Stablecoins Are Buzz Word, But Practical Issues Remain Unsolvedbr>
Stablecoins are suddenly a big buzzword in the cryptocurrency community. The stable coins, tethered to some real-world asset in fiat currency, real estate or other tangible good, are seen as a way to manage the incredible volatility that has been part of digital currency’s growth.
Jude Regev, founder and CEO of Element Zero, a non-profit, decentralized stablecoin, talked with Block Tribune about the state of the stablecoin.
BLOCK TRIBUNE: Why would a stablecoin fail?
JUDE REGEV: Depending on the type of stablecoin it can fail in different ways.
Centralized and Fiat-collateralized – Here a company that acts as a centralized party, may fail to return the funds when requested or may create more stablecoins than actual money in the bank. The fiat and/or underlying assets, may be prone to volatility and instability. Also, during 2018 we saw how even a coin such as USDT, which was backed by USD, dropped in price to $0.85 on a secondary exchange (Kraken). This demonstrates that even stablecoins backed by fiat money can still carry a risk of manipulation. Also, once governments create their own digital coin then we will see a number of stablecoins crash. For example, if the US Government created a digital coin of the US dollar then all the companies that are pegged against the dollar will collapse as people will flock to the government-backed version. People are going to cryptocurrency because they do not want anyone to control their money and yet there are also stablecoins with “backdoors” that can freeze and even seize your money without any notice. This reduces trust in stablecoins and can cause people to abandon the coin or even not use it in the first place.
Decentralized and Crypto-collateralized – This protocol either works or completely fails and crashes. For example, if the cryptocurrency it is based on drops by more than 50% (which has happened more than once) the collateral funds cannot support this volatility and the coin will not be able to maintain its stability or its original value and subsequently would collapse. At this point, the company managing the stablecoin will demand from coin holders to return the stablecoin if the collateral value drop is 25% and the ratio reaches to 1:1.5. If the coin holders do not do this, then the company will resolve the issue by a foreclosure auction on the collateral offering that to the higher bidder—exactly like banks who take possession of homes that have not had paid their mortgages on time.
Decentralized and Non-collateralized – This method has a fair number of skeptics, as it is predominantly dependent on trust and leaves itself open to panic. This becomes problematic because panic tends to quickly and irreversibly degrade the value of the coin. There are a number of scenarios that can potentially create instability in the coin’s value, furthering the uncertainty that generates public concern, rumors, and panic. This increasing sense of doubt is like a domino effect, often leading to a “run on the bank” scenario
Algorithmic Management of Reserves/Liquidity – No one can predict the future. Any algorithm, by its nature, is limited to its programming. A “Black Swan” event can and will cause this coin to fail.
BLOCK TRIBUNE: Tether has been the subject of all kinds of rumors on capitalization. What do you know?
JUDE REGEV: There have been a number of rumors about Tether for over a year now from delisting to competitors launching an assault on them to insolvency issues. But the biggest issue seems to be about a lack of transparency and trust – it is an offshore operation and does not appear to be offering clear information on its financial relationships. People are leaving Tether because of the transparency/trust problems and going to stablecoins that have solved these issues.
BLOCK TRIBUNE: Since stablecoins are something of a new buzz, how do you see their market playing out in the next six months?
JUDE REGEV: I expect we will see stablecoins being manipulated, unable to remain stable, and ultimately lose their overall value. As long as a stablecoin can be manipulated, there will be no mass adoption.
BLOCK TRIBUNE: What would galvanize the stablecoin market?
JUDE REGEV: The main problem at the moment for stablecoins and their protocols is that you do not know what the future will bring, you don’t know what you don’t know. The market will be galvanized when we see a stablecoin enter that can actually solve the price volatility problem by eliminating it in the first place.
BLOCK TRIBUNE: Is there a real need for stablecoins?
JUDE REGEV: There are many valid use cases that can be solved by stablecoins. For example, the loss of purchasing power due to inflation, for Fiat and crypto markets experiencing periods of high volatility. Where citizens face currency volatility and loss in value, e.g. Argentina, Turkey, Venezuela, etc. For Individuals who want to buy goods and services across borders without significant fees and taxes being applied. As a financial solution for the unbanked, poor, or people in developing countries and for investors who require long term asset stability. These are just a few of the problems that a stablecoin can solve.
BLOCK TRIBUNE: Who is the stablecoin target audience?
JUDE REGEV: Everyone – Anyone who wants to keep their long-term investments safe from inflation. Anyone who wants to avoid high volatility. People who have no other option for financial opportunities due to their economic conditions or governments regulatory approach to their currency. Anywhere where there are high fees, stringent controls, and a lack of liquidity.
BLOCK TRIBUNE: Why, in your opinion, have these coins failed to gain traction in all but one instance?
JUDE REGEV: Currently, the investment community are only using stablecoins to park their money, no one is really using it for long-term holding and people in general are not using it as a payment option. There is also the problem that the current approaches have not inspired confidence as market volatility has knocked them off their stability pedestal. This lack of stability has also led to a loss in confidence and trust. Until we see a true stablecoin enter the market that cannot be manipulated, can be stable and combat inflation, then we will see mass adoption.