2019 Complete StableCoin Guide 1/7
By: Alyze Sam
Tags: Blockchain, Women In Tech, Finance, Crypto, Cryptocurrency

Purpose & Need

The goals StableCoins attempt to accomplish.

Create stability among cryptocurrency trading pairs in forex-style trades.

among cryptocurrency trading pairs in forex-style trades. Aim to diversify portfolios in times of market instability.

in times of market instability. Desire to be used for daily transactions, as effortlessly as fiat.

as effortlessly as fiat. Aide in adoption of digital currencies.

of digital currencies. Form a new, better financial ecosystem .

. Assist in investment predictions by minimizing current cryptocurrency market volatility .

by . Provide global access to a stable currency, protecting those plagued by hyperinflation.

StableCoin Advantages

Benefits of Cryptoconomy. Low fees. Secure transactions. Somewhat or completely anonymous.

Low fees. Secure transactions. Somewhat or completely anonymous. Stable . Asset-backed.

. Asset-backed. Blockchain Technology Utilized . This ledger system brings security, transparency and accountability.

. This ledger system brings security, transparency and accountability. Simple . System is easy to understand for fiat and digital currency users.

. System is easy to understand for fiat and digital currency users. Aids in Adoption . Acceptable bridge from fiat to cryptocurrency use.

. Acceptable bridge from fiat to cryptocurrency use. Smart Contracts . Placed to protect all parties with interest in investments.

. Placed to protect all parties with interest in investments. Regulations. Fiat-involving processes involved.

StableCoin Disadvantages

Centralized . Defeats purpose of cryptocurrency.

. Defeats purpose of cryptocurrency. Requires Third Party . Requires trust from an entity.

. Requires trust from an entity. External Audits Needed. To ensure assets are accounted for.

To ensure assets are accounted for. Less Return on Investment . Traders and investors look to other means for financial gain.

. Traders and investors look to other means for financial gain. Lack of Education . New technology and processes take time for mass adoption.

. New technology and processes take time for mass adoption. Regulations . Fiat-involving processes involved.

. Fiat-involving processes involved. Example: StableCoins tied to real world assets such as; fiat, gold, corn, oil, sugar, diamonds, wheat, sugar. Stable asset-backed cryptocurrency makes a great digital currency for everyday use by any consumer.

Particularly useful Examples;

Fixed Income Investments . Asset management made easy.

. Asset management made easy. Loan Payments . Financial loans with benefits of ‘smart contracts’.

. Financial loans with benefits of ‘smart contracts’. Ordinary Payments. Everyday transactions.

Everyday transactions. Recurring Payments. Mortgages, rent, subscriptions.

Key Factors for Evaluating StableCoins

When investing in a StableCoin, it’s wise to consider a few key factors;

Auditability . If not completely decentralized, do users have access to audit the systems financial fundamentals to confirm collateral?

. If not completely decentralized, do users have access to audit the systems financial fundamentals to confirm collateral? Collateralization ; Collateral defined; ‘To offer an asset as a surety that a debt will be repaid.” When ‘collateral’ or ‘collateralization’ is used in StableCoin’s terminology, it’s the asset the borrower leverages in order to secure a loan from issuer. What is the collateral behind StableCoin?

; Collateral defined; ‘To offer an asset as a surety that a debt will be repaid.” When ‘collateral’ or ‘collateralization’ is used in StableCoin’s terminology, it’s the asset the borrower leverages in order to secure a loan from issuer. What is the collateral behind StableCoin? Fallback methods. What are the procedures in the event of system failure? What happens to assets? What regulations protect the users?

What are the procedures in the event of system failure? What happens to assets? What regulations protect the users? Growth . Does this ecosystem have stable stability?

. Does this ecosystem have stable stability? Maintenance . What is the overall costs? The ecosystem loses efficiency when high overhead costs and excessive fees exist, thus risking market fluctuation.

. What is the overall costs? The ecosystem loses efficiency when high overhead costs and excessive fees exist, thus risking market fluctuation. Pegging ; StableCoins are often ‘pegged’ by an entity. Investopedia states, “Pegging is a central bank’s open market operations meant to stabilize its country’s currency to that of another country by fixing its exchange rate.”

; StableCoins are often ‘pegged’ by an entity. Investopedia states, “Pegging is a central bank’s open market operations meant to stabilize its country’s currency to that of another country by fixing its exchange rate.” Redeemability ; Users are not always able to redeem their token exchange for underlying asset, one should know this before investing.

; Users are not always able to redeem their token exchange for underlying asset, one should know this before investing. Stability methods . What is the underlying reason this is a stable investment? What guarantees and risks exist?

. What is the underlying reason this is a stable investment? What guarantees and risks exist? Transparency. If on a centralized system, are ledgers open and viewable by users?

Where to Find Stability; “Quantity Theory of Money”

Many StableCoin White Papers state their cryptocurrency is designed based off ‘The Quantity Theory of Money’ to control currency supply with a goal of maintaining price stability.

The infographic shown is termed ‘The Fisher Equation”. Irving Fisher and. Milton Friedman developed this equation in the 20th-century based off the popular orthodox theory by 17th-century classical economists, “Quantity Theory of Money”

Simply;

Money Supply multiplied by Velocity of Circulation is equal to; Price level multiplied by Transaction volume. (M x V = P x T )

If M doubles while V and T remain constant, then P theoretically will double; therefore the value of each individual unit of currency will be cut in half.

Majority of notable economists accept ‘The Fisher Equation” as valid over long-term use. Therefore, with this pre 17th-century theory in mind, economists state StableCoins will maintain price stability by increasing or decreasing money supply.

StableCoin’s can remain stable based on this concept because, if the cryptocurrency’s value drops below a certain price point, its users drive the crypto to be scrapped, decreasing the total supply of tokens, which stabilizes its value. If the token’s value rises beyond a certain price point, users incorporate more supply to keep cryptocurrency at fair market value.

Being an aged theory, there’s some problems with “The Quantity Theory of Money.” An example being; V and T are assumed to be constant for the long term. Consequently, M and P are perfectly proportional. An intelligent design was in mind, as this theory was developed based on an advanced economic structure which assumes money velocity and transaction would be consistent. However, blockchain projects are rapidly changing and the technology is in its infancy, therefore it’s difficult to calculate token velocity and transaction volume, and assume they’d be constant. Considering V and T as variables, it may be time to add more variables to ‘The Fisher Equation”.

Criticisms & Quotes

Vitalik Buterin, in a 2014 Ethereum article states, “Are stable-value assets necessary? Given the high level of interest in “blockchain technology” coupled with disinterest in “Bitcoin the currency” that we see among so many in the mainstream world, perhaps the time is ripe for stable-currency or multi-currency systems to take over. There would then be multiple separate classes of cryptoassets: stable assets for trading, speculative assets for investment, and Bitcoin itself may well serve as a unique Schelling point for a universal fallback asset, similar to the current and historical functioning of gold.“

UC Berkeley’s Computer Security Researcher, Nicholas Weaver wrote StableCoin Tether is “the primary vehicle for hiding money flows by allowing customers to switch between different cryptocurrencies. In short, they represent a significant problem.”

Preston Byrne, founder of Monax, wrote, “fiat-world examples of pegged assets form an object lesson in why you don’t try to peg currencies: because you are unable to hold the peg any longer than you can afford to subsidize your differences of opinion with the market.” Later stating, StableCoins are “the techno-magical idea that a cryptocurrency can tell the market what its price should be, rather than the market determining what a cryptocurrency’s price should be.”

“Distributed StableCoins aim to achieve both the characteristics of crypto-coins like Bitcoin (censorship resistant digital transactions) and the price stability of traditional financial assets, such as the US Dollar or gold. These systems are distinct from tokens such as Tether, where one entity controls a pool of US Dollar collateral, ultimately making the system centralised and thus susceptible to being shut down by the authorities.”

Nick Szabo stated central banks could soon turn to cryptocurrencies to shore up reserves, Finance Magnates reports Jan. 9, 2019. “There’s going to be some situations where a central bank can’t trust a foreign central bank or government with their bonds for example. One solution that’s been developed is to have the Swiss government hold it for you — that’s not a trust minimised solution. The Swiss government itself is subject to political pressures and so a more trust minimised solution is cryptocurrency.”

“ Tyler Winklevoss and Tyler Winklevoss Bitcoin (BTC) bulls and founders of the cryptocurrency trading platform Gemini , have said stablecoins and tokenized securities will usher in a bright future for the digital currency space. The twins made their remarks during an interview on Fortune’s crypto-focused news segment The Ledger on Jan 14, 2019… Cameron further noted that with at least 60 percent of $100 bills now held overseas, dollars on the blockchain are poised to significantly reshape the global currency market.”released on cointelegraph January 14, 2019.