility issue but keeps the benefits of altcoins, what is need is a stablecoin, a well-balanced "Plan B" digital currency.
A stablecoin is a digital currency collateralized (backed) by the value of an underlying asset.
Stablecoins are pegged to the cost of fiat in a ratio of 1:1, or any other asset. Price fluctuations affect the coin but the ratio is maintained all the time.
Here are some facts about stablecoins:
- There were almost 200 stablecoin projects back in 2017. From which only 30% of announced stablecoins are still ongoing. The rest are either in development or closed.
- Strikingly, 50% of all active stablecoins gravitates towards the Ethereum network.
- Off-chain (transactions outside of the blockchain) is the most popular form of collateral for stablecoin projects. Of that type, USD-mirrored stablecoins are the most popular.
- Conversely, 67% of closed stablecoin projects were backed by gold.
Of all live projects, Tether has raised the most amount of funding with $ 1 Billion via an IEO (Initial exchange offering; a crypto startup alternative to Initial coin offering where a crypto exchange raise funds on behalf of the startup).
The stable coins are of four types:
- Fiat-backed (supported by fiat money or stock, physical values (Tether, TrueUSD))
- Cryptocurrency-backed (tied to the value of other cryptocurrencies like Dai)
- Commodity-backed (linked to one or more commodities like gold with DigixDao)
- Non-collateralized (not supported by either fiat or cryptocurrencies)
Different types of Stablecoins / Image Credit: Medium
Taxonomy of stablecoins:
To aim for partial or total replacement of fiat money, here are the main initiatives:
1 - Fiat-backed (off-chain):
Tether (USDT): The ERC-20 Tether token is the first and most popular stable coin in the crypto world. It is a quick and cheap way to transfer value from one exchange to another, without the need for using “unstable” cryptocurrencies. Originally designed to always be worth $1.00, it is not possible for Tether Ltd. to guarantee that it is the reality although Tether is 100% backed by Tether's reserves. Tethers cannot be exchanged for U.S. dollars and the company is unable to provide an audit showing sufficient reserves so its mechanism of stabilization is unclear. However, Tether pegged smoothly to the dollar since the end of 2018 and its daily exchange volume tops the crypto world podium. Noteworthy, Tether does not force buyers to fill in KYC /AML verification and this alone is a value proposition by itself as the firm disregards US regulatory requirements. It is also a risk for fraud because the lack of transparency to the public can badly serve USDT. If Tether is positioned to become the digital US dollar, it is a digital dollar the US government shall not be so pleased to use.
USD Coin (USD): An ERC-20 open-source stablecoin created by Coinbase and the Circle company. The Circle USDC application creates and exchanges USDC. International banks are invited to be partners in the Coinbase stablecoin emission. The coin is pegged to the dollar and supported by an equal, audited, fully redeemable fiat reserve. This public smart contract includes a whole financial blockchain ecosystem with a wallet, exchange, DeFi products, payment services..etc. More information here.
True USD (TUSD): Like Tether, the ERC-20 TUSD token is extremely stable with a policy more transparent than USDT in the eyes of the US state. The TUSD coin was also successfully audited. Still one has to pass the KYC / AML verification steps to comply with financial regulations. TrueUSD makes sure to provide users with attestations of escrowed/blocked amounts with legal protection against the misappropriation of the underlying USD. The dollar liquidity is distributed between the bank accounts of different companies that have signed these escrow agreements so that the collateralized reserve is not controlled by one institution. Doing so, TUSD is a bit the opposite of Tether as it offers a stable coin pegged to the dollar for investors who fear lack of trust and lack of liquidity. One can also redeem TUSD for real US dollars.
DAI (DAI): Dai stable coin also equals $1 and is stabilized in an incentivized and decentralized way that sets it apart from the other stablecoins. Dai is backed by Ethereum smart contract programs and maintained by multi collateral external incentives among which CDPs (collateralized debt positions). A CDP represents a position created by locking collateral in the MakerDAO's smart contract platform to output Dai . As such, CDPs are the transposition of financial market derivations into the DeFi system. Buyers who acquire and stake an equal value of Ether (in USD) will generate DAI. The mechanism of stabilization invites owners to create more Dai when their price increase and to sell back to the pool when the price drops. Developed in 2014 by MakerDAO, the multi-collateral Dai can be considered as a solution to the high volatility associated with crypto trading and CDPs are a core element to stabilize Dai.
Binance USD (BUSD): BUSD is a U.S.-regulated stablecoin issued in partnership with Paxos and available for exchange and redemption at the rate of 1 BUSD = $1. A Binance-native alternative to other prominent stablecoins, BUSD is also available on Binance for trading against BTC, BNB and XRP. Paxos plays the role of the USD custodian and issuer of BUSD. “Paxos is leading the digital trusts space and we are excited to work with them in developing our native stablecoin,” said CZ (Changpeng Zhao), Binance CEO. “We hope to unlock more financial services for the greater blockchain ecosystem through the issuance of BUSD, including more use cases and utility through the power of stable digital assets.”
STASIS EURO (EURS): The EURS stablecoin is always backed 1:1 by collateral euro reserves held in accounts at partner institutions with a strong focus on regulations. It benefits from the combination of Ethereum based blockchain and Euro substantial stability. Stasis pulled together a range of licensed financial interlocutories to balance its digital asset services. The company STASIS and its EURS asset are compliant under EU Nation - Malta law. Its audits are performed by a Big Four company. More information about STASIS EURO [EURS] on stasis.net/qa.
Stable electronic money must be aligned or backed by an asset less dependent on central bank manipulations. At the moment, the majority of the stable coins are pegged to centralized fiat money. Also, fiat-backed cryptocurrencies require one or more custodians (banks) to hold the fiat currency collateral. Those financial institutions guarantee the issuance as well redemption of the stablecoins.
Also, valuation audits must be performed to ensure that the collateral is being maintained in equivalent reserve. Dai proposes a multi-collateral mechanism that is more distributed than the other fiat-backed coins.
Anyway, all these digital currencies continue to rely on the underlying dollar or euro assets.
2 - Cryptocurrency-backed (on-chain):
- MakerDAO’s (DAI): Dai is the most prominent stablecoin in this category. In fact, DAI is both fiat-backed and cryptocurrency-backed. It allows using a basket of crypto assets as collateral. Because of the collateral cryptocurrency's volatility, these stablecoins are “over-collateralized” meaning that a higher valued cryptocurrency is used to issue lesser valued-stablecoins. For example, in order to buy $1,000 worth of DAI stable coins, one will have to deposit $2,000 worth of ETH to buffer against price fluctuations. Crypto-backed is transparent and fully decentralized, easy to convert into other cryptos and there are no external custodians. However, it is possibly less stable than fiat-backed stablecoins and one needs to monitor the value of the crypto collateral.
3 - Commodity-backed (based on precious metals):
These are similar to fiat-backed coins except resources like gold maintain their value.
Paxos Gold (PAXG): Paxos allows to hold BUSD and also provided monthly audit attests. It is an ERC-20 token on the Ethereum blockchain and represents a legal prerogative to one ounce of gold stored in the institutional vaults. It is redeemable for physical gold. Each PAXG is backed by one fine troy ounce (t oz). PAXG can easily be moved or traded anywhere in the world with low fees, 24/7. If you own PAXG, you own the underlying physical gold, held in custody by Paxos Trust Company. Thus PAXG is centralized as someone must issue the tokens. For that, one needs to trust the token issuer and the precious metal reserves.
Tether Gold (XAUT): Tether Gold is a digital asset offered by TG Commodities Limited. It is available as an ERC-20 token on the Ethereum blockchain and as a TRC20 token on the TRON blockchain. Like PAXG, one full XAUt token represents one troy fine ounce of gold on a London Good Delivery bar. XAUT can be transferred to any on-chain address from the purchasers' Tether wallet where it is issued after purchase. Specific gold bar(s) will be associated with each on-chain address where Tether Gold is held. The allocated gold is identifiable with a unique serial number, purity and weight. It can be traded or moved anytime and anywhere in the world. Holders benefit from the combination of both physical and digital assets as they are owners of gold but avoid paying high storage costs and limited access to physical gold.
DigixDao (DGX): DGX is another gold-backed. 99.99% fine gold bars are made divisible, transferable and redeemable so that 1 DGX equals 1 gram of gold. Every gold bar backing DGX is always openly verifiable by the public, 24/7, with blockchain technology. The custodian vault is The Safe House Singapore. As with previous commodity-backed coins, DGX is also an ERC-20 token on the Ethereum blockchain. A gold purchase entails storing it in a vault and DGX minting. The receipt is then sent to a distributed database (IPSF) and the transaction is store in the blockchain.
4 - Non-collateralized (algorithm-based):
Ampleforth (AMPL) is a good example of a non-dilutive cryptocurrency. The number of AMPL owned by investors can change each day because the protocol automatically adjusts supply in response to demand. When the price is high, wallet balances increase. When the price is low, wallet balances decrease. Because the global supply is balanced universally and proportionally across every wallet’s balance, one's percent ownership of the network remains fixed. AMPL maintains that this decorrelation mechanism sets it apart from Bitcoin's price pattern. Further, as AMPL is not fixed in supply and does not use collaterals, the supply algorithmic adjustment makes Ampleforth more adaptable to sudden shocks in demand.
CarbonUSD (CUSD) was another example but the CUSD ETH contract was compromised and decided to delist their coin.
Non-supported by any assets, these stablecoins keep the value constant with specialized public algorithms and smart contracts to balance the supply and demand of tokens in circulation. Nevertheless, one has to trust the algorithm and the balance of coins will change based on the total supply. Use cases: diversify cryptocurrency portfolios, reserve collateral in DeFi.
The bottom line
To be credible, today's sound choice for real, day-to-day money is close to what a stablecoin offers. That is at least all of these features:
- strong cryptographic & confidential capabilities
- fast transaction speeds
- scalability (the more nodes, the more stable and decentralized the blockchain)
- low transaction fees
- practical alternative to cash (to buy bread from home or at the store)
- store of value (predictably useful if exchanged at a later time)
- limited total supply
All in all, my preference goes to gold-backed and multi-collateral stablecoins. To my eyes, these deliver the best alternative in the cryptocoins world.
They demonstrate price stability and low volatility (like a swiss currency), steady valuations, security, anonymity and decentralized features of a cryptocurrency.
Even so Ampleforth and Tether are notable exceptions that introduce decentralization features not completely possible with gold.
For that matter, Dai looks like a real Swiss pocket knife as well.
To defuse a too volatile crypto market, gold-backed and multi-collateral stablecoins seem the best choices at our disposal.