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The Latest Entrant In Crypto’s Search For Utopia
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The Latest Entrant In Crypto’s Search For Utopia

It is often said that cryptocurrencies are the modern-day version of a Rorschach Test. Stare into a Bitcoin address deeply (1BvBJDEYstWetqTFn5Au4m4GFg7xJkdN2) and the individual will be able to see whatever he or she seeks. To maximalists and ardent libertarians that ascribe to the most puritan ideological vein of the movement, cryptocurrencies offer a refuge or escape hatch from today’s monetary and financial system bereft with corruption. In their eyes, a crypto-denominated system will no longer see citizens subject to abrupt and whimsical currency devaluations. Governments will not step in to save banks, because perhaps banks no longer need to exist, or at the very least they are no longer “too big to fail”.

On the other end of the spectrum there are devout defenders of today’s monetary system. While they acknowledge problems stemming from the Great Recession needed to be addressed, most notably finding a better way to manage risk, they believe that overall the system is healthy. They feel that as long as banks act responsibly henceforth, the system should go back to working order. After all, the post-World War II financial system – first defined by Bretton Woods and then by today’s free-floating exchange rate system – is what is responsible for American prosperity in the first place. Furthermore, they question the need for a new form of money that does not have the backing of a central government. Fiat currency, which most readers are already aware is just paper, only has value because governments say it does. Cryptocurrencies such as Bitcoin have no intrinsic value – so they essentially become a confidence game.

However, a large swathe of the populace in the U.S. and around the world falls somewhere in the middle of these two boundaries. These are individuals who ask why it costs so much money to send wires around the world, yet at the same time they cannot be told when it will arrive.  They wonder why their local grocery store places a $10 minimum on all credit card transactions, when they can buy a $.75 candy bar at a 7-11 across the street with their American Express.  They even question why they cannot pay for content article by article, rather than buying a $35 a month subscription to a newspaper when they only read 5% of the content. Furthermore, these scenarios do not even get into countries bereft with economic and monetary instability like Argentina, Zimbabwe, and Venezuela today, or Greece in 2014, where citizens face a daily struggle to protect their wealth and even move assets out of the country.  However, at the end of the day most people around the world still sleep comfortably at night because they know that the money in their pocket will be accepted by any merchant in the morning.

There needed to be a better way, and originally it was supposed to be Bitcoin. It was hailed as much in Bitcoin founder Satoshi Nakamoto’s omnipresent white paper, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. Under this utopian system individuals could do everything from buying coffee at a local Starbucks to sending thousands of dollars in remittance payments around the world for a matter of cents in transaction fees.

However, from inception Bitcoin was never designed to handle the throughput necessary to support a global monetary system.  A block on the blockchain has a size limit of 1MB, which allows it to typically handle no more than 7 transactions per second.  This is a drop in the ocean compared to the bandwidth of networks such as Visa and Mastercard.  Additionally, as the system evolved people started to identify more uses for Bitcoin beyond just payments, such as a store of value, or they began using the network tokenize/anchor assets to a blockchain like land titles.  This growing ecosystem placed impossible stress on the system and necessitated a way to ease pressure on the network.  Everything came to a head in the famed ‘blocksize debate’, which saw an acrimonious and protracted debate between conflicting ideas and scaling proposals that ended up in a number of Bitcoin forks, with the most notable being Bitcoin Cash, which supports 32MB blocks.  That said, neither has seen wide adoption.

Around this time alt-coins and ICOs became the craze.  The thinking here was that we are going to be changing how we interact with the internet.  Rather than having to pay money to access services, we will utilize consumptive tokens that can be bought and sold around the world on liquid exchanges.  Due to the east of creating a token (often through Ethereum’s ERC-20 protocol) and raising an ICO, there was an explosion of interest in the space.   During 2017, the price of Ethereum rose from $7 on January 1 to $719 on December 31.  Bitcoin was also swept up in the craze, as its price rose from approximately $1k on January 1 to almost reaching $20k before ending the year at $12.6k.  A large reason for these price appreciations was that it was necessary to buy into the ICO gold rush with cryptocurrencies.

We all know what happened next, the price of all major crypto assets cratered. This occured due to a number of reasons, such as the unsustainable frenzy surrounding crypto, a rash of negative stories such as Bitcoin ETF rejections by the SEC, and a realization that several ICOs were outright scams.  The aftermath: today Ethereum is $172 and Bitcoin is $6,275. Plus market cap of all cryptoassets is a fraction of what it once was.

So where do we go from here?

This is where stablecoins come into play.  These tokens a designed to maintain a consistent value, either because they are backed 1-1 with fiat currency, utilize collateral, or employ a computer algorithm that adjusts supply accordingly based on activity.   There is no shortage of stablecoins in the market today (Tether, TrueUSD, Dai, Basis, Carbon, etc).  Just this week two more came onto the market, Paxos Standard and the Gemini Dollar, which both received approval from the New York Department of Financial Services. With these assurances, logic dictates that users should not be fearful of spending their coins only to see their value double-overnight.  They will also provide a needed source of scalability and liquidity in the market, which can help smooth trading around the world.

Will they work?

It remains to be seen.  Although stablecoins may represent our next, best, attempt at promoting crypto use they are not without their drawbacks and limitations.  For instance, Tether has a market cap of $2.7 billion and a daily trading volume of $2.4 billion.  Therefore, the velocity of money supply is very high.  Tether claims to have one USD in reserve for every Tether in circulation, yet there has never been an authoritative audit that proves this assertion.  In fact, Tether is one of the few truly “too big to fail” or “systemically significant” enterprises in crypto today, and if word got out that it did not have sufficient reserves (not to imply that it doesn’t), it would have a calamitous effect on the entire ecosystem.  Additionally, other coins that use smart contracts and take algorithmic approaches are unproven, and as we saw with the 2016 DAO hack, smart contracts are not airtight.  If the populace loses confidence in one stablecoin it could reverberate throughout the world.

This does not mean that stablecoins are not worthwhile endeavors, because they certainly are.  However, like any other cryptocurrency they are going to go through growing pains and challenges.  How its multiple creators respond will ultimately dictate its future.

Perhaps it would be easier just to have crypto fiat already?

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