It's a term we hear and use all to often in cryptocurrency - stable coin. The truth is, however, in the history of man's monetary systems there has never once been a stable coin.
The term stable coin is a complete misnomer and is actually the opposite of why cryptocurrency exists.
Cryptocurrency exists to get away fake interest rates, fractional reserve banking that allows banks to create currency at will, and corrupt derivative investments - all of which creates a manipulated currency value.
The truth is there are only two types of currencies that exist in the world - inflationary currency and deflationary currency. That's it. There are no stable currencies nor have there ever been any stable currencies.
Any coin that is claimed to be a stable coin is nothing more than a coin that is selling on a false illusion. Factually they are nothing more than a digital version of fiat currencies. There is actually no need for stable coins in the majority of countries.
At this point, most first world countries are starting to open up to the idea of cryptocurrencies. Things like cryptocurrency credit cards exist for Europe, the UK, and America. Banks are starting to work with cryptocurrency companies such as is the case with Quontic, a New York bank that gave every employee bitcoin and is open to work with cryptocurrency businesses.
Inflationary Fiat Currency and Deflationary Cryptocurrency
The point is, stable currency doesn't exist. The traditional fiat currencies are not stable by any means. Rather just the opposite. Fiat currency is inflationary. This can easily be seen by examining the past 100 years of currency in america - the world's strongest currency.
$100 USD today would have been worth $1,380.60 USD in 1919. That means in 100 years the value of the US Dollar has decreased by 92.75%.
This is exactly the opposite of how cryptocurrency was designed to work. Bitcoin was created to be deflationary. In January of 2009 when bitcoin was first launched it was worth effectively $0.01 USD. Twelve days later when the first bitcoin transaction took place, the value was at $0.03 USD.
At the time of this writing bitcoin is worth approximately $11,508 USD. That is a 115,079,900% increase in 10 years 7 months.
My point in these figures is to show the difference in inflationary and deflationary currency. The world's strongest fiat currency has had a loss of 92.75% in value in 100 years while the worlds strongest cryptocurrency has had an increase of 115,0079,900% in value in just 10 years.
How does this relate to supposed stable coins?
Well the majority of stable coins that exist, are considered stable because they are tied to a fiat currency value. Considering fiat currency is by default an inflationary currency, this means anything tied to that value is also inflationary, not stable.
If one needs an inflationary currency, they already exist and cryptocurrency is not needed. You can use cash, credit cards, debit card, merchant accounts like PayPal, etc. There is little need to tie a cryptocurrency to something that will decrease in value.
In the early days of cryptocurrency tying things to fiat currency made more sense as the largest exchanges didn't allow fiat currency pairing - however for most people in the UK, the EU, and the US that is just no longer the case.
What about asset backed cryptocurrency?
A lot of people seem to think that the solution is an asset backed cryptocurrency and the most common asset to back cryptocurrency with seems to be gold. Gold, like cryptocurrency is deflationary.
One troy ounce of gold in 1919 would have cost approximately $20 USD. By today's standards that would be $296 in value. However we know gold does not have a value of $296 USD but rather $1401 USD. That is an increase of 373%.
An increase of 373% can hardly be deemed as stable by any definition of the word. Now of course an increase of value is certainly better than a decrease in value, but the fact remains no matter what you try to tie cryptocurrency to, it is not stable by any means.
Will a stable coin ever be possible?
Practically speaking it is unlikely we will ever truly see a stable coin, however it is theoretically possible. There are two methods I can think of that would make a truly stable coin.
- Method 1: A smart contract based stable coin.
A smart contract stable coin would require being pegged to an asset of some sort, whether that is a fiat currency, gold, or something else. The total supply of the coin would have to be adjusted as the fiat currency values inflate and deflate for whatever it is backed to.
For example if one were to create a currency pegged to the USD, one would have to burn coins as the value of the dollar is inflated to maintain a true steady value. Equally if there was a period of deflation, more of the coin would have to be generated. This would probably work best with tokens and smart contracts - though honestly not very practical.
- Method 2: A collapse of all fiat currencies
If all fiat currency currency systems were to collapse, tying the value of cryptocurrency to gold, silver, or other precious metals would then make a true stable coin.
If for example a coin was created that was tied as 1 coin is equal to 1 troy ounce of gold, then that value of that coin would never change as long as fiat currency did not exist. The reason that's not stable while fiat currency exists is because both the gold and the token will be tied to the fiat value. So if the value of gold were to go up versus the USD, the value of the cryptocurrency in USD would also go up.
If the fiat currency were taken out of the equation, this would not be a problem and thus stability would be achieved. One coin would always be one ounce of gold and one ounce of gold would always be 1 coin.
The things I have stated in this article may seem obvious to those who have been in crypto for a while but it's a topic that confuses a lot of people and I have had countless discussions about this on LinkedIn.
Many people don't understand that crypto was created to get away from manipulated inflationary currencies and "stable coins" are nothing but digital versions of the these existing system.
If cryptocurrency is ever to truly win the currency war against banks and governments, then stable coins need to be buried. They only serve as a tool for banks to prop up the existing system and set cryptocurrency further away from its ultimate end goal of being digital cash.