Since it is obvious that a decentralized international currency is desirable, what should this currency look like? There exists a philosophical divide between two camps regarding what sound money is. The crypto-anarchists who love Bitcoin propose one main argument: "governments rob us of what we own by printing more money at their own discretion". Bitcoin solves this problem by being a decentralized fixed-supply currency, which is unseizable on two fronts — you have custody of your own money (unlike banks), and your money cannot be inflated away (no one can create more Bitcoin and reduce the value of your holdings). To this group of people, Bitcoin and other decentralized fixed-supply currencies are sound money. On the other side of the Bitcoin camp, there exist another group of people who believe that inflationary currencies are not inherently evil, but instead what is damaging is poorly managed, corrupt, and irrational amounts of inflation — factors which led to the extreme devaluation of various currencies in the past.
The fundamental problem with Bitcoin as sound money is that perfect value-retention (fixed supply) comes at the cost of usability. Fixed supply currencies will always be volatile, because the world is dynamic and demand for that currency changes over time. This inherent volatility renders Bitcoin complete unusable across a large set of financial transactions. The unpredictability of price of a currency is a huge barrier in commerce, and may be undermine any claims that Bitcoin will ever become sound money. If there are expectations that the price of Bitcoin will rise in the future, people are hesitant to spend. If there are expectations that the price of Bitcoin will fall in the future, people will not accept it as payment. Although there is validity in the argument of value-retention, I believe that the drawbacks of a fixed-supply currency are too great to ever enable money-like utility.
The State of Stablecoins in 2018
The importance of a price-stable cryptocurrency cannot be understated. Today, these stablecoins reduce the friction between fiat and crypto, allowing traders to easily jump in and out of positions without having to perform bank transfers. In the medium term, stablecoins will be used as the base currency for all on-chain financial contracts and applications, such as loans, gambling sites, prediction markets, and so on. In the long term, some stablecoins aspire to become a new form of money to replace the USD — a brand new monetary system that is used across the globe without any political bearings. How close are we to that pipe dream?
The short answer is: Far. Out of all the projects today, the only one which has seen significant use is Tether, with over $2B in daily transaction volume. Although it is still the early days, we have seen a variety of projects use different models to achieve price-stability. I shall do a full review of all the stable coin projects in the space in my following post. Stay tuned.
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If you like what I do, check out my other posts on crypto-economics, technical analysis and all things crypto related!
Trade on Binance. Where the fees are only 0.05%.
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