Stablecoins, the holy grail of every exchange that can’t work with traditional fiat currencies.
After Tether’s USDT, that has been the stablecoin of choice for many years, suffered from severe rumors that the highly controversial token isn’t backed by real US dollars on a 1:1 basis, countless players in the blockchain world sensed a magnificent and profitable opportunity to launch a stablecoin as well.
Throughout the past 12 months, dozens of new non-volatile cryptocurrencies emerged from the shadows, including the three original stablecoin types fiat-backed, crypto-backed and non-backed. Whether it’s the Gemini Dollar, MakerDAO or bitUSD — their value should remain close to one dollar at any time. But what if I told you, that the current stablecoin evolution is a dead end?
The stablecoin dilemma
While several players in the cryptocurrency world have started a race towards becoming the most adopted fiat-backed stablecoin, issuers seem to have totally forgotten that there are inherent issues with all of them. The upcoming exodus of all fiat currencies around the globe has already been predicted by several financial gurus. According to David Stockman, former director of the Office of Management and Budget under Reagan, the next financial crisis might be just around the corner. Stockman recently told CNBC that he is expecting “an epic monetary and fiscal collision.” So, as the immense meltdown could literally happen any minute, fiat currencies seem like a pretty bad material to use as collateral for a supposed stable cryptocurrency.
But wait, there are also crypto-collateralized tokens that are said to maintain a stable value! Well, I’m really sorry to disappoint you, but after hours of researching facts, calculating mathematical formulas, evaluating theoretical events and decrypting the Enigma cipher machine, I came to the conclusion that crypto-backed stablecoins have an immense issue to deal with: They are backed by one of the most volatile assets on earth. Although issuing new crypto-backed coins requires a premium amount of cryptocurrencies as a collateral, the system is not prepared to absorb rapid price plummeting as of 80 percent and more. Since we are expecting a financial catastrophe, it cannot be guaranteed that this stablecoin type will survive a so-called Black Swan event.
What did you just say? Are you actually thinking of an algorithmic stablecoin, that is not backed by anything at all? Right, you must be one of those banksters. To be fair, non-backed stablecoins have been successfully around for almost 50 years. Some of them have some quite funny names, such as Dollar, Euro or Yen. Sure thing, algorithmic “central bank lookalike” stablecoins, that are based on theories like the Seigniorage Shares, could potentially remain more or less around a certain price. However, their system is designed to fail as soon as it stops growing continuously, which comes with scary similarities to a ponzi scheme.
Introducing: the currency of the future (and past)
Remember the time where money was actually backed by a physical good, with limited supply and low preserving efforts? Cool, me neither. But for the past few years, I began seeing a silver lining (actual silver) on a dark and cloudy sky. Not sure if you heard about it, but there is a technology that can literally tokenize any type of physical and digital asset, where ownership can be tracked, that is extremely transparent and ridiculously easy to transfer. It’s called distributed ledger technology, or simply blockchain.
Additionally, we have commodities that have proven to effectively store wealth for thousands of years. Some of them have just the perfect characteristics, such as a limited supply and acceptable measurements and weight, to serve as a form of currency. You know what I’m talking about, they are called precious metals and precious minerals. Then there are also resources that simply come with a high demand, as they are needed for production steps or transportation. Those could be crude oil, plutonium and in a few years perhaps water.
In a fast changing environment like the blockchain world, it is no surprise that several projects are already thriving to supply the world with asset-backed coins. Some of the most popular examples are DigixDao’s gold token, that is 100 percent backed by physical gold, and Venezuela’s oil-backed Petro. Besides shiny and greasy coins, I would also like to shed light on another commodity, that I’ve actually never thought about as a currency.
So I recently stumbled across a company that is developing a cryptocurrency completely backed by real diamonds, called DiamCoin. While this might sound a little crazy at first, it actually makes a lot of sense when you think about it. In fact, diamond is a quite solid asset, being one of the most resistants in any crisis. In the 2008 financial melt down, diamond dropped by six percent, while gold dropped by 25 percent. Furthermore, the price of a diamond has been in an ongoing uptrend for multiple decades, with the demand being seemingly endless growing. In comparison to gold, diamonds are actually tiny little stones, that can be shipped easily around the world in an envelope.
In a recent press release of the company, known as Hello Diamonds, Economic Nobel Prize winner Sir Christopher Pissarides and member of the director’s board said “while blockchain technology has the potential to disrupt the current financial system, it is still mainly used for speculation. If we can eliminate the volatility and bring in stability, we now have the financial tool necessary to replace the archaic payment systems in place today.” — I love this guy.
The future of the future, or what I’m dreaming about
Not sure if you noticed, but I like the idea of asset-backed stablecoins a lot. Now listen what I actually have wet dreams about: A crypto-backed currency, where the underlying coins and tokens are backed by assets of the real world. This crypto-backed-asset-backed cryptocurrency would gain its value through various assets, that are thoughtfully considered in regard to current events. Part of the basket should be traditional money alternatives, such as gold, silver and diamonds, as well as highly demanded resources, like oil and plutonium. While I’m thinking about that, we should add Bitcoin to it as well.
The idea is to have a currency that is basically an index of many different goods, that always maintain a certain value. Even if the prices of one or two assets tanks, the currency remains relatively stable. Furthermore, the tokens should always be exchangeable into its backing crypto assets, that again can be exchanged into physical goods. Imagine this type of currency as global money, that gets constantly updated through adding new assets and dismissing unsuitable ones… perfection. Anyway, I hope you find yourself now better prepared for approaching armageddon of the financial world as we know it today. Take care.
Which stablecoin type will survive the financial apocalypse was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.