Stablecoins are close to being a real currency, but not quite

Photo credit: Ravital

Disclosure: The author holds some cryptocurrencies but none of the ones discussed below.

Stablecoins have been heralded as the gatekeepers of crypto’s mainstream adoption.

They represent a class of crypto-assets that aim to maintain a stable value against a target price, stopping volatility. However, despite people’s interest in stablecoins, there are plenty of criticisms and misconceptions surrounding its numerous models.

Money as we know it

Money exists for three reasons:

1. To act as a store of value and a hedge against depreciation
2. To provide a form of accounting and record keeping
3. To facilitate a medium of exchange between parties and function as a predetermined measure of value

These factors are critical, as they allow us to use money in a range of situations. For example, we may choose to receive our salaries in money, reassured that it won’t devalue overnight, or we may use money to buy goods and services knowing that the value exchanged is accurately represented on either side.

Crypto-assets, as we know them, struggle to meet these three criteria. Because of volatility, we can’t buy our coffee with Bitcoin or keep our savings in the cryptocurrency either. This is the biggest critique of Bitcoin—the fees and volatility make it impractical as a form of “digital cash.”

So while cryptocurrencies represent an exciting innovation and technological advancement, they are still far from mainstream adoption.

Enter stablecoins.

The impossible trinity

According to Friedrich Hayek, the author of The Denationalisation of Money, in order to have “good money,” it must be separated from government. However, that is not enough to have “perfect money.” Perfect money needs to be separate from the government, able to maintain a stable value, and have an inherent value. This is why former Federal Reserve Chief Alan Greenspan says gold is the perfect form of money.

Stablecoins are an evolution of cryptocurrencies aimed at addressing the “stability” factor of perfect money. However, they still fail to meet the trinity below: