Stablecoins won’t be as stable as Cryptocurrency

Cryptocurrency

 

Stablecoins have gone from a little-known corner of the cryptocurrency market to its center. Large institutions like Mastercard are now trying to create alternative payment networks based on stablecoin and cryptocurrency.

I am rooting for such efforts to be successful, but so far I have news for you: stablecoins are not always stable. However, unlike many critics, I find fluctuations in stablecoin prices not only acceptable but desirable.

The potential for stablecoins is clear. Imagine if the software that uses cryptocurrency could bypass some of today’s banking and financial institutions and all the costly bureaucracy that comes with them. You can send money transfers at a lower cost, make payments faster, and get higher returns on your deposits, at least if the transaction technology can be improved.

At the heart of these systems will be blockchains in which coins will be pegged to dollars on an individual basis through backup support. In fact, such assets already exist and are growing rapidly.

Even if all goes well, why should these different brands of stablecoins stay at $ 1 apiece? In most well-functioning markets, suppliers compete for innovation, quality, and price. This diversity is a natural result of trying to figure out which coin systems – completely stable or not – are the best.

If market prices do not convey this information, how can you find out? In my opinion, higher prices will indicate the quality of the coin and attract more customers; coins with a strictly fixed price will fill the niche, and coins with lower prices will lose business or otherwise serve as a discount for those on lower-income levels.

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Critics of the stablecoin pay attention to fraud and the possibility of a sharp drop in prices, and indeed, many coins have already failed. Even if we assume that regulation and the market will limit the most dramatic episodes, some coin issuers will be more stable and innovative than others. With success in the market, there will be an exit from the market, and the prices of some issuers will fall as it exists, on the other hand, if you think stablecoins perform so many new and wonderful functions, you would expect many of these assets to sell for more than a dollar.

This is where I meet myself: I bought traveler’s checks to travel abroad. In many cases, you have had to pay a mark-up of a few percentage points; One hundred dollars in traveler’s checks can cost you $102 or $103. This is because checks offer anti-theft services that are not available in cash.

More specifically, you can use other not fully collateralized coins to support your lending through decentralized financing. The yield may be higher, but of course, there is a risk that the sponsor will become insolvent. The prices of these coins will be different, although one goal is to make them more stable than Bitcoin.

To take another look at why prices won’t stay fixed, consider the incentives of a stablecoin issuer. Let’s say your problem is currently with the US dollar and you have 100% reserves of very reliable assets. Maybe you will be tempted to cut your inventory down to 98%? 95%? If the price of your coin stays at the $1 level, okay, you come out ahead. If the price declines in proportion to the new and higher risk, you, as an issuer, still break even. So it looks like coin issuers will have an incentive to test exchange rates one-to-one, weakening their support.

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Some issuers will agree never to deviate from 100% reserves, as Gemini is doing now. But, most likely, it will be just one of many brands. You can also deal with coins backed by euros, yen, or other currencies.

You might believe that regularly changing prices for these various coins would be terribly inconvenient. But information technology allows you to call up exchange rates with a single keystroke or by requesting your smartphone (soon enough). Plus, these coins should only be part of the financial system, not something you use every day to buy a cup of coffee.

If my scripts prove to be accurate, will they be called “stablecoins” for long? Unstablecoins will not work. How about stablecoins? I would like some of them – depending on the price, of course.