I’ve been talking a lot about StableCoin recently; it’s an extremely important part of the decentralized economy being built all across the world, and I think that 2018 will see the rise of much more successful StableCoin projects than have been attempted in the past year. It will be interesting to see how the “next generation” of StableCoins operate, especially since all of the projects up until this point have used a very similar model — creating a collateralized asset and manipulating its price by some mechanism resemblant of pretty typical monetary policy. Have a look at the article I wrote a few days ago for more information about that, or read up on MakerDAO’s system for an example of what I would consider to be pretty typical of attempted crypto monetary policy.
As StableCoin technology continues to develop into what might eventually be called a “decent store of value,” the implications of a decentralized stable asset could be far reaching.
Of course, it’s one thing to say that they could be far reaching; it’s quite another to actually give some examples and articulate how a functioning StableCoin might be useful in the decentralized economy. So here it goes:
The most obvious application of StableCoin is in the payment / financial transaction industry. Consider a typical credit card. Under the current system, using your credit card requires a lengthy behind the scenes effort on the part of the banks to record the transaction information, send the applicable fiat currency out to the vendor, and then accept the payments as new deposits into the vendor’s own accounts. Shifting this process over to a decentralized cryptocurrency would, in the short term, simplify this process by allowing for instant transactions between the accounts of vendors and clients, and, in the longer term, render the centralized banking institution completely obsolete by allowing consumers to manage their own accounts and exchange value electronically through decentralized wallets.
Moving down the line to a slightly less obvious, but equally important application, let’s consider how StableCoin might be applied in the credit industry. In the current system, when a debtor borrows money, that debt has to be underwritten in some medium of exchange such as a fiat currency like USD.
This much is apparent: when you go to the bank, they may loan you $10,000, not 150 bikes and 300 oranges.
The fact that the bank underwrites your debt in USD may seem like a perfectly natural and obvious way to do things, but it’s quite the opposite. It’s a very calculated effort on behalf of the debtor to select an asset that will hold a stable value over the duration of the loan so that they can retrieve as much value as possible in the future when you pay them back. If, for example, the bank loaned you 100 Bitcoin, and suddenly the price of Bitcoin crashed by 60% (which it’s certainly prone to do on a weekly basis), when you went to pay the bank back the 100 Bitcoin, they would have lost 60% of the value of the initial loan (minus of course whatever interest rate they charged you, which, in the case of loaning Bitcoin, was probably very high!)
The problem is that even USDs are not entirely stable, nor do they derive their value from any trustless decentralized source. The price and value of USDs depends entirely on the Federal Government in the United States and the monetary policy of the Fed.
In the case of a StableCoin built on the blockchain, it is possible to create a decentralized asset that could be used across the world to underwrite debt. Such an asset would be a complete game changer for the global credit markets, as it would allow them to operate with a robust, highly liquid, and trustless store of value!
Storing debt value, and greasing the skids of financial transactions are the two main applications of StableCoin technology on the minds of people working hard to develop it for a better financial future. If you have any other ideas, questions, or comments, leave them below!