Tether is the most commonly known stablecoin. It is a cryptocurrency which buys one USD from the market before issuing one tether. This means that when one USD leaves active circulation, one Tether enters active circulation. In that way, the Tether price has stayed stable over the times. Crypto with a value less than10 cents is quite uncommon of in the crypto world, except in cases of stablecoins like Tether or USDT.
So, what appears to be the problem with them? Is it not a good sign which says that we finally have a clutch of cryptocurrencies which can stay stable despite the high volatility shown by their non-stable brethren?
The arrival of stablecoins
It was a question of time for people to start mining coins and pegging it to a fiat currency. Some of them tried to peg it like commodities. It is flawed for the same idea that most Americans blame the Chinese for. Back in 1944, the leading economists of 44 countries arrived at the same conclusion, during the Bretton Woods conference. Maybe a fixed-exchange-rate system could actually cause the economic state of the world to behave.
Less than 30 years after that, the Americans had to move away from the fixed-exchange-rate system to partially free float. It is partly free as all governments buy and sell their own currencies, as well as foreign reserves in the open market.
Coming back to the stablecoins, they actually claim to have established a fixed-range-rate system which allows a smooth transition from traditional currencies to cryptocurrencies. Of course, if they make it, they would come.
Problems related to stablecoins
Before the technical issues, we will address the human element first.
Agencies manipulate stablecoins
Tether, which is the largest stablecoin by market share in the world, was indicted for creating new USDT without buying an equal amount of USD. This is a problem for adults. For as long as there is a central authority, the element of human error is going to be there too.
Even if we build a smart contract which buys USD or any other currency, and then issues a stablecoin, the problem will still be there.
Stablecoins also affect velocity
Velocity is the rate at which a currency changes hands. No matter if it is too high or low, the price is going to fall. Stablecoins actually remove a currency or commodity from circulation and create artificial scarcity. Technically, that scarcity should not exist as of the 1:1 exchange rate. However, practically, no jurisdiction is going to agree to accept crypto issued by a non-governmental body and is going to demand USD instead.
So, while a 1:1 exchanges rate should actually lead to an increase in the value of the stablecoin, it causes a slight fall in the prices because of the deflated demand.
Stablecoins are not decentralized
Stablecoins have problems creating the token. This is not decentralization unless you and anyone else has the same opportunity to create the same stablecoin, such as the activity of mining Bitcoin, there is no decentralization. Centralized stablecoins are also similar to the big banks which were too big to fall until they did so.
Stablecoins are inflationary
The problem of 1 stablecoin to and the removal of 1 fiat from the economy are actually inflationary. The exchange of 1 of them for 1 fiat does not create economic activity. This actually makes them inflation. Since the fiat which is removed from the ecosystem is not destroyed or burned, it is part of the ecosystem. Issuers can actually keep this fiat in banks which loans it out to the public, and the locked fiat increases supply, as well as causes inflation.
Stablecoins decrease the tax base
If you actually make some profit by trading cryptocurrencies, you have to pay your taxes on the benefits. However, if a trader buys stablecoins during bear market runs, he can actually keep their cryptocurrency profits off the books. The number of taxpayers, as well as the amount of tax collected decreases. Without any taxes, the governments cannot function and will also break down. However, this is different from Zimbabwe and Venezuela. In them, the government is intact, but their economy has fallen. With no government will come anarchy and not laissez-faire.
Problems that are unresolved
However, there are some unresolved problems such as bounty programs that basically give people free money that is never valued. For instance, if you get 10,000 tokens which you can convert to even 1 Ethereum, you are not going to evaluate that 1 Ethereum because you did not work for it. On an average, ICOs give out 2-5% of their total supply as bounties and airdrops. Also, this is one of the reasons for the fall in the price of ETH.
Simon Owen, the in-house counsel for Aurus, says that he has never been a massive fan of bounty campaigns. He understands why many token offerings do them, but it seems to him more like a weakness. Here is how he sees things:
Most tokens, even those that are infamous tokens, which he always stood quite firmly against, act in certain ways such as securities or shares: their value is also supposed to go up, proportionate to the achievement of the underlying project.
If a person owns a particular token before their friends or network, they have a visited interest in them getting it anyway, maybe because they believe in the project, as well as want to see the profit of their friends alongside them, be it to hedge certain potential risks.
No matter what, there is an incentive for a person to encourage other people to buy the token. Any incentive which is created by the company on top of this has, in Simon’s point of view, higher chances of scaring away investors that know how to judge the value of the project.
Although the top 100 Bitcoin wallets hold most of the Bitcoins, the community actually believes in them as Bitcoin is decentralized. Bitcoin is a parallel currency, and it is not affected by the price of the fiat currencies. The downturn from recently of the cryptocurrency markets took us back to 1944. The top economists are contemplating stablecoins as a solution in order to help us sail through these tumultuous times.
Fixed-exchange rate systems also led to an economic depression about 50 years ago. If they are left unchecked, stablecoins are going to make history repeat and kill the decentralization movement as we know it.
Finally, people think that the march from centralization to decentralization is linear. However, history teaches us that it is circular. The road back towards centralization actually goes through stablecoins. The stablecoins are not a bridge, but they are in fact a flight of Penrose stairs.