This article is only a proposal. I have no intention of establishing a stable coin such as that described herein. I have enough on my plate already.
Stable coins have received plenty of attention lately. Given the extreme volatility of crypto, many people see stable coins as a bit of a safe harbour, a place where you can park your assets out of the storms engulfing crypto markets.
Stable coins could also serve as a bridge between the crypto utopia we’ve been promised and day-to-day life. Even if everyday people get blockchain savvy, they will not adopt crypto as a payment mechanism if they don’t know how much a coin is going to be worth in the medium to long term. Would you use Bitcoin to buy a TV if you thought its value was going to rise and you might be able to buy 2 TVs for the same amount of Bitcoin next week? Or, on the flip side, would a seller accept a crypto if they thought its value was on its way down?
There is a clear need in the market for a cryptocurrency that holds its value. Beyond that, a stable coin could also serve as the lifeblood of a smart securities platform. If pegged to fit, it could distribute widely accepted funds based on programmatic triggers or voting by shareholders.
A stable coin pair could also make international currency transfers instantaneous, thereby disrupting a hugely inefficient market.
A number of stable coins are pitching their tents. They can be classified as
- Fiat-pegged or asset-backed coins
- Algorithmic coins.
Fiat-pegged coins generally have money in a trust account (or gold or some other commodity in a vault), and they issue an equivalent amount of coins. The coins are expected to be redeemable against the dollars on demand.
The most notable example of this is Tether, but Tether has attracted the wrong kind of attention due to its lack of transparency. In the wake of this, several new pegged stable coins have emerged, such as Gemini (Backed by the Winkelwoss brothers, of Facebook fame) and USDC (backed by Circle). These new-generation stable coins are better regulated and more transparent.
But they carry a fatal flaw. Being regulated means that governments can confiscate them at any time. The whole point of blockchain-enabled decentralization has been that it is censorship-resistant. Being regulated means that, in some shape or form, these coins are not truly decentralized. Distributed yes, but not decentralized (we will explore the difference in a future article).
In response to the problem of regulation, a number of algorithmic stable-coin projects have sprung up. These coins have pre-programmed logic that tries to influence price and thereby achieve stability — the premise being that governments can’t confiscate such coins because they don’t rely on physical assets held in trust somewhere.
This type of stable coin has two problems:
- Many seem to behave like securities. Havven, in particular, uses virtual collateral and also issues its holders with transaction fees. Common enterprise in pursuit of profit. Havven would be above-board if it didn’t distribute transaction fees.
- But the bigger problem is that algorithmic stable coins do a poor job of maintaining price stability. Look at any of the projects and their records speak for themselves. Clever algorithms cannot replace the need for a peg to fiat.
This raises another key point: what is stability?
Is stability benchmarked against fiat? Or is it the inherent value, like gold or real estate? (Again, this is a topic we will discuss in detail in a future article.)
But for a stable coin to work in a smart equities platform, it has to serve as a unit of account, and it also needs to be acceptable as a simple replacement for day-to-day currency without switching to a new system. For that reason, a stable coin must be pegged to a fiat currency. Yes — we are going to have to continue working in a world of dollars and cents, at least until the blockchain utopia arrives.
So how do we solve the censorship conundrum? How do we prevent a scenario in which a government swoops in and confiscates your crypto dollars?
Jews in Europe faced a similar problem in the Middle Ages. Not only did they face religious discrimination, their assets were often subject to forfeiture whenever there was a violent change in the political order. Political revolutions of all kinds resorted to easy pickings: the Jews were a micro-minority and had real assets such as gold and real estate that could be seized. So seized they were.
Over time, the Jews developed a system to counteract this. Instead of owning an asset in their own name, they would securitize — thus, a manor would be held by many shareholders of a common entity. The Jews would hold (typically bearer) shares in this common estate. No one knew the exact makeup of the shareholdings and, even if they did, confiscation of the asset would mean antagonising other shareholders as well. By dispersing their assets among others, the Jews obtained protection from seizure.
The same principles can be applied in the crypto world.
We start by taking the premise used by Havven to issue its stable coin — that is, using virtual rather than physical collateral. The reasons for this are sound. To establish a link between a physical asset and a crypto coin is quite hard. But the public does not trust virtual collateral, and this explains the price instability.
What can we use instead?
The answer is simple: we use other existing stable coins, like Gemini or USDC. These represent collateral that is already on the blockchain. Anyone who holds these stable coins can lock their currency into a smart contract and issue a new stable coin that can be bought by others. The value of the new stable coin is exactly the same as the one in the smart contract escrow (which in turn is pegged to fiat via a trust account).
What we would be doing is replacing single-point, centralized-trust-account collateral (which can be seized) with multi-point, decentralized trusted collateral.
Any one who owned these new coins could, on demand, unlock the smart contract, swap out their coins for the original collateralized stable coins, and redeem them for fiat.
Given that we are relying not on a single stable coin as a source but, rather, on a basket of currencies to create collateral, it would be impossible for a government body to shut down the entire system by seizing the trust accounts.
Such a stable coin would ideally be measured in cents rather than dollars, so that any nominal fluctuations or differences in currency values can be sorted to the lowest unit.