Stablecoin

The EU Parliament’s economic committee just reached a compromise on the digital euro, and the part that matters got almost none of the coverage. Fees and offline payments took the headlines. Underneath them, the French and German data authorities had forced privacy up the agenda, insisting the digital euro behave like cash. They are right to fight that. They are fighting it on far too small a field. Because the digital euro the ECB is actually building is a capped, intermediated, offchain instrument that arrives around 2029. By then the question won’t be whether Europe has a digital euro. It’ll be whether anyone still needs one. The opportunity in front of the ECB right now is larger than the one it is planning for, it is buildable with technology that already exists, and everything standing in the way is a policy choice. None of it is cryptographic. ...

In finance we sometimes talk about a “risk free rate”. It’s a mythical investment with no risk, paying with 100% certainty according to some defined schedule. As any real investment with actual risks should compensate for those, real investments then must pay an appropriate risk premium above the risk free rate. Often, investors will use government bonds as a “good enough” proxy for the risk free rate. If the government can practically print money to pay for their obligations, the risk of a default is seemingly low (at the cost of inflation). We of course know that governments sometimes default on their debts, yet it’s often the best proxy we’ve got. ...

Stablecoins are on the up. If we look at stablepulse, at the time of writing, we’re at over 200B in circulating supply. Volumes are also up, both metrics at all time highs. And while the big actors dominate, their models are by no means decentralized. There’s either an element of cash in a bank, or a link to other TradFi instruments. Or if not that, some other element of centralized control, at best through a DAO. ...

In “traditional finance”, we’ve got something called a derivative. In short, a derivative derives it’s value based on some underlying asset. In the “new finance” world of blockchain and DeFi, we’ve got something called a stablecoin, where the price of the coin is pegged to some underlying asset. So a stablecoin is just a derivative then, no? Usually people think of coins pegged to the USD when they hear stablecoin, but it doesn’t need to be. It could be pegged to anything, just like a derivative could use any underlying asset and definition on top. ...

For a while I’ve wanted to write something about stablecoins, these tokens on the blockchains, that are backed by some underlying asset. Usually we associate stablecoins with those backed by a currency, like USD or Euros. But it doesn’t need to be backed by currency, it can be backed by commodities, stocks, bonds, etc. This gives you the benefit of having a token you can easily exchange, transfer and utilize in smart contracts, and also having it backed by more than just pure human emotions and speculation. ...