Stablecoins Discussion

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#1

There was no discussion topic for stablecoins so I made one!

I agree that stablecoins are and will continue to be very important for DeFi and trading. I think they will be mass adopted before other forms of crypto and are more likely to be the first experience of crypto for the mainstream.

I don’t get why Tether is being so evasive about the cash reserves backing USDT- unless there’s something to hide. If they would just let one of the big 4 firms fully audit their claims it would dispel their shady reputation and more people would trust and use USDT. As it stands if I had to use a centralized stablecoin I’d be more inclined to trust USDC as at least they have to be fully compliant with US regulations.

My real question though is: should stablecoins be pegged to the USD? Would gold be a better peg choice in the long run?

It makes sense right now to peg stablecoins to USD as they are the world reserve currency, but… the chance of a global financial meltdown is growing. The debt bubble will burst at some point, even if the current pandemic does not trigger it. In a scenario were the USD is experiencing significant inflation (money printer goes BRRRRR!!) pegging a stable to the USD may no longer make sense. All fiat goes to zero eventually.

Gold backed stablecoins like Digix are another alternative, but again there’s the difficulty of proving, and continuing to prove, these coins are actually backed by the physical gold they claim to be backed by. They aren’t trustless. True decentralized stablecoins like DAI can be verified mathematically because they exist entirely in the blockchain and are collaterialzed by assets that also exist entirely on the blockchain.

So if we want stablecoins that actually have a stable absolute value, not just relative value, then pegging to fiat currency is not such a good idea.

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#2

I was thinking about this the other day as well.

Stablecoins will work well to bring adoption into the cryptomarket, we cannot deny this, but if fiat currencies devalue too much, the incentive of stablecoins to the collateral that back them will reverse. This would be the ultimate sign that cryto adoption has hit a new epoch.

I believe we are still far away from this “flippening”, but this is the future we should look towards, otherwise crypto has largely failed to achieve its goal.

In the meantime, a shortterm DeFi investment would work well to leverage gains back into cryptocurrencies that prove to hold value, but this requires knowing when to arbitrage to be successful.

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#3

Here is how I see the logic behind it:

In order for adoption to happen, one has to translate its worth to something that others can relate to easily. Since USD is the world’s currency that majority of the human population can relate to, it is therefore logical to peg stablecoin’s worth to USD for now.
Remember, humans don’t like to be uncomfortable with unfamiliar things.

I would agree with @mayjer that we’ll need a better peg of stable value that ideally guarantees its purchasing power over any other currencies. I also do agree pegging to the immutable, mathematically proven and traceable over-collateralized assets trading within blockchain networks would make a fair pitch to the people of its worth.

I am still wrapping my heads around money and finance, but one thing I am sure of is that as long as a large community starts agreeing on what 1 BTC/ETH/DAI can buy them, the cycle would then begin to grow.

My question is:
How can a stablecoin be more useful between the sender, the receiver, and the powers-that-be trying to maintain power and influence?

I’m hoping there’ll be some sort of a “trojan-token/coin” that would stealthily creep into governments’ portfolios for their benefits temporarily and slowly pushing fiats out of the system without them knowing they’ll lose power over it, and finally allowing free market and better economic capitalism to happen organically for the benefit of humanity in decades to come.

I’d like to know how you all think down in the comments below.

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#4

For consumers, as long as the stablecoin has low volatility, is very liquid, and accepted practically everywhere, then it’s all good.

The only “stablecoin” useful to a government will be a Central Bank Digital Currency (CBDC) issued by their country. These will be programmable fiat and they’re already coming. We’ll probably see China’s coin launch this year. Other countries have announced plans to launch their own and still more are “looking into it”. We’ll likely see a “Fed Coin” in the near future as the US will not want to let China get too far ahead on that.

Somewhat off topic rant about fiat vs crypto

I don’t see the government giving up the ability to print currency- not willingly. Either the whole fiat bubble bursts and crypto rises from the ashes like a pheonix… or crypto becomes so pervasive on it’s own merit that the concept of sovereign currency becomes irrelevant. It could also be the case that both systems exist in parallel and interoperate seamlessly.

In my view, it all depends on how forward thinking governments become (or are forced to become). If central banks manage to kick the fiat can far enough down the road, then it comes down to what their response will be when crypto starts to get really big. Crypto is an existential threat to banks and a threat to the government’s ability to wield monetary policy. If governments and banks are smart they’ll adopt an “if you can’t beat 'em join em” attitude and a “seamless interoperability” scenario becomes likely. If they choose to fight dirty and attempt to regulate crypto out of existence, then I suspect it will backfire on them and crypto will go “full privacy” mode and keep on trucking with or without their approval.

For banks, it’s do or die. Just like how the internet made phone service companies obsolete, crypto makes banks obsolete (particularly with DeFi). Any phone companies that did not embrace the internet are gone, any that are left are now Internet Service Providers (ISPs) and voice is just another data stream over the internet.

…Anyway this has gotten off topic. I don’t think governments want anything to do with stablecoins unless they have full control over them. As Andreas Antonopoulos would say, “they will never be open, public, decentralized, neutral and censorship resistant”.

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#5

Stablecoins are quicker, easier and cheaper to transmit than regular fiat. You don’t need to wait for days, get your bank’s permission or pay banking fees when sending a stablecoin.

On the other hand a stablecoin carries all the risk of the underlying asset for example: if the doller were to have crisis of confidence a coin like USDT could become worthless.

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#6

I’m a bit confused about the issuance of Dai…so Dai is ONLY created when crypto assets are deposited as collateral to a vault? …However, when repaying a CDP you have to repay the stability fee in Dai, which never existed because it was more than you yourself generated. So you have to obtain the Dai from somewhere else, meaning that someone else’s crypto collateral has to be locked in the system somewhere. Does this effectively mean that there are more Dai owed than can be ever be paid back?

@amadeobrands

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#7

Good question.
See here in-depth response.

This accrued fee goes to purchasing MKR off the secondary market, and burning it. This mechanism ensures propers alignment incentive between MKR token holders, and the governance over MakerDAO. Good governance decisions = more MKR burned over time. Bad governance decisions = less MKR burned over time.

MKR Burn rate = DAI Market Cap * Stability fee * TimeMKR Price in DAI

When CDP holders repay their loan, and receive their collateral, they don’t care what the price of MKR is, because their fee is DAI-denominated. They don’t care if their $35 fee is equal to 10 MKR, 1 MKR, or 0.0001 MKR. They just burn whatever $35 of MKR is. This is actually a quite nice user-experience, as this process can be abstracted away from the user.

In order to source the MKR on the behalf of CDP holders repaying their debt, the MakerDAO system takes the stability fee out of the DAI being repaid, and purchases MKR with it on a decentralized exchange (this process entirely automated by a smart contract). Like the user, the smart contract is agnostic to the price of MKR, it just needs to source the USD value of MKR that is owed from the stability fee. If a CDP owner owes $35, the MakerDAO smart contracts puts $35 up for auction, and burns whatever MKR it gets for $35.

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#8

i would like to use stable tokens more often, as they would make my life easier.
but i am hesitating:
a)i don’t feel secure about them / don’t trust them entirely yet
b)i don’t want the us $ as the reference currency, but would much prefer an alternative save heaven (like i.e. CHF)

therefore:
are there any options available already to own quite secure non us$ stable-coins (or are any on the horizon)? ( i am aware of the option for s-chf as synthetic token on SNX; but I feel quite uncomfortable, because i think if the underlying SNX/ETH nose-dives I can loose a lot/all - but i don’t know, if this assumption is overly pessimistic and not realistic)

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#9

EURS came up in Good Morning Crypto yesterday. It’s a centralized stablecoin backed by Euros:

Ultimately though, any stablecoin pegged to fiat will suffer the same consequences. Euro, Canadian Dollar, Swiss Francs (CHF), British Pounds, Japanese Yen, Chinese Yuan… is one really that much better than the other if people loose faith in the US Dollar? All fiat goes to zero eventually through inflation.

I started the “Bitcoin Standard” course the other day. Highly recommended. Talks about what money really is, it’s history, and how it works. Indirectly related to this topic as discusses what fiat currency actually means.

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#10

Why has STASIS EURS not taken market share as the #1 stable coin out there? It receives regular audits from reputable accounting firm and the ‘hype’ on their website with the president and prime minister of Malta endorsing this stable token was quite convincing. It is the only stable coin I am holding but frankly I am quite ignorant regarding this issue which is not an uncommon state for most…but I am reluctant to go ‘all-in’ at this point with EURS and sticking with HSBC EURO savings…but this can’t last forever as although it is insured deposits, it is negative savings…

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#11

Stablecoins are kind of dumb, in my opinion. You can’t dictate value to the market.

Also, the stablecoin assumes that it’s the same as whatever it’s pegged to, such as USD. I don’t know about anyone else but USD is USD, not USDT, USDC, or DAI. These are essentially counterfeits masquerading as the real thing and the naive buy into it without doing any due diligence.

In terms of decentralization, if the future of cryptocurrencies is anchored to the monetary policies of central banks like the Fed or ECB, then we are more doomed than I thought. Imagine spending so much time and resources to build a decentralized world but the unit of value is tightly coupled to the old world of central banks, fractional reserve lending, fiat, etc. SMH

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#12
  • Of course, stablecoins aren’t legal tender USD, but they don’t need to be as long as they’re freely convertible into fiat with low price volatility and sufficient liquidity
  • The low volatility in price is the primary use case of stablecoins. This makes them an excellent medium of exchange
  • I’d rather hodl BTC or ETH, but it makes much more sense in the current market for businesses to pay or receive crypto funds in a stablecoin.
  • Long term, in a scenario where the financial system is dominated by crypto, prices would likely be denominated in BTC (satoshi’s). There would be an ocean of liquidity, making stablecoins largely redundant as BTC itself (and other major tokens) would be stable.

I see stablecoins as a (temporary) bridge from the legacy fiat system to sound money based on crypto. Fiat is doomed, I certainly agree there. In that sense a stablecoin pegged to fiat makes no sense long term. Free market crypto tokens will dominate digital fiat created by central banks, it’s inevitable. The independence of crypto from government is it’s reason for existing- the separation of money and the state.

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#13

The name ‘stablecoin’ is a bit hokey, it reminds me of some shady scammer minting his own coupons, claiming that it’s the same or redeemable for USD of equivalent value.

You might accuse me of hyperbole but I can always point to the 74% capitalization rate of USDT. There are a lot of USDT holders out there right now who think they can always liquidate into real USD when the time comes, proof that no one is really doing any due diligence; this is just more of the same fractional reserve lending garbage schemes that’s been fueling this debt-ridden global economy since the 1970s.

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#14

If I posses a stablecoin, how likely is it that I can actually redeem it for fiat? This is a legit question.

I would agree that Tether is shady. I avoid it like the plague. USDT is a big question mark and I don’t understand why they’re not more transparent- I guess they believe they can “get away with it”. USDC however is fully regulated and audited. While I haven’t used it yet either, I would trust it more.

Even in the case of USDC it’s a centralized coin and by nature of being backed by something physical in the real world (USD), it can’t be fully trustless. You’re ultimately putting faith in Coinbase, the auditors, and the bank where their fiat currency is held in custody.

DAI is an interesting case in that it is over collateralized by ETH, and now other tokens like BAT, USDC, and wBTC. It can be proved cryptographically that DAI is fully backed. MakerDAO is however having a challenge maintaining it’s peg, so there is that, but this will likely improve over time as they learn how to better tune the game theory incentives and more liquidity enters the market.

Ultimately, if the community loses faith that fiat backed coins are actually backed by the USD they claim to be their value will go to zero. If people lose faith in the USD then the real value of all stablecoin tokens goes to zero regardless.

As I mentioned above, you could have a stablecoin backed by and denominated in gold, but it can’t become fully trustless and would still need to be centrally managed. You could however hash all the audits onto the blockchain and at least be able to verify that.

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#15

This idea is really pie in the sky. There’s virtually no difference between current vault solutions and the one proposed by tokenization. You would still have the same counter-party risk in both scenarios where you are trusting the powers that be to look after your gold.

The best way to own gold is to hold it physically under your own possession. This is why BTC is a great innovation because it improves upon this model through cryptography so that you don’t have the same worry of getting your physical gold stolen or lost. You still have to be careful of losing your BTC but I think you are afforded much more control and safety if you’re smart about it.

#16

Certainly. The only trustless model is entirely crypto-native. This is why MakerDAO and DAI are the most interesting of the current stablecoins.

A lot of physical things will get tokenized besides currency and gold- land, buildings, vehicles, many big ticket durable goods, etc. The question becomes what threshold level of verifiable proof is necessary to be confident in the validity of such tokens? Any tokenized physical item cannot be completely trustless, but surely there is level of confidence that is “high enough”.

A token backed by physical gold would be a “vault solution” so yes, there would be no difference in terms of counter party risk, but I disagree there is no benefit to tokenization.

  • Putting the audits on chain has a number of benefits
    • More transparency
    • Harder to fake audits- especially if it requires auditors and other 3rd party authorities to sign audit transactions
    • Audit records become immutable
    • If you want to get really fancy you could include IoT devices with RFID tracking, Proof of Location, and Proof of Identity for auditors
  • Tokenization would also
    • Reduce the risk of multiple claims to the same physical piece of gold
    • Allow arbitrarily small fractional shares of a single physical piece
    • Have the benefits and freedoms of a crypto token
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#17

Peter Schiff should hire you, that was amazing :slight_smile:

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#18

LOL. Ouch. I’ve thought about this before, wondering how you might make gold work as the basis of a currency. I still think a crypto-native solution is better overall. Money is content type, just like “text”, or “image”, it’s an idea and needs no physical form.

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#19

I meant that as a compliment, I love Peter. Unlike other crypto peeps, I love BOTH gold and crypto. I think they are both essential to reclaiming financial sovereignty.

I still give the slight edge to crypto because it virtually pulverizes counter-party risk whereas gold still has to deal with a lot of overhead just to mitigate that aspect. BTC storage is FREE and SECURE, something that gold simply can’t compete with.

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#20

I have been pondering on this. I clearly see the benefit of stablecoin, but where i get a bit confused with it is, the fact that DAI/SAI is pegged to USD. We all know that USD is heading for an almighty, wallop bang crash, so when that happens isn’t that also going to unstabilise DAI/SAI?

I can’t see how it wont, or am i missing something here.

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