The Missing Piece of the Crypto Puzzle: Inventing a Fair Stablecoin

The Missing Piece of the Crypto Puzzle: Inventing a Fair Stablecoin

May 25, 2021 6 min read

Opinions expressed by Entrepreneur contributors are their own.

When investing in crypto, are a necessary piece of any successful strategy. These are cryptocurrencies pegged to the dollar’s value. However, creating a legally compliant, decentralized and fair stablecoin is more complex than one might think.

Where do millennials invest?

With the Nasdaq, Dow Jones and S&P 500 all hitting all-time highs this month, you wouldn’t believe that we’re living through a pandemic and recession. However, this has everything to do with it. To get out of the Covid-19 economic crisis, governments will have to print money to save struggling sectors. In the face of a falling dollar, investing is more than a nice bonus — it is necessary to preserve wealth. With the Federal Reserve Chairman himself admitting he expects a rise in inflation, a clear message has been sent to everyone — invest your money in anything but a savings account. This message has been heard loud and clear.

Currently, one of the most exciting areas to invest is cryptocurrency. Interest has grown exponentially, leading even the world’s second-richest man, Elon Musk, to invest in Bitcoin. More than a technology, crypto (more precisely, DeFi) aims to challenge the current financial system and recreate it in a fairer, more transparent way.

As prices of real estate rise and commodities such as gold have a hard time keeping up, millennials turn their sights and savings to the fast-growing digital asset class. It’s fun, it’s easy, and it moves quickly. This has led the crypto market to cross the $1 trillion mark at the beginning of 2020. Perhaps even more impressively, the market doubled that a few weeks ago by crossing $2 trillion. The more people believe in it, the faster cryptocurrencies grow.

This has created an increasing demand for a particular type of cryptocurrency, though, one that isn’t likely to grow in value but rather provide utility and stability to the crypto market: stablecoins.

Related: 4 Ways DeFi Can Generate Passive Income

What are stablecoins?

In the simplest terms, stablecoins are cryptocurrencies tied to the value of a currency backed by government regulation and a central bank, such as the U.S. dollar. Very often, this is the currency used by stablecoin providers to guarantee the value of their cryptocurrency. But why would anyone want a cryptocurrency tied to the price of the dollar? Doesn’t that defeat the whole point of investing in cryptocurrencies?

It’s not so simple. While no crypto investor will only hold stablecoins in their portfolio, these have become a vital part of any investment strategy for many reasons. First, they’re an excellent way to transfer a set amount to another person. For example, in the case of a business contract, it’s much easier to agree on a value in dollars than in a volatile cryptocurrency. If you had negotiated a 1BTC monthly salary in March 2020 when Bitcoin traded around $4,000, the contract would undoubtedly pose problems to your employer now that Bitcoin hovers around $50,000.

Second, while the dollar has been on a downward trend in 2021, this decline is slow. By all accounts and purposes, the dollar is a stable currency. This makes stablecoins pegged to their value a good option when it comes to taking profits on successful trades. Often, traders will realize their profits on cryptocurrency trades in stablecoin or predict downturns by converting their crypto assets to stablecoins on crypto exchanges.

The very first stablecoin, Tether, shows why stablecoins can often be problematic. To legally justify their ability to provide stablecoins, Tether declared they would back every single USDT 1:1 with real dollars that could be unlocked if crypto users decided to return their stablecoins. However, this turned out to be false and legal issues followed for Bitfinex, Tether’s parent company.

Related: Tesla CEO Elon Musk Says Bitcoin Purchase is ‘Less Dumb’ Than Holding Cash

A fair and transparent stablecoin

Stablecoins collateralized by real dollars will always be centralized, and this centralization, as was the case for Tether, can lead to abuses. While these are still the most widely used stablecoins, questions about the transparency and credibility of their parent company will always create issues and slow down growth for the crypto market.

On the other hand, stablecoins collateralized by crypto assets such as DAI from MakerDAO allow crypto users to collateralize their digital assets, such as Bitcoin or Ethereum minting DAI, a stablecoin. To regain access to these assets, users have to return the DAI. The problem lies in the fact that if the price of Bitcoin or Ethereum falls and the assets become under-collateralized, the user’s funds can be liquidated and sold to the highest bidder to recuperate its funds.

This also allows investors to increase their leverage. If you were to collateralize Ethereum and borrow DAI, you could use it to buy more Ethereum and increase your exposure. But beware, amplified profits could also lead to amplified losses, and liquidations are a genuine threat in crypto.

The last stablecoin model is the algorithmic one in which stablecoins are not collateralized. These work with a rebase mechanism in which, every 24 hours, the price of the token returns to $1. If there is a lot of demand, new stablecoins are minted and distributed to holders, while if there isn’t enough, the coin returns to $1 and a portion is taken out of circulation.

The stablecoin market is ripe for disruption, and one protocol has an interesting take on a fairer stablecoin. Standard Protocol has developed a model which profits from the strengths of both crypto-collateralized stablecoins and the rebase mechanism to solve the outstanding issues inherent to prior stablecoin models.

First, Standard Protocol is decentralized and its governance is left to its community. This transparency protects it from legal issues and increases the credibility of the protocol. In this protocol, digital assets are collateralized and, if needed, sold fairly through an open automated market maker system that allows anyone to take art in liquidation auctions.

This collateralization of the stablecoin with tangible digital assets will allow Standard’s stablecoin MTR to be more stable than algorithmic stablecoins as the value of each coin will be backed by the user’s assets. These assets could even be natural commodities such as a tokenized representation of gold.

By embracing the elegant but unstable model of algorithmic currencies and backing it with real, valuable assets, Standard Protocol is developing one of the most exciting stablecoin projects so far. This may become the de facto protocol for stablecoin usage in crypto.

Related: Mark Cuban Says Explosive Growth in DeFi Is ‘Like the Early Days of the Internet’

Tether and USDC Hit Milestones as Stablecoin Growth Continues

Bloomberg

(Bloomberg) – Kyle Davies and Su Zhu started Three Arrows Capital at the kitchen table of their apartment in 2012. Now they’re among the world’s biggest crypto holders with a portfolio worth billions of dollars.At least for the moment.Their portfolio was rocked in recent days as environmental concerns over mining, regulatory scrutiny, warnings by Chinese authorities about digital currency payments and a flurry of erratic tweets by Tesla Inc’s Elon Musk whipsawed prices. For Davies, an early investor in the space and an evangelist for the underlying technology, the recent volatility is just a blip, enough perhaps to scare off newbie investors, but not for someone who has experienced far more volatile periods.“Bitcoin’s down 30% off the highs, it’s really not down very much,” the 34-year-old said in an interview from Singapore. “I don’t see anyone really being that spooked.”Former traders for Credit Suisse Group AG, Davies and Zhu, the two are among the Wall Street pioneers who’ve embraced crypto, along with Dan Morehead of Pantera Capital and Mike Novogratz of Galaxy Digital. Now everyone from retail day traders to bankers are jumping in: CNBC reported this month that Aziz McMahon, head of emerging market sales for Goldman Sachs Group Inc. in London quit the bank after making a fortune trading cryptocurrencies for himself.While many of the early devotees’ fortunes rose and fell on the currency’s price swings, crypto wealth is quickly turning into real dollars for some, whether through initial public offerings or companies that bring in traditional revenue. Brian Armstrong, co-founder of crypto-wallet Coinbase Global Inc., has a net worth of $9.3 billion after his firm’s IPO, according to the Bloomberg Billionaires Index, while Binance’s Changpeng Zhao created the world’s largest crypto exchange.Grayscale StakeDavies and Zhu, also 34, have resisted talking about their fortune and recommended on social media that crypto billionaires do the same.However, a filing in January revealed the extent of the firm’s influence, when Three Arrows reported it owned a 5.6% stake in the Grayscale Bitcoin Trust, a $22 billion fund invested solely in the cryptocurrency set up by Barry Silbert.Davies declined to say whether their position had changed or specify how much of the firm’s capital belonged to them. Most of their other direct investments in cryptocurrencies and related companies don’t need to be publicly disclosed.The Grayscale stake made Three Arrows the largest shareholder and would have been worth as much as $2.1 billion in April. The trust’s shares have since tumbled 43% following Musk’s announcement this month that Tesla would suspend accepting the digital currency for purchases of its electric cars because of “rapidly increasing use of fossil fuels for Bitcoin mining” and regulatory clampdowns from China.Despite the environmental spotlight Musk’s tweet placed on Bitcoin, Davies said he doesn’t believe that those concerns apply across cryptocurrency trading as a whole.“There are many cryptocurrencies that are proof-of-stake, which use very little if any electricity,” Davies said. “That is the direction that a lot of crypto is headed in.”A proof-of-stake setup for a digital currency allows users with significant equity positions to verify transactions. That compares with proof-of-work transactions, such as those used in Bitcoin mining, where users have to complete complex math problems to access a coin, consuming much greater volumes of electricity.Derivatives TradersDavies and Zhu attended high school together, then studied at Columbia University in New York before joining Credit Suisse as derivatives traders in Tokyo. After three years at the Swiss bank, they quit and launched Three Arrows Capital to begin trading traditional currencies in emerging markets.“It was a very inefficient market, and that’s where we got our start,” Davies said.Within three years, they went from working in their San Francisco apartment to hiring about 35 people and trading 5% to 10% of all local emerging market currency volumes, he said.They diversified into options, equities and crypto after “bigger and better firms came in and were better than us” in FX emerging-markets trading, Davies said. By 2018, the firm concentrated exclusively on crypto.Their Singapore-based company now runs a fund, DeFiance Capital, that invests in decentralized finance, betting that these businesses will “eat traditional finance over the next decade,” according to the group’s website. Investments include InsurAce, which provides insurance services, and CDEX, a cryptocurrency swap platform.‘Outsized Voices’“We have been long crypto for a while,” Davies said. “We’ve not always been long Ethereum, in fact we’ve been short for periods of time, too. What’s the best way to beat Bitcoin right now? Well it’s just to own Ethereum. The ultimate goal of my book is to outperform Bitcoin.”Davies said that Ethereum is currently the firm’s largest cryptocurrency holding. It has gained 245% this year compared with the U.S. dollar, while Bitcoin is up 29%.Despite the turbulence created by Musk’s tweets, Davies said he’s less worried about the billionaire’s influence on the crypto market with each passing day.“The thing about outsized voices is they usually don’t last very long if they’re used too much,” Davies said. “If he were to tweet every single day, by the end of the year he would have no price impact.”(Updates Ethereum, Bitcoin returns in 20th paragraph.)More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.

Amid rising stablecoin inflow, cautious traders fear a dead cat bounce

The recent extreme volatility in the cryptocurrency market following Bitcoin’s (BTC) dip to $30,000 and the recovery to $38,000 has traders confused about whether the current price action is a ‘dead cat bounce’ which will see token prices head lower or a solid reversal that will set the floor for the next leg higher for the market.

While BTC price still remains more than 40% below its all-time high of $64,863, bulls have managed to weather multiple attempts to significantly break below support at $36,000.

A closer analysis of on-chain data and exchange inflows shows that Bitcoin’s sell-off led to the market-wide downturn and Delphi Digital analyst Nick Pappageorge highlighted the fact that BTC inflow to exchanges “topped over 20,000 BTC in just one hour on Wednesday,” which was the highest level sesince March 2020.

BTC exchange inflows. Source: Delphi Digital

FUD-o-rama destabilizes the market

One of the major sources of market turbulence identified by Pappageorge was the seemingly daily FUD headlines, including yet another Chinese government ban of cryptocurrencies and concerns that Tesla would dump its Bitcoin holdings. These back-to-back fear-laced narratives led retail traders to offload their coins on exchanges to escape a further price slide.

Pappageorge also pointed to concerns raised by a pair of hacks on the Binance Smart Chain which saw the price of PancakeSwap (CAKE) and Pancake Bunny (BUNNY) plunge, with the latter being drained of $45 million worth of user funds as compounding market fears.

The turnaround in sentiment this week has been in part fueled by positive headlines such as the formation of a Bitcoin mining council following a meeting between Elon Musk, Michael Saylor and North American Bitcoin miners, which has helped spark a turnaround in BTC and altcoins. The quick reversal so triggered the debate on whether the current market activity resembles a dead-cat-bounce or a trend reversal.

70% nuke -> 80% bounce -> 10% dip

Dead Cat or Reversal pic.twitter.com/qefB6y4ahQ — Darren Lau (@Darrenlautf) May 25, 2021

Experienced traders accumulate at lower prices

While many of the newer entrants to the cryptocurrency market have found the recent volatility nauseating, the more experienced investors jumped at the chance to accumulate BTC at a 50% discount as the number of new accumulation addresses reached new all-time highs amid the shakeout.

Number of Bitcoin accumulation addresses. Source: Glassnode

Well-known Twitter personality and Bitcoin analyst PlanB posted the following chart showing how Bitcoin oscillates around the stock-to-flow (S2F) model, showing the recent downturn is well within the standard range it deviates.

BTC price oscillations around S2F model. Source: PlanB

PlanB said:

“Buying opportunities like today are rare (Q1 2019 when I wrote the S2F article, March 2020 due to covid, and now). Life is all about choices.”

As for bullish signs needed to support a quick recovery, the May 24 Delphi Daily report from Ashwath Balakrishnan highlighted the “sharply rising” circulating supply of fiat-backed stablecoins, which has increased from “15 billion to nearly 21 billion in the last 5 days.”

Stablecoin circulating supply. Source: Delphi Digital

While this could be a sign that dip buyers are “loading up ammo,” Balakrishnan was sure to note that “it could also just be stablecoin arbitrageurs” and stressed the importance of “ensuring that the circulating supply doesn’t drop sharply to confirm these inflows will be deployed.”

A record amount of dry powder is now available on exchanges but at the same time, an entirely new cohort of cryptocurrency investors who just experienced their first 50% pullback are now wondering if they should pull out the market or double-down on their investment. The more experienced in the crowd are betting that the market is headed higher but further volatility is all but guaranteed.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.