Stablecoins will have to reflect and evolve to live up to their name

Stablecoins must reflect and evolve to live up to their name

In the case of stablecoins, unfortunately, the name has been a misnomer until now. The fact that stablecoins are fixed to “real” assets does not associate with stability. Traditional underlying assets are not free from market volatility, and like most stable coins containing fiat currency, they can be just as unstable. However, the name may be aspirational – something that stablecoins can still survive if they arm themselves with a solid foundation.

Where has all the stability gone?

At the risk of confusing metaphors, stability is the currency of the day. Markets are volatile, debt levels are high and inflation is increasing following the COVID-19 pandemic and ongoing supply chain problems. The cryptocurrency markets have benefited as investors search for alternative reserves of money. However, prices remain to see an unexpected up and down movement.

In search of a solution to volatility, the crypto community has turned to stablecoins for the recognized stability afforded by their fixed relative valuations. A current report by the Hong Kong Monetary Authority (HKMA) assessed this trend, showing an explosive expansion of the stablecoin market since 2020 in terms of market capitalization. Payments firms are also leaping on the bandwagon, with PayPal recently announcing plans to roll out its own PayPal coin, which will be backed by the United States dollar.

And therein lies the problem. Stable currencies are usually given by increasingly volatile fiat currencies. Governments have pumped $17 trillion worth of new money into the global economy amid extensive quantitative easing as well as increasing global debt levels and devaluing the purchasing power of currencies that support stablecoins.

Thus, the increasing movement towards stablecoins, although in many ways a step in the right direction, is reason to re-think whether they are to live up to the promise of their namesake.

A solution worth its weight in gold

As governments are printing more and more fiat currencies, we really cannot afford to turn our backs on the capacity of stablecoins backed by stable assets. For stablecoins to fulfill the promise of “stability,” there must be a larger and more mainstream movement away from being backed by inflation-prone fiat currencies toward more reliable physical assets.

Gold is the most practical option. During all the turmoil during 2021, the price of gold remained stable between $1,700 and $1,950 an ounce, confirming both its stability and value.

But, tying a coin to an imaginary stockpile of gold doesn’t get on far enough. The underlying asset must be fully distributed and redeemed – one gram of gold for one token. This prevents the coin from detracting from the reality of the asset it exemplifies and prevents the coin from contributing to credit growth.

If owners of a stablecoin were able to redeem assets directly, they could provide an effective store of value and medium of exchange far beyond the capabilities of new monetary systems.

Renewed call for regulatory oversight

Such currency would be possible in an entirely audited system where regulation is in force. Ironically, mass migration to stablecoins based on some unfounded idea of stability may have been the straw that brought down the economic Jenga tower.

The recent controversy surrounding Tether (USDT) – the most widely used stablecoin and backed by the US dollar – has been ignored by the company for allegedly not having a dollar to back its coin and that it is compulsory. Being irregular and unaudited is unverified.

Author

  • Gowtham Paramasivam

    Hi, I’m Gowtham Paramasivam, Chief Technology Officer at Dconn. I’ve always been intrigued by how we humans thrive on building things. Being a techie, that fascination turned into a vision after learning about Blockchain Technology. I’ve never left it since and I believe that in the coming years, most of our systems will rely on blockchain. I hope that you find my articles informative and also help you understand the true potential of this technology better.

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