Recently I spoke to the CEO of MakerDAO Rune Christensen. MakerDAO is the company behind not one, but two, top 2o-cryptocurrencies for market capitalization. One of these is Dai, sitting at number 107 with a modest market capitalization of $ 46 million, and the second is Maker (MKR), which is currently in 29th place with a market capitalization of $ 272 million. At its peak, MKR had a market capitalization of over $ 1 billion.
The market performance of each of these coins individually would be impressive. The fact that the coins exist together and one governs the other makes it even more impressive. Dai is a stablecoin, intended to behave similarly to Tether (eg, pinpoint the value of the currency on a fiat asset, in the case of both Tether and Dai is the US dollar). The similarities between Tether and Dai, however, end here.
What is a stable currency?
Very early in the days of cryptocurrencies, it became clear that bitcoin was about to become a speculative investment, at least until it reached global adoption. The limited supply of money, the reduced volume, the boom and bust cycles have made the use of daily money unsustainable.
Enter the stablecoin. These coins can potentially offer all the advantages of blockchain technology: an immutable ledger, smart contracts, decentralization and more without any volatility associated with more traditional cryptocurrencies like bitcoin and ethereum.
The Three Types of Stablecoins
There are three types of stable coins:
The basics : Each unit of this type of coin is supported by a fiat currency unit. For example, in the case of Tether each unit of Tether is supported by a US dollar. I can also go to the Tether website and redeem my Tether for US Dollars.
[Editor’s note: Tether does not operate in all jurisdictions and is not currently accepting any registrations through its main website portal.]
The good : These coins are incredibly easy for consumers to understand. Although they are sometimes subject to volatility, especially in cases where currency integrity is questioned, in theory, the fact that you can always redeem a token for a fiat unit should stabilize the price.
: While we briefly discussed our interview, what follows is a much longer explanation of how the legal currency has gone from being a reserve currency to the current inflated state.
Brief history of inflation USD  The easiest way to explain this type of currency to explain could be the US dollar before the presidency of Richard Nixon. At that time, anyone could enter any bank in America, deliver the $ 1 bank and get 1.67 grams of gold to nine tenths of fine. This was the law and the result of the Gold Standard Act approved at the turn of the 20th century. Then, one day, 47 years ago, Richard Nixon decided to remove the "gold standard" from the United States. Because it happened and what happened next is the key to understanding the issues behind a reserve currency.
The gold standard worked great in the first and second world war. In 1944, with the end of the war, representatives of 44 nations met to develop a new monetary system. The system, called "Bretton Woods" after the name of the city in New Hampshire where this meeting would take place, had the objective of devising a monetary system that "guaranteed exchange rate stability, prevented competitive devaluations and ensured economic growth". The system was focused on the US dollar and required the liquidation of all international accounts in USD. These dollars could be converted into gold at an exchange rate of $ 35 an ounce.
The system worked very well in the post-war years. Virtually every other economic power in the world had been destroyed by war leaving the United States with an unprecedented monopoly on production and trade. Moreover, the country possessed more than half of the world's gold and other countries quickly consumed American goods. They had no choice, their production capacity, natural resources, and to some extent their work forces had been devastated by the war.
What happened next was easy to predict: rebuilt Germany and Japan. Both countries had been formidable pre-war industrial powers and regained their status within a few years. The United States had problems to face: the Vietnam war and aggressive spending had caused huge amounts of inflation and the share of economic output had fallen by almost 10%. The system has been heavily criticized internationally, with an American economist explaining: "It only costs a few cents for the Bureau of Engraving and Printing to produce a $ 100 bill, but other countries have had to raise $ 100 worth of real assets to obtain one. "
However, the system faltered until the overvaluation became too obvious for foreign leaders to ignore anymore. The US central bank held only $ 13.2 billion in gold compared to $ 14 billion in other central banks. Only about 20% was redeemable from other countries. The French president de Gaulle announced his intention to exchange all the dollars in his country for gold. This is when the dominoes have begun to fall: West Germany has left the Bretton Woods system and other countries have seen their currency increase by almost 8% against the dollar. The overwhelming economic response was panic. Switzerland and France exchanged paper dollars for hundreds of millions of dollars in gold.
Instead of leaving Bretton Woods, Nixon decided to suspend the convertibility of gold. On national TV in 1971, Richard Nixon announced that the United States would leave the gold standard. He then imposed an import tariff of 10% and frozen wages and prices for the next 3 months to prevent any immediate inflation. He continued to comfort the American people by saying, "In America, your dollar will be worth as much tomorrow as it is today." This, as we now know, was not the case. Over the next 50 years, expansionary monetary policy increased public spending, and the recovery and subsequent boom experienced by countries that had previously been struggling to collect the pieces of their economies after World War II recovered. All of this made the dollar 19% of what it was worth when Nixon made its announcement.
All this brings me to my original point: the problem with reserve currencies. Yes, it may be true that today, with your Tether, you can trade it with a physical dollar. But it may not always be that way. Tether has so far refused to undergo a complete overhaul of his books (as promised), and his price has undergone volatility more than once. He also faced criticism from Bloomberg for his business schemes on some exchanges.
The basics: Instead of using a fiat to support the currency, crypto is used, typically in an excess of fashion guarantee (ie the ratio between stable currency and cryptography is greater of 1: 1). The system is then managed by smart contracts that buy and sell the underlying assets to keep the currency at $ 1.
The voucher: Transparency is the biggest here. Because all transactions take place on the chain, anyone can inspect the underlying assets.
The bad: The cryptocurrencies are incredibly volatile. Volatility of the underlying means that to maintain a price peg, it is necessary to be extremely over-guaranteed.
The basics: Smart contracts are used to maintain the price level of adjusting the supply of currency. As the price of money increases, more money is created to lower the price. As the price decreases, the currency is bought. If the money supply runs out, the rights to the future issue of coins are sold to raise funds. In some cases, the system is governed through the use of a decentralized autonomous organization (DAO) in which users can vote on monetary policy. Users can also lock coins (to reduce the circulating offer) and earn interest.
The good: The best part of these types of currencies is that they are independent of any other currency. The value of the guarantee can not go down in spiral because there is no guarantee
The bad: There is no guarantee. If the price of the coin takes a big enough shot and enough people sell the coin right away it will not be able to recover since it will have no money to repurchase coins.
Returning to the American example, this is why Nixon has issued an executive order that sets prices: to avoid this kind of galloping inflation. This type of inflation is not theoretical: Nubits, a cryptocurrency founded in 2014, has been able to maintain the price of $ 1.00 for more than a year, but now trades at $ 0.20.