Stablecoins: Brilliant idea or ticking time bomb?

Posted on May 28, 2018

Stablecoins: Brilliant idea or ticking time bomb?

If you have been in crypto for more than two minutes, you know one simple fact: Coin prices are really volatile. And that volatility isn’t just tough on investors. It’s also tough on those who provide services to crypto startups in exchange for tokens — and for the crypto startups themselves, who are having to run a business with an ever-changing budget.

Given the growth of the crypto sector in the past year, significantly increased interest by institutional investors and the high volatility of many assets, the concept of stablecoins has seen quite a bit of interest. As the name implies, stablecoins are crypto-assets that seek to hold a consistent value vis-a-vis another currency. There is a lot of great material out there on the topic.

You can read this overview from Argon Group, this one from Haseeb Qureshi, this one from Leslie Ankney, or this one from Myles Snider of Multicoin Capital. Qureshi’s piece does a nice job of outlining the differences, both pro and con, of “fiat-collateralized,” “crypto-collateralized,” and “non-collateralized” stablecoins. Stablecoins are certainly an appealing concept, which is why one of the newer ones, Basecoin (since renamed Basis), has amassed a huge war chest of $125 million from a long list of top-shelf investors.

The first stablecoin I ever heard of (and one of the originals) was DAI developed by MakerDAO. When I first read the whitepaper over a year ago (actually, I read it 3-4 times), I struggled with it. The mathematics were intense, but the concept of using smart contracts and price oracles via a protocol that could either increase or decrease (aka “burn”) the supply of DAI to maintain a price of $1 was undoubtedly innovative.