Like very few other aspects of personal finance, cryptocurrencies have captivated popular interest. From the tech-savvy gamers to big names in finance to average joes in coffee shops, virtually everyone has grown comfortable with names like Bitcoin, Ethereum, Litecoin, and Ripple. High-flying cryptocurrencies like these can make for a great investment – and they definitely make for interesting news; however, when it comes to actual usability, certain aspects will keep them from ever becoming the legitimate threat to real-world currency that they were initially marketed as. On the other hand, to quote Yoda from The Empire Strikes Back: “there is another”, and it happens to be today’s word.
Attempting to bridge the gap between real-world fiat currency and cryptocurrency, stablecoins are a cryptocurrency that is designed to work like actual physical money. Coming from the utilitarian compounding of the words stable, based on the Latin stabilis, meaning ‘firm, stable, or fixed’, and coming to us via the Old French stable, estable, and the word coin, based on the Latin cuneus, meaning ‘a wedge’, which arrived in English from the Old French coing, loosely translated as ‘a piece of money’. Comparatively, via name and function, stablecoins aim to provide the stability of physical currency while maintaining the ease and security of a cryptocurrency.
When it comes to the exact first usage of the term “stablecoin”, the closest known origin comes from a November 19, 2014 post on Ethereum’s official blog by Ethereum co-founder Vitalik Buterin, entitled, “On Bitcoin Maximalism, and Currency and Platform Network Effects”, where he mentions the idea, stating: “perhaps we should all engage in a little US dollar stablecoin maximalism instead.” Though the word may only date from 2014, the idea itself is anything but new.
For most of our monetary history – until the Great Depression of the 1930s – our currencies have been backed by some sort of universal asset, likely gold or silver: we have only fully used the international monetary system of pure fiat money since the mid-1970s. Though mostly leading to increased levels of economic growth, sole use of pure fiat money has also led to economic problems involving inflation, deflation, as well as prodigious reliance on central banks. Opposing this idea of “worthless” money, Austrian economist Friedrich August von Hayek was one of the first proponents of a theoretical stablecoin, arguing for a decentralised, stable currency in the 1970s. In practice, the first appearance of stablecoins occurred in 2014, with BitShares, Tether, and MakerDAO.
Although stablecoins can attempt to achieve stability from a number of means, such as algorithmic control, being backed by other cryptocurrencies, fiat currency, or even real-world commodities, this assurance of worth is meant to deal with 2 major cryptocurrency shortcomings: volatility and store of value.
Looking at Bitcoin, for example, the price moved from USD 8,800 on November 24, 2017 to well over USD 19,000 on December 15, 2017 and back to USD 8,500 by February 9, 2018. For anyone who purchased anything using Bitcoin during this 77 day span, the price volatility of Bitcoin means that they either dramatically overpaid for an item (pre-rise) or the seller lost a tremendous amount of value (post-fall) on the Bitcoins. These constant (and often wild) fluctuations mean there is no chance for stable pricing, and without stable value, accurately valued transactions can’t happen.
Additionally, there’s a well known story from May 22, 2010 of a Florida-based programmer, Laszlo Hanyecz, who offered 10,000 Bitcoins to anyone willing to send him 2 pizzas. At the time, the value of the Bitcoins just covered the price of the pizzas, USD 25, and now the transacted Bitcoins are worth approximately USD 40 million; however, in the next couple of years, they could easily be back down to USD 25. Since Bitcoins themselves have no inherent worth, aren’t backed by any authority, and are only worth what anyone will pay for them (and where you can use them), they have no stored value.
Lacking the volatility of other cryptos and having their own valuation from other assets, stablecoins could very easily be the next step in bringing cryptocurrency usage to the masses, but the system is still far from perfect. First, there is a trust issue: unlike with many relatively open and accessible governments that issue currency, you’re forced to trust the word of an unknown third-party entity to organise and manage the stablecoin. Second, by still being a cryptocurrency, there are numerous issues of legality that are yet to be defined, and there’s a lack of empirical research on stablecoins as well as cryptocurrencies. Still, this fascinating facet of cryptocurrencies definitely isn’t going anywhere, and, at the very least, it will be interesting to see it develop and mature over the next several years.