Stablecoins: an economic perspective – Hacker Noon

There has been a lot of buzz lately discussing the concept of stablecoins — a cryptocurrency which doesn’t suffer from high price volatility like Bitcoin.

For the most part, they focus on the technical challenges of implementing a peg in a cryptocurrency. In a nutshell, a peg secures the price of a currency as closely as possible to the price of a different currency — in the case of nearly all cryptos, to the US dollar.

At first glance, this seems interesting. Thanks to the efforts of the US federal reserve, the dollar functions fairly well as a store of value, medium of exchange and unit of account — the 3 critical features of a successful currency. If a decentralized crypto could be pegged to the dollar, then we would be able to enjoy the best of both worlds, right?

Sadly, no.

Every single project out there that has tried this has either not been remotely decentralized (I’m looking at you Tether…) or has suffered from other shortcomings. But beyond this, there is an inherent flaw in pegging cryptos to the dollar.

This flaw is an, albeit indirect, reliance on a central bank. This goes against everything Bitcoin stands for. The entire beauty of Bitcoin and other decentralized cryptocurrencies is the lack of need for banks. That is pretty much the entire damn point.

There are also some hot projects out there that propose a price peg to other cryptos (or to an index of cryptos). This too is problematic. The peg will never be as stable as (trustworthy) FIAT currencies because it’s inherently tied to volatile cryptos.

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