Stability is Making a Little Known Type of Cryptocurrency into the Future of Money
I started the project durocoin.com to make the first stable cryptocurrency — a cryptocurrency with the speed of Bitcoin, but with the stability of a national fiat currency. As is often the case, when you invent an “original” product, you soon find it already exists.
The Problem: Volatility
Bitcoin is very volatile sort of money, and that prevents it from being used in day to day exchanges. Here is the past year of Bitcoin prices in US Dollars.
Imagine you are a renter and have to pay your 3.2BTC rent (~$1000). June through November are roughly fine, but then come November’s spike up to $400 per Bitcoin, your rent just went up by 20% solely due to the volatility of Bitcoin. The problem of volatility are compounded when you try lending and borrowing money at interest (notice there aren’t flourishing Bitcoin lenders). What rate would you use when the underlying value of the loan could go up or down by 200% in one year?
The Current Solution: National Fiat Moneys
National currencies are managed by national banks like the Federal Reserve and the Central Bank of Europe to maintain their stability, both their stability of value, of interest rates, and of exchange rates to one another. This global regime of monetary stability allows for civilization itself to continue in the form of robust international trade, loans and leases as long as 30 or even 99 years, and the basic predictability of economic activity over months, years, and decades. The system now is no less than a marvel for one who considers the alternative.
A New Solution: Tethers
A “Tether” is a tokenized crypographic contract that is pegged, or “tethered”, to a national currency. Currently Tether.to runs their tethers on the Bitcoin blockchain using a centralized asset layer called Omnilayer. Tether.to maintains tethers to the US Dollar, the Euro, and the Yen. However, there is nothing stopping tethers to be tethered to any fixed price or formula.
Through a smart contract, each tether is 100% reserve backed by Tether.to in its national currency. So if you buy $100USDT (T for tether), then 100 tether contracts are made and the $100USD you give to Tether.to are put into a bank account waiting for when you or someone else trades in their USDT’s for USD’s in the future.
Economic Background
Tethers were first suggested most clearly by the Nobel Laureate F.A. Hayek in his book The Denationalization of Money (link to full text).
F.A. Hayek suggests that moneys can be successfully and stably produced by private companies. Each one would peg itself (tether itself) to a public price fomula. Every money would compete with every other on stability. Even in Hayek’s day, Hayek suspected that private monetary stability was achievable, and now it would be relatively easy given the derivative wizardry the past 30 years has invented. Stable moneys not being able to compete more on stability would sub-specialize in serving the various sorts of consumers and producers.
Economic Consequences
So what will happen as Tethers replace national currencies? F.A. Hayek suggests that a lot of good will come of it.
- Market-set Interest Rates — Interest rates will be set by the market instead of set by a central bank.
- No More Bubbles — Market-set interest rates would lead to the end of economic bubbles and busts and cause a constant boom of economic growth.
- Increased Investment — Currently the fear of bubbles and busts make investment shorter and more risky. Without bubbles, investors can take a longer view on their money, leading to better and more efficient investments and more economic growth.
- End of Too Big To Fail — Without government monopolies on money, government bailouts would be impossible. Without government bailouts the credit ratings of too big to fail organizations would be downgraded, leading to their natural break up into smaller, safer, and more resilient companies.
- Higher Purchasing Power of Wages — Currently central banks cause the inflation of consumer prices. Wages, correspondingly become relatively less valuable over time. In a competitive money economy there would be no inflation meaning that wages would stay strong over time.
- Improved Global Trade — Central banks are responsible for keeping international exchanges of currencies stable, but they don’t do a great job of it. We can expect a global, competitive, private money market made up of cryptographic tethered moneys to do a much better job.
