Evan Kuo is the co-founder of Ampleforth (formerly Fragments), a startup that develops advanced technological solutions for the stablecoin market, and the former founder of the on-demand delivery startup Pythagoras Pizza.
The following is an exclusive contribution for the 2018 year of CoinDesk under consideration.
"I do not think we'll ever have a good price before we take the thing out of government hands, that is, we can not take them out of government hands violently. All we can do is introduce something that can not stop smartly and indirectly. . "- Friedrich Hayek
In 1976, Nobel Prize winner Friedrich Hayek wrote an important and prescientific document entitled "Denationalization of Money". Bitcoin advocates love and often cite this work as the reason why Bitcoin needs to exist, but Hayek's original vision seems less like today's Bitcoin and more like today's stablecoins.
Hayek has painted the image of a world in which money, like banking, is denationalized. He believed that, unlike law and language, money had not been allowed to evolve due to sovereign influences that suppressed competition. And he predicted that if governments were to allow it, currencies would naturally evolve to compete for greater stability, eventually eliminating the effects of devaluation of inflation.
A bold statement, paired with a simple two-pronged approach:
- Open the free exchange of money
- Allow the issuance of independent money.
At the time of publication, it would have been almost impossible to imagine one of these events. However, Hayek wrote with the hope that some perfect storm of circumstances may one day change the game, even going so far as to suggest that the change may have to take place without government support.
Today, more than 40 years after the beginning of the idea, we see the denationalization of money that takes place organically in the form of digital resources.
A clever roundabout way
The Bitcoin protocol can certainly be described as a "smart and indirect way" of introducing an independent money that no central authority can stop. In a stroke of genius, the creators of Bitcoin have exchanged the technical scalability for social scalability. And in this sense, Bitcoin's approach to decentralized money was exactly the solution Hayek had requested.
However, this is the point where the analogy linking Bitcoin to the fictitious coin of Hayek, the duchy, diverges.
Hayek explicitly opposed the notion of a fixed offer currency. Possessing full knowledge of the economic history behind scarce metals and fresh to the collapse of Bretton Woods, he knew with certainty that the fixed offering was not the solution he sought.
Like poor metals, fixed procurement activities can not respond to changes in demand and will never reach the sustainable level of price stability in the short term necessary to compete with the central bank currency.
Fortunately, with the Bitcoin ideals amplified by extreme speculative interest, the protocol has succeeded in recalling a critical mass of attention to the inefficiencies of the existing monetary and banking systems. And more importantly, Bitcoin has instilled into a new generation of innovators the idea that money is something we can change.
The overwhelming majority of the stablecoins we see today are covered by collateral. In 2015, unscheduled cryptocurrency exchanges required a token with pegged fiat so that traders could enter and exit speculative positions on variable-price assets such as Bitcoin. Many of these exchanges were outside the United States and lacked direct banking relationships.
The halter rose to meet this pressing need, collateralizing 1 US dollar for each USDT token coined and forming partnerships with all major exchanges. This meant that regardless of whether you were a citizen of the United States or not, you could buy and sell a tokenised representation of the US dollar without restrictions. In fact, Tether opened the free circulation of sovereign money, unlocking the first phase of Hayek's vision – the one that defined the "practical" approach to denationalization.
Since then, much has been written about the Tether controversy and suffice it to say that its quasi-monopoly, lack of transparency and dependency on centralized banking partners have set it up for abuse allegations.
Hayek believed that opening free money would raise the ground for monetary quality by putting pressure on weak currencies to implement monetary policy at the level of their best sovereigns. For example, if the citizens of Venezuela or Argentina could simply buy in and out of US dollars, there would be no excuse for prolonged abuse of monetary policy.
And it is right that in a context of open competition, the natural tendency of the digital goods market was to diversify with Tether through competition. Recently, several fiat guaranteed alternatives have come into play, including the Paxos Standard Token (PAX), Gemini Dollar (GUSD), TrueUsd (TUSD) and the Circle & # 39; s CENTER (USD-C) consortium.
These newcomers are rapidly gaining momentum, putting pressure on older players to improve their accounting practices and ensure their redemption, or face extinction. Hayek could not have asked for a better demonstration of the advantages of open competition.
However, since these tokens are centralized, their use is highly authorized. At any time a bank partner can be limited, forcing tokens to circumvent the authority or cease operations. Furthermore, the continued adoption of the fiat collateralised stablecoin simply advances the dominance of existing sovereign currencies.
Algorithmic Stablecoins Independent cash issue
Hayek also believed that the introduction of independent money would raise the ceiling of monetary quality by putting pressure on the best sovereign currencies to be more responsible for their issuance and regulation of supply. He defined this second phase as the "generalized" approach to denationalization.
A considerably lower number of stablecoin can be called independent money. Nevertheless, it is here that we place the greatest hope for the future of digital resources; and correspondingly, this is where most venture capital has been committed. MakerDao, Reserve, Ampleforth and until recently, Basis, are examples of stablecoin projects that fall into this category.
Like Bitcoin, algorithmic stablecoins are designed to be market-driven, regulatory-resistant, and have rigorously applied supply policies that can not be forced by central authorities to change. With a big difference. Unlike Bitcoin, they will be functional units of account, allowing them to compete with the sovereign currencies on stability.
Lacking military and government mandates, independent funds can exist only if they are better at issuing and regulating supply than existing alternatives. If an independent cryptocurrency were more equitable or more stable than the existing currencies, knowledge of this would also put pressure on the best central banks to implement a better monetary policy.
Today about 60 percent of foreign reserves are already held in US dollars or Treasury bills; and many people, including the International Monetary Fund, believe it is a social responsibility to avoid creating a world that is overly dependent on the US dollar for global economic affairs.
In addition, the interconnectedness of today's global economy together with the US obligation to engage in cycles of continued deficit spending (for example, the Triffin dilemma) contributes to ever-wider cycles of boom and bribes that quickly translate internal economic crises into global economic crises.
And the dissatisfaction of these cycles, the awareness that such cycles can stop the banking system of even the most powerful economy in the world, which has stimulated the cryptocurrency movement during the last crisis global financial As a community, we should not lose sight of this vision.
Looking forward to 2019
It will take a long time for algorithmic stablecoins to be used in exchanges in the way collateral coins are used today. The algorithmic stablecoins have the potential to profoundly transform money as we know it, but they are much more difficult to realize and introduce risks that can only diminish with time and size.
For this reason, we expect that in the next period the collateralised stablecoin will continue to dominate the case of the use of basic exchange pairs in exchanges, and their success will be guided by business relations with regulators and exchanges, rather than community or ideology.
To achieve adoption, digital native stablecoins will need incentives beyond the utility of basic trading pairs to offset their increased risks. These incentives could be greater stability, a better philosophical basis or theoretical gaming incentives aligned with the growth of the network.
Ultimately, only algorithmic stablecoins can promote the underlying mission of digital currencies and emerge as real alternatives to government money. Hayek would have asked not one, but many simultaneous denationalized currencies to prove their worth.
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