• Stable coins are on chain proxies for real world fiat currencies.

• They have a permanent use case because of a stable short term store of value

• There are two stable coins in crypto: Debt Collateral & Algorithmic

• The Most Ideal Stable Coin exists somewhere between both.

A stable coin is in reality a relic, but if you have played any game in an alternate dimension, you know relics are important & powerful. Stable coins are the bridge between cryptocurrency and the real world, and the basis of all of our financial systems.

These coins essentially function as proxy for Dollars, Euros, Yen and a plethora of real world currencies on the blockchain.

The biggest issue about cryptocurrencies is the volatility in prices. Let’s take bitcoin as an example. At it’s all time high a house that would have cost 140,000 USD would have been 2.1 Bitcoin, but today would be 7 Bitcoin.

This level of volatility, at this point in young lives of digital commodity monies, functions to swipe at one of the pillars of money. Maintaining a safe store of value is key to employing a currency. While Digital Commodity Monies have functioned as great stores of value over long horizons, it is the short term that matters much.

I might be trying to go to the store to fill my car with gasoline, while using ETH. The price of a gallon of gas will be 3 USD. This would cost me about 30 USD, or 0.02 ETH (1.00 Ether = 1500 USD) to make this exchange. Just a month ago this could have costed 0.025 ETH. This makes a difference when business are operating in separate currencies. When ETH prices falls, I am spending more money or losing purchasing power.

I could be in a bind with just 0.02 ETH, and the price of ETH could fall 20%, resulting in a less gasoline, likely hurting my bottom line.

The Dollar, Euro or Yen all offer different benefit their users because the value of their holdings vs the things they want to spend these monies on. Even if a business was brave enough to accept cryptocurrencies, their suppliers would have to charge in cryptocurrencies to keep the business afloat, regardless of price change.

As you can see, the stable coin (on chain fiat proxy) plays an important role in the lives of many people around the world. Not only a means of protecting assets from falling market prices, but also the general exchange of the monies for good and services.

The issue with using these currencies, is that in no way form or fashion can it be decentralized. The USDC or United States Dollar Coin is backed by United States Treasury Bonds, and if the US Treasury asked the Coin controllers (Circle) to freeze someone’s USDC, they would. Furthermore, many stable coins in the Crypto Space are backed by this coin as well.

https://beincrypto.com/circle-pledges-action-after-freezing-75k-tornado-cash-linked-usdc/

Another issue, of centralization and fiat currencies is the fact that reserves cannot be guaranteed at all times. I bring up this issue on the grounds of Tether, the controller of USDT, who has faced reasonable challenges of solvency. These insolvency ideas is much easier when protected by the veil of centralization.

https://cointelegraph.com/news/0-3-fall-in-assets-could-render-tether-technically-insolvent-wsj

The settlement layer for old financial systems comes down to military force, but cryptocurrencies have repeatedly held value without the need for pillaging communities. How do we create a short term & long term store of value without the smell of centralization on it?

Maker DAO was the first team to come on the scene with something reasonable for us all. The Debt Collateralized Stable functions this way:

The Person who mints: “Ether is so valuable I don’t want to sell it, but I do want to buy French fries. I will use my Ether as collateral and take out the money for French fries.”

The Person who accepts: “This token is worthless! But the Ether that minted this token is valuable, so I will accept this token because it represents value elsewhere.”

The True value of the stable coin comes from the underlying debt, but the issue is that the underlying debt is extremely volatile, which can threaten the value of the issued stable coin, threatening the fungibility of the stable coin.

https://thedefiant.io/what-is-dai

Another way to create a stable coin is to attempt to do a full fiat path and tell people the value and walk away. Essentially this is called the Algorithmic Stable Coin, and this should be prevented at all cost.

Money requires trust, and the best monies require the least amount of trust in humans. Algorithmic Stables require humans to trust one another, and this is possible when there is nothing threatening that trust. But at first sight of trouble humans will do whatever necessary to to protect the individual.

Think back for ages and recall how much human trust in gold preserved nations and economies. An algorithmic stable coin is hollow, and without a powerful nation state decree, people will discover this at some point.

I do think the debt collateral stable coins are going to be in the future of cryptocurrency for a long time, but the supply is fully up to the whim of the community who uses it. How much of the collateral token can be shifted to the protocol to mint more token supply?

We know it is wrong to print infinitely, per Jerome Powell, but we also know it is important to have an expanding money supply at some point. An ideal stable coin will have the ability to expand its supply suddenly when demand is warranted, and shrink when demand dries to. The issue is that debt collateral stables require more debt to expand the supply.

As more Ether and Stable coins flood the accounts of Maker DAO, more DAI can be minted. The only incentive to create DAI comes from a desire to take out loans.

Can debt truly fuel an economy of growth without ever causing a spiral? Likely not. The perfect stable coin is likely one that is fractionally backed, so that supply can grow ahead of debt collateral.

I know advocating for fractional reserve banking sounds insane doesn’t it? I am sorry for even bringing it up.

Banks do not have full reserves. And Why? So they can make risky loans and lose all their money at the taxpayers expense. Who will save a Fractional Reserve Stable Coin? Absolutely no one. So the incentives are far from similar.

A fractional reserve stable coin would increase supply when demand permitted it, but it would also not over reach. If a stable coin has a collateral of 1,000,000 and over extends by 5% to a total supply of 1,050,000 incentives can be increased to encourage deposits. As deposits increase the supply can further outrun new deposits, until deposits slow where the supply growth can slow, or even pause.

You might ask, “Well what would happen if no one deposits?”

There are two sad possibilities. The token can fall from 1.00 to 0.95 or tokens can be burned until it better matches the supply. This system, if managed by an intelligent algorithm, would be ideal for Cryptocurrency.

The name of fractional reserve and algorithmic stable coins have been besmirched by many who chose to neglect economics for profit. Nonetheless, the pathway to an independent currency on blockchains is somewhere between the debt collateral & algorithms.

Fractional Reserve Banking fails because depositors have no way to check on the reserves of their respective institutions and are forced to rely on perfect trust. As long as these stable coin reserves are instantly verifiable through open block scan technologies, I think there is a pretty strong chance that it can work.

We might ask why it is important to have a money supply that is flexible and reacts to the market it serves. As a scientist whose read a little more economics than most, I find that the principles of homeostasis are an important part of social networks.

• Stable coins are on chain proxies for real world fiat currencies.

• They have a permanent use case because of a stable short term store of value

• There are two stable coins in crypto: Debt Collateral & Algorithmic

• The Most Ideal Stable Coin exists somewhere between both.

A stable coin is in reality a relic, but if you have played any game in an alternate dimension, you know relics are important & powerful. Stable coins are the bridge between cryptocurrency and the real world, and the basis of all of our financial systems.

These coins essentially function as proxy for Dollars, Euros, Yen and a plethora of real world currencies on the blockchain.

The biggest issue about cryptocurrencies is the volatility in prices. Let’s take bitcoin as an example. At it’s all time high a house that would have cost 140,000 USD would have been 2.1 Bitcoin, but today would be 7 Bitcoin.

This level of volatility, at this point in young lives of digital commodity monies, functions to swipe at one of the pillars of money. Maintaining a safe store of value is key to employing a currency. While Digital Commodity Monies have functioned as great stores of value over long horizons, it is the short term that matters much.

I might be trying to go to the store to fill my car with gasoline, while using ETH. The price of a gallon of gas will be 3 USD. This would cost me about 30 USD, or 0.02 ETH (1.00 Ether = 1500 USD) to make this exchange. Just a month ago this could have costed 0.025 ETH. This makes a difference when business are operating in separate currencies. When ETH prices falls, I am spending more money or losing purchasing power.

I could be in a bind with just 0.02 ETH, and the price of ETH could fall 20%, resulting in a less gasoline, likely hurting my bottom line.

The Dollar, Euro or Yen all offer different benefit their users because the value of their holdings vs the things they want to spend these monies on. Even if a business was brave enough to accept cryptocurrencies, their suppliers would have to charge in cryptocurrencies to keep the business afloat, regardless of price change.

As you can see, the stable coin (on chain fiat proxy) plays an important role in the lives of many people around the world. Not only a means of protecting assets from falling market prices, but also the general exchange of the monies for good and services.

The issue with using these currencies, is that in no way form or fashion can it be decentralized. The USDC or United States Dollar Coin is backed by United States Treasury Bonds, and if the US Treasury asked the Coin controllers (Circle) to freeze someone’s USDC, they would. Furthermore, many stable coins in the Crypto Space are backed by this coin as well.

https://beincrypto.com/circle-pledges-action-after-freezing-75k-tornado-cash-linked-usdc/

Another issue, of centralization and fiat currencies is the fact that reserves cannot be guaranteed at all times. I bring up this issue on the grounds of Tether, the controller of USDT, who has faced reasonable challenges of solvency. These insolvency ideas is much easier when protected by the veil of centralization.

https://cointelegraph.com/news/0-3-fall-in-assets-could-render-tether-technically-insolvent-wsj

The settlement layer for old financial systems comes down to military force, but cryptocurrencies have repeatedly held value without the need for pillaging communities. How do we create a short term & long term store of value without the smell of centralization on it?

Maker DAO was the first team to come on the scene with something reasonable for us all. The Debt Collateralized Stable functions this way:

The Person who mints: “Ether is so valuable I don’t want to sell it, but I do want to buy French fries. I will use my Ether as collateral and take out the money for French fries.”

The Person who accepts: “This token is worthless! But the Ether that minted this token is valuable, so I will accept this token because it represents value elsewhere.”

The True value of the stable coin comes from the underlying debt, but the issue is that the underlying debt is extremely volatile, which can threaten the value of the issued stable coin, threatening the fungibility of the stable coin.

https://thedefiant.io/what-is-dai

Another way to create a stable coin is to attempt to do a full fiat path and tell people the value and walk away. Essentially this is called the Algorithmic Stable Coin, and this should be prevented at all cost.

Money requires trust, and the best monies require the least amount of trust in humans. Algorithmic Stables require humans to trust one another, and this is possible when there is nothing threatening that trust. But at first sight of trouble humans will do whatever necessary to to protect the individual.

Think back for ages and recall how much human trust in gold preserved nations and economies. An algorithmic stable coin is hollow, and without a powerful nation state decree, people will discover this at some point.

I do think the debt collateral stable coins are going to be in the future of cryptocurrency for a long time, but the supply is fully up to the whim of the community who uses it. How much of the collateral token can be shifted to the protocol to mint more token supply?

We know it is wrong to print infinitely, per Jerome Powell, but we also know it is important to have an expanding money supply at some point. An ideal stable coin will have the ability to expand its supply suddenly when demand is warranted, and shrink when demand dries to. The issue is that debt collateral stables require more debt to expand the supply.

As more Ether and Stable coins flood the accounts of Maker DAO, more DAI can be minted. The only incentive to create DAI comes from a desire to take out loans.

Can debt truly fuel an economy of growth without ever causing a spiral? Likely not. The perfect stable coin is likely one that is fractionally backed, so that supply can grow ahead of debt collateral.

I know advocating for fractional reserve banking sounds insane doesn’t it? I am sorry for even bringing it up.

Banks do not have full reserves. And Why? So they can make risky loans and lose all their money at the taxpayers expense. Who will save a Fractional Reserve Stable Coin? Absolutely no one. So the incentives are far from similar.

A fractional reserve stable coin would increase supply when demand permitted it, but it would also not over reach. If a stable coin has a collateral of 1,000,000 and over extends by 5% to a total supply of 1,050,000 incentives can be increased to encourage deposits. As deposits increase the supply can further outrun new deposits, until deposits slow where the supply growth can slow, or even pause.

You might ask, “Well what would happen if no one deposits?”

There are two sad possibilities. The token can fall from 1.00 to 0.95 or tokens can be burned until it better matches the supply. This system, if managed by an intelligent algorithm, would be ideal for Cryptocurrency.

The name of fractional reserve and algorithmic stable coins have been besmirched by many who chose to neglect economics for profit. Nonetheless, the pathway to an independent currency on blockchains is somewhere between the debt collateral & algorithms.

Fractional Reserve Banking fails because depositors have no way to check on the reserves of their respective institutions and are forced to rely on perfect trust. As long as these stable coin reserves are instantly verifiable through open block scan technologies, I think there is a pretty strong chance that it can work.

We might ask why it is important to have a money supply that is flexible and reacts to the market it serves. As a scientist whose read a little more economics than most, I find that the principles of homeostasis are an important part of social networks.