The next generation of stablecoin, based on a balance between algorithmically managed supply and demand, aims to reinvent the global monetary system, but first it is necessary to wait for cryptocurrencies to reach maturity and see how they interact with traditional tools. Development scenarios

The stablecoins, cryptocurrencies that unlike bitcoins have a stable price because they are tied to a stable medium of exchange (a fiat currency, typically the US dollar), seem to be the most obvious way for the mainstream adoption of cryptocurrencies.

Especially since the next generation of stablecoin, based on a balance between algorithmically managed supply and demand, aims to completely reinvent the global monetary system.

Let's see how, but first let's focus on the limits of bitcoin and the highest principles of stablecoin design.

Property of money and the limits of bitcoin vs stablecoin

Using bitcoin is not the ideal way to make a simple purchase: it would be really exciting to be able to pay for a coffee with critpovaluta, if only the BTC price did not change constantly while you leave the house, you reach the bar and queue up to order .

For money to function optimally it must have three basic properties: a medium of exchange, a unit of account and a store of value. Cryptocurrencies are having great difficulty with the last two points, as most of them are deflationary: while values ​​rise, there are no incentives to spend them on a daily basis. The volatility of cryptocurrencies also limits their applications to derivatives, Blockchain-based loans, forecast markets and other long-term agreements. All these challenges have highlighted the need for stable cryptocurrencies, or "stablecoin".

In addition to a guarantee of stability, the stablecoins give those looking for a store of value a clear option to escape the local banks and evade the economies in crisis. This means that people living in countries with unstable economies and severe political regimes will have the opportunity to access a reliable and censorship-resistant monetary system.

Currencies and Maslow's pyramid

According to Maslow's hierarchy of needs, stability and security overlap to form one of our most basic needs, yet there are no truly stable currencies for the moment.

The US dollar is certainly not as stable as we thought; the only resources currently used to maintain the dollar's purchasing power are astonishing: wars, crimes, bribes, fractional reserves, and so on. Perhaps, we can never achieve stability and the only option will be to continue to deceive ourselves, according to what is known as the "black swan" postulate, according to which events are intrinsically unpredictable and the only value of an asset it is the value that most people believe it has. Therefore, most current attempts to create stablecoin could be defined as attempts to affirm "currencies of faith".

Moreover, the Blockchain has already provided us with the tools necessary to instill a new sense of trust in each of us.

What are the stablecoins and the design principles

The fact of being "pegged" ("fiat pegged token", also a digital representation of a fiat currency) is the most essential element of the stablecoin, as it is so that the value of the currency is linked to another exchange medium considered stable , which is generally another currency.

In monetary policy, we talk about currency anchoring or fixed exchange rates. New stable currencies cannot appear from nothing. To be successful, a guarantee must be created for each coin minted on the fact that it can be considered reliable. It can be American dollars, gold, real assets, Smart Contract, but the 1: 1 guarantees are sometimes not enough, because, if you choose a volatile asset as collateral, all possible price fluctuations should be covered.

However, if we remember well how the Gold Standard evolved, we would know that 1: 1 gold coverage only existed at the beginning, gradually diminishing until it was completely eliminated, when confidence in the monetary system was now firmly confirmed . The current attempts to create fully secured stablecoins, therefore, resemble the initial stages of development of any new currency system and are dictated by the current lack of trust in cryptographic resources.

There are three basic approaches to this problem:

Stablecoin fiat / asset - collateralised

These coins are often supported 1: 1 by real assets like the US dollar, gold or oil. They are generally very centralized, as the guarantee must be stored in some trusted environments such as a bank account. Users of a system like this must trust the third party that guarantees it.

Stablecoin crypto - collateralised

If we do not want to depend on the traditional payment infrastructure, we could use cryptographic resources as a guarantee of stability. In most cases, these types of projects mitigate risks by using different currencies, with over-guarantees to cover price volatility. The guarantee can be in a ratio of 1: 1.5 or higher. This scheme eliminates the need to trust a third party, but requires an economically ineffective over-collateralisation, blocking an enormous amount of cryptographic resources.

Stablecoin not collateralised

If, after all, stability is nothing but the right combination of supply and demand, then eliminating any form of collateralization means that, instead of supporting the currency with some resources, a "central algorithmic bank" is created which manages the demand and the offer based on rules codified in a Smart Contract. These coins are also called "fiat stablecoin", because they work just like the traditional banking system, but in an encrypted environment. If the price goes up, more coins are minted; if the price goes down, part of the existing ones is repurchased and burned. Non collateralized stablecoins should have a very complicated design, still far from perfect. We could also choose not to attach a currency to the US dollar, but rather to some economic measures of life stability such as the consumer price index (CPI) or special drawing rights (DSP).

That said, it is clear that the non-collateralised stablecoins are the most innovative design solution. These independent stablecoins could not only safeguard themselves from crypto-volatility, but would also be safeguarded from the collapse of traditional currencies. With the ability to create new stable economies beyond government control, unsecured stablecoins could become more practical than current legal currencies and radically change the world.

The choice of the centralization measure

The next important part in stablecoin design is the choice of the centralization measure. Depending on the means of guarantee that you have decided to use, it is necessary to rely on reliable sources. The US dollar should be stored somewhere, like in a bank, to ensure that it covers all the tokens in circulation (this would be a highly centralized version of the stablecoin). To mitigate this risk of single-point-of-failure, one could anchor the stablecoin to the basket of national currencies, keep the guarantees in several depositories, link them to more decentralized cryptocurrencies, create rules hard-coded in a Smart Contract to eliminate any limit physical, or use a combination of these methods.

The fundamental problem of decentralization of the stablecoins is that the Blockchain is not able to access data from the outside. The price of the activities in respect of which the stablecoins are anchored consists of external data that cannot be easily made available for a Smart Contract whose objective is to stabilize the value of the stablecoins in question.

There are three basic approaches to this problem:

• Reliable data source (centralized system).
• Median of a set of data feeds (centralized system).
• Schelling scheme (decentralized system).

The stablecoin market, the state of the art (not just Libra by Facebook)

Now let's see what is happening in the stablecoin market, starting with the simplest solution: the stablecoins supported by fiat or other real-world assets.

The best known project is Tether. Tether is a completely centralized solution with currencies backed by the US dollar. For now, it is the most common stablecoin. There are currently 2.6 billion dollars in Tether coins in circulation, without trusted audits on the corresponding guarantees. Despite the problems of centralization and audit, Tether remains the best stablecoin in terms of price stability, with no significant decline.

The next category consists of the crypto-collateralised stablecoins, among which the first to appear on the scene was Bitshares, with the BitUSD stablecoin launched in 2014. The latter is still negotiable, with an exchange rate of around USD 1. One grain new was the creation of MakerDAO Dai, a stablecoin anchored to the American dollar and backed by guarantees registered in Ethereum's Smart Contract. MakerDAO has a flexible price algorithm designed to cover the volatility of crypto-collateral. The project also has an internal governance token, the MKR, used to vote on risk management issues and the business logic of the Maker system.

All these stablecoins are based on certain guarantee schemes, but it is suspected that these stablecoin are inevitably destined to fail because even those over-guaranteed would not survive an event like the one described by the aforementioned posture of the "black swan".

Among the stablecoins are not guaranteed, however, the most important project is certainly Basis (ex-BaseCoin), which recently raised USD 133 million from A16z and Google Ventures. It presents itself as a stable cryptocurrency with an algorithmic central bank: when demand increases, the Blockchain will create more Basis; when demand is falling, the Blockchain will repurchase the Basis in circulation to restore the price. The main problem is that this model is based on the continuous growth of the system to cover price gaps. The Basis team plans to stimulate this process by infusing the funds they have raised until the network reaches a critical mass, but there is no certainty that this will be enough.

Facebook Libra

At this point, one cannot fail to mention Libra, the Facebook cryptocurrency, whose project was announced to the public precisely on June 18, 2019 and which, however, will not be actually made available on the market before 2020.

There are two reasons that suggest that Facebook's stablecoin will be central to the process of spreading cryptocurrencies, and that is why the value of Bitcoin rose in relation to the news released by Zuckerberg: Libra promises to be the first cryptographic asset launched by an important technological company with global influence, both in the financial world and in the consumer web services; furthermore, it would be the launch of the strongest stablecoin ever created, which will be linked to a number of existing fiat currencies.

Despite the numerous positive aspects, however, it is important to note that the Blockchain on which Libra will rely will be of the "permissioned" type, and therefore the ecosystem connected to the stablecoin in question will not be truly decentralized, as it will not be possible for anyone to create a knot and join Libra's Blockchain; it is always a question of compromises.

Possible scenarios

The non-collateralized stablecoins could create cash flows independent of the control action of the central banks and, ultimately, of the governments themselves. Certainly, governments would still be needed, but only for the creation of infrastructures to support the enormous changes in national currencies. The stablecoins could introduce a new level of trust, thanks to which people around the world would choose a global currency instead of their local regime.

However, creating and maintaining stability in the current political and economic climate, to say the least chaotic, still seems out of reach. For this reason, it might be better to wait for cryptocurrencies to reach maturity and see how they interact with traditional tools, before trying to create a stablecoin that leads to change in the world economy.

We would not have to admit that he was wrong when it would be too late to make up for the mistake made.