December 27, 2024 ☼ Crypto ☼ Payments
As much as I enjoy exploring stablecoins, I like going back every now and then to ask myself the fundamental question: why do we even need them? While this may easily be answered by those who understand crypto, it is something I have to think about given I’m still more comfortable with the TradFi world.
Any currency needs to be judged on what it does - whether it is a unit of account, a store of value, or a medium of exchange. Memecoins offer value through humor! Bitcoin perhaps only barely ticks the store of value box, with its speculative value destined to eventually peak (either at $150K or $1M or whatever).
Well-managed stablecoins, by contrast, stand out for their lack of volatility. Their unchanging value is useful to merchants and consumers, ensuring that the worth of goods and services remains stable both before and after a transaction. They therefore excel as a medium of exchange. As a unit of account, they are unlikely to ever replace fiat. When it comes to being a store of value, I find myself conflicted.
Most stablecoins are pegged to fiat currencies, primarily the US dollar, which means their value is “tether”ed to a centralized system. If fiat itself is subject to inflation, does a stablecoin truly solve the problem of preserving value? In one sense, yes - it addresses issues like USD access and transactional efficiency, which makes it useful in regions with volatile local currencies or for cross-border payments.
But in another sense, it seems redundant. Central Bank Digital Currencies (CBDCs) aim to solve many of these same problems, arguably with more societal trust and institutional backing. Do stablecoins then, at least those that are fiat-backed, offer anything that CBDCs cannot? I’m not entirely convinced.
The perfect stablecoin would ideally be decentralized, non-volatile, and highly liquid. It would resist inflation and free people from wealth erosion caused by those controlling the money printers. This is especially crucial today, as stagnant median real household incomes may leave future generations poorer than current ones.
The perfect stablecoin would remove governments from direct monetary control, leaving them to facilitate production without the inherent conflict of doing both.
In this vein, I tried conceiving the perfect stablecoin and came up with DebtCoin - a stablecoin tied to national debt. I thought it would be relatively inflation-resistant, given how inflation and national debt can be inversely correlated. Managing liquidity and reserve growth was tricky though. Still, it was a fun thought experiment.
For now, I think stablecoins are doing what they can: they’re helping crypto take its first major strides toward real-world use cases, beyond just speculation or an instrument for the “revenge of the nerds”! They can also be a step toward breaking the monopoly of existing payment systems. Some competition and diversity in payments would be great to see.
But that isn’t the ultimate goal…