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Stablecoins – Not So Stable

Enough has been said about the extreme volatility of cryptocurrencies and how it hinders the broader real-world adoption of cryptocurrencies. Bitcoin’s store-of-value and uncensorable medium-of-exchange propositions are vastly undermined by its huge price swings. Any asset that fluctuates by 20% in a single day cannot become a reliable instrument for either of the aforementioned value propositions. According to a few cryptocurrency maximalists, the extreme volatility of cryptocurrencies can be attributed to the speculative nature of the asset class and that the volatility will subside once investors understand the inarguable benefits of the utility aspects of cryptocurrencies. On the other side, crypto detractors posit that the high fluctuations in crypto asset prices will never lead to the real-life adoption of cryptocurrencies. It’s a chicken-and-egg problem here. More adoption curbs volatility and high volatility curbs adoption.

This is why stablecoins are important. To drive real-life adoption of cryptocurrencies, new users need to interface with the crypto world through a price-stable cryptocurrency (Stablecoins). Stablecoins are cryptocurrencies whose value is pegged to the value of a different asset (mostly USD, but gold-pegged and RMB-pegged stablecoins are also in existence). For USD-pegged stablecoins, the theoretical price of the stablecoin is always $1. The price-stability offered by stablecoins reduces the friction to onboard new users through decentralized applications such as prediction markets, blockchain-based loans, etc. Despite the many benefits of stablecoins, there are dangers to consider.

The biggest risk for stablecoins comes from the fact that their value is pegged to the value of a different asset. This is in many ways similar to how emerging economies peg the value of their national currency to USD or EUR to provide exchange rate stability for importers and exporters. History shows us that currency pegs are hard to maintain and when the peg breaks, all hell breaks loose and it creates a downward spiral of value destruction. As anyone that has heard of George Soros will tell you, hedge fund managers can be destructively ruthless sometimes. Soros was heavily influential in breaking the pegs of national currencies in 90s, which subsequently resulted in significant devaluations of local currencies (GBP and Rupiah are cases-in-point). Central banks of meaningful sizes were unable to fend off the attacks of speculators on their currencies. We are not sure how thinly funded cryptocurrency projects can withstand a full-blown onslaught by a big speculator.

In our upcoming blog post, we aim to provide a deep dive into the taxonomy of stablecoins and how they actually function, in addition to the structural risks in their operating models.

Team ZenPriveX is in Singapore this week for the inaugural edition ofConsensus Singapore. We hope to come back to with you key takeaways from the event and other interesting things we pick from around conference in Singapore in a newsletter soon. You can read about our Consensus New York round-up here.

Please hit us up if you are in Singapore this week.

Meanwhile in Crypto Wonderland….

“Another Institutional Grade Crypto Exchange” LXDX is a new cryptocurrency exchange that is currently in progress aims to address deficiencies, such as lack of liquidity, sub-optimal matching machines, and inadequate cybersecurity, of the current cryptocurrency exchanges. LXDX is headed by former SpaceX engineer Joshua Greenwald and based in Malta.

“Tora for Crypto is Coming” Trading systems provider Tora and Kenetic Capital, a HK-based cryptocurrency institution have come together to create Caspian, a trading platform that allows institutional investors to trade across multiple exchanges effortlessly. In the ICO pre-sale, Caspian secured $16 million funding from Kenetic, Galaxy Investment Partners, Global Advisors, etc. The public sale is likely to start in the first week of October, with the company aiming to raise $1.5-$2 million dollars for future development.

“Finally a Use for XRP?” In a recent interview, Sagar Sarbhai, the head of Ripple’s regulatory relations in APac and the Middle East told CNBC that Ripple could launch their latest product xRabid as early as next month. Unlike Ripple’s flagship product used in settlments across banks, xRabid will use the currency XRP to function. According to Ripple, this will further reduce costs and enhance speed of cross border settlements.

“NASDAQ Furthers Crypto Push” Cinnober, a Sweden-based trading solutions provider, which is also partnered with BitGo, the recently launched institutional cryptocurrency custody provider, is in talks to be acquired by the exchange heavyweight NASDAQ. The MnA offers (obvious) potential synergies as NASDAQ looks to enter this field and has long had a positive outlook towards cryptocurrency markets.

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