17 May 2018

Do We Really Need StableCoins?

When I was a very small child growing up in South Africa, most of the world's fiat currencies were backed by Gold. One South African Rand bought you two American Dollars, and that rate of exchange never varied. The price of Gold was fixed by an Agreement of Nations at $35 per troy ounce.
I suppose that, with the value of the world's money being fixed by decree to the value of shiny metal, it is to be expected that things will favour the currency of that country where most of the shiny metal was mined. At the time South Africa mined substantially more than half the world's annual tonnage of new Gold, and its currency was as hard as rocks. Today you need almost twelve-and-a-half Rands to buy one single US Dollar (though by the time you read this that exchange rate will be different), and that US Dollar is a meagre shadow of its former self. Its value has been eroded by something like 87% since Nixon abandoned the Gold Standard back in '71. I still remember banknotes that had printed upon them, "I promise to pay the bearer on demand." I occasionally wonder how many people actually pitched up at the Reserve Bank in Pretoria to ask for their One Rand in Gold in exchange for that bit of paper. I don't suppose there were many, because of course there was a Catch. The best Catch that ever was. Catch 22. It was illegal to own Gold metal, so any exchange of paper money for the Real Thing could only result in your immediate detention for hoarding Gold. Standard M.O. for sovereigns, really...
The thing is that everything prices, wages, relative currency values, and so on — were all pretty stable back then. At least major governments tried very, very hard to make it appear so despite many people harbouring serious doubts that it was true. So a lot of people have come to believe that ditching the Gold Standard was a Bad Idea because it resulted in a bunch of volatility in the prices and monetary valuations of all things, a lot of fluctuation and a WHOLE LOT of inflation eroding the value of the very thing we use to value our time, goods and services. Money itself. These people have become convinced that if only we returned to using Gold as the basis for valuing our money, many of the evils of the world would be corrected. Stable money would be the Big Fix for everything that's wrong with the world.
And, of course, they're wrong. There never was such a thing. The stable value of Gold was simply a form of government-enforced price-fixing, an agreement by that cartel of sovereigns who were best placed to impose their will by dint of terrible weapons.
Fast forward to the present day where we find ourselves in the Alice in Wonderland world of neonatal crypto-assets, and one of the big complaints is that crypto-money is too volatile, the wild price fluctuation rendering it nearly unusable as actual currency for the purchase of goods and services. (Of course that volatility is the very thing we love when we go out to buy our new Lambo from the profits of our cryptocurrency speculation, but that's another conversation for another day.) What a lot of people claim to want is a StableCoin — a crypto-currency whose value changes very little, preferably not at all. Then when the price of Bitcoin takes a dive they could convert their stash into the Stable Coin (further fueling the fall in the price of Bitcoin as the mass selloff takes its course) and preserve the value of their money.
Of course we could just convert our Bitcoin back to fiat when the price takes a dive — most will call that "taking profit" or "taking risk off the table" — but that seems contrary to the whole Crypto Programme. It buggers with the notion that we ought to be taking control of money away from governments if, as soon as we run into headwinds, we run for refuge in the arms of Mommy and Daddy. So the idea is that we should make our own stable money as safe harbour from the Winds Of Adversity.
Ironically, when we look at this whole situation a little more critically, you'll notice that we keep blithering about the "price" of various assets — Bitcoins and so on —  without considering what unit of account we're using to quantify that price. It's usually — almost always — the US Dollar — itself hardly a bastion of stability or safety. Anybody who has speculated in the Forex Markets has surely profited or lost at the mercy of the fluctuation in the relative value of the USD, not to mention all the other national fiat currencies.
Hell, even the value of Gold wobbles up and down at the whims of the marketplace, and those wobblings have also been the source of fortunes made and lost to the vagaries of the Hidden Hands.
The point is that it's all relative.
So what EXACTLY does it mean to create a StableCoin that is pegged to the US Dollar or backed by Gold when the values of those underlying assets wax and wane in imitation of near-perfect random noise? What does it boot us when one DAI — by exceedingly clever and cunning means — maintains its value via Smart Contract at Pretty Close To One Dollar when the very value of that Dollar wanders drunkenly up and down in response to random draughts of hot air?
Initially I was all for having StableCoins, but over time I've become rather sceptical about their value and their usefulness. I certainly think they are a good thing in the short to medium term, while the rest of the crypto-money space gets its shit sorted out. StableCoins can and will provide a useful place to store value in the face of speculator-driven price changes to other crypto-assets, and they serve as a useful way to say to a sceptical world, "Look! See! Crypto-assets need NOT be unruly wild beasts. They CAN be tamed!"
But over the longer run I am a bit more dubious about their place in the ecosystem. Over time, as institutional investors increase their shadowy presence in the crypto markets, as Central Banks begin to participate in the flows of crypto-money, and as financial regulators and tax authorities develop the tools to impose a degree of order on the space, we should expect volatility to decrease. Lambos will, once more, become less easily attainable, but the true value and purpose of crypto-money will be more closely realised and we'll find it easier and easier to get paid with crypto-money, to pay our rent with them, use LTC to buy groceries, BCH for Fiats, XLM for plane tickets, and so on.
And then,... as the "prices" of crypto-assets become less wild,... then we can become more comfortable with letting those valuations fluctuate against the assets we use a units of account — the thing that gives some meaning to the numbers we assign to any asset to tell us its value. In return, quite likely, we will start to use these crypto-currencies as units of account themselves. We'll start to quote the price of Euros in ETH and the price of Rands in DSH. Just like the EUR/USD exchange rate wobbles up and down from one trade to the next, so will the XAU/BTC and the OIL/XMR, and we'll become more comfortable with that.
So, for a little while at least, StableCoins seem to have a useful niche to fill in the crypto ecosystems, but in the long run?

I am not at all sure they make a shred of sense.

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