Fiat currencies are designed for slow depreciation over time.
We are attuned to believe that a dollar, euro, yen, etc. today will buy the same amount of energy tomorrow.
The recent volatility surrounding the 1 USD peg of Terra’s USD stablecoin, UST, has prompted me to begin what will be a series of essays on stablecoins and Central Bank Digital Currencies (CDBC). These two concepts are interlinked with the fundamental nature of a debt-based, fractional banking system that dominates the global financial system.
Banks remain far and away the most popular intermediary, which has enabled certain banks to engage in reckless conduct — because they believe the government can print money to nominally bail them out for their imprudent practices.
Because there are no real farm-to-table Bitcoin economies, we still pay for most things in USD or another fiat currency. And because the traditional means of sending and receiving fiat are so costly and convoluted, the ability to bypass the expensive banking payments system and send each other fiat value instantaneously for a low cost is extremely valuable.
Fiat-backed stablecoins want to use the storage facilities of banks, but pay them nothing for it. That to me is a strategy that, at scale, will not survive.
They will not be allowed to grow big enough to properly service the world of internet-connected entities that require fast, cheap, and secure digital payments.
The benefit of fiat fractional banking is that the system can grow exponentially without draining all money good collateral from the economy.
All algo stablecoins feature some sort of mint / burn interplay between the governance token and the pegged stablecoin. And all of these protocols have the same issue of how to entice people to prop up the peg when the pegged stable trades at a significant discount to the fiat peg.
Just about every algorithmic stablecoin has failed spectacularly due to the death spiral phenomenon.
The death spiral is no joke. This is a complete confidence game. It’s a confidence game akin to the current debt-based fractional banking system; however, this game does not have governments who can coerce usage of the system with the threat of mortal violence.
Of the four options presented, I prefer a Bitcoin and derivatives-backed stablecoin the most, followed by an overcollateralised crypto-backed one. However, each of these solutions immobilises crypto into large pools. The problem, as I mentioned in The Doom Loop, is that these public networks need assets to move between parties in order to generate transaction fees that pay for the upkeep of the network. HOLDing is toxic in the long run. Therefore, let us not become complacent, but continue to strive to create farm-to-table Bitcoin economies.
Algorithmic stablecoins are not much different than fiat debt-backed currencies, save for one crucial factor. Terra and others like it cannot force anyone to use UST at any price.
A government can always force, ultimately at the point of a gun, its citizens to use its currency. Therefore, there is always built-in demand for fiat, even if everyone knows the “assets” backing such a currency are worth less than the currency in circulation.
Given that most people never read how any of these protocols actually work in distress scenarios, it will be a sell first, read later exercise. This will continue to weigh on all crypto assets as all investors lose confidence and would rather suck their thumb, clutch their safety blanket, and hold fiat cash.
The crypto capital markets must be allowed time to heal after the blood letting concludes.
I am a buyer at Bitcoin $20,000 and Ether $1,300. These levels roughly correspond to the all-time highs of each asset during the 2017/18 bull market.