Category Archives: stablecoin

An Overview of Stable Crypto Tokens

The high volatility of digital currencies is the reason why using another digital coin as a unit of account is not the best idea. For example, Bitcoin’s price changed by 10 percent in one day, while Ethereum’s price changed by 20 percent in a single day several times. A stablecoin is an asset that has … Continue reading An Overview of Stable Crypto Tokens

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State Change #26 – Hadrien Charlanes, Stable

The usability of cryptocurrency has historically been a stumbling block for adoption: The addressing system is alien to many users, payment rails have been weak or non existent, and it’s value has been volatile. The problems are being solved however. Coinbase’ relationship with PayPal and Metamask’s integration of the Coindesk Buy Ether button has brought Ether to anyone with a credit card. Mathematician and financial engineer, Hadrien Charlanes is solving the volatility problem with a collateral based hedging system called Stable.

Content: Hadrien Charlanes, Arthur Falls
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MakerDAO Founder Claims “Absolutely Zero” Obligation to DAO Investors In Interview

MakerDAO Founder Claims “Absolutely Zero” Obligation to DAO Investors In Interview

We sat down recently with Rune Christensen, the founder of MakerDAO, to discuss The DAO’s collapse and the implications it will have for Ethereum and Cryptocurrency moving forward after the soft fork. He expresses doubts at the notion that the Ethereum community holds any obligation to The DAO and other interesting viewpoints from security to hard-fork consensus.

Also Read: Pound vs Yen: The Battle Over Bitcoin Rages On

Rune Has Faith in Ethereum, Not The DAO

So Rune, Can you give Us a little bit of background on Yourself, On Maker, and the Situation The DAO’s Collapse has put Maker in?

“I’m the founder of Maker, which is an ethereum based DAO that will soon launch a stable cryptocurrency backed by smart contracts with ethereum based collateral. TheDAO’s collapse hasn’t meant much to us, we already anticipated those types of risks and knew it was something that could happen. We are going to be even more careful with security in the future, though, as we were also affected by the bug in one of our alpha stage contracts. luckily nothing was stolen, and not much money was at stake because we had made clear warnings and risk disclaimers.”

Okay,  Rune, given those circumstances, what is your position on the best of the proposed solutions, Soft Fork, hard Fork, and otherwise?

“I think the best solution is to wait for consensus. A clean 100% refund fork is most likely at this point, but also see the potential for a second blockchain to emerge or even possibly the old one being kept alive.”

Can you elaborate on why you think it’s best, and the disadvantages of the other options for Maker, and Ethereum?

“When using blockchains its always the best to go with the consensus, so it’s an easy choice. The biggest question is whether the community will see diverging advantages in the “code is law” governance approach.”

What about long term consequences for the Ethereum ecosystem, and concerns that the soft fork could be easily abused by miners?

“It turns out the people concerned were right on this one.”

Many are blaming Solidity for the issue as much as The DAO’s code, scale of deployment and handling of the attack, and claiming is as much to blame if not moreso. What are your thoughts on this?

“It’s misleading to claim it is Solidity’s fault. However, there are various things with solidity, the EVM, and the entire tech stack basically, that could and are still being improved. Overall I think Ethereum’s technology is in extremely great shape and lightyears ahead of everything else.”

Current DAO Hard Fork Voting Status

How much responsibility does the Ethereum community have to those staked in the DAO?

“Absolutely Zero.”

What is Maker Doing that ensures that it will not become another TheDAO?

Same as we have always been doing, obsessing about security at every step of the design and implementation process. We knew very early that security was going to be the most important factor and have been building our entire stack around that maxim from the start.

Early Voting from ethereum mining pools has shown strong support of a hard fork. What is your recommendation to those that have yet to vote on the matter?

Vote with the majority.

MakerDAO has suffered from security issues similar to the DAO’s over the last few months, the prime difference being their decisive action in fixing them, preventing any theft of their collateral or stablecoin. The DAO has been a massive, market altering failure, but Rune, along with many others believe that the underlying technology is not to blame. What we see in terms of utility from complex Ethereum-based smart contracts will be interesting to see following the hard fork.

Thoughts on the coming hard fork and the future of other Ethereum DAOs? Leave them in the comments!


Images Courtesy CarbonVote.com, MakerDAO, Pando

The post MakerDAO Founder Claims “Absolutely Zero” Obligation to DAO Investors In Interview appeared first on Bitcoinist.net.

The Economics of Stablecoins

Stablecoins are a new idea that is being advanced by some people in the cryptocurrency community. A stablecoin is a digital currency with a flexible supply. The idea behind such a coin is simple: we create a cryptocurrency that uses some kind of metric to track demand for the coin, which will trigger an automatic increase or decrease in the coin’s supply. This is supposed to keep the purchasing power of the currency stable — hence the term “stablecoin.”

Also Read: Thoughts on Bitcoin Blocksize Economics

The Economic Reasoning Behind Stablecoins

HayekThe motivation behind the idea of a stablecoin is the belief that low purchasing power volatility will be the main driver behind mainstream demand for a cryptocurrency. This idea is not exclusive to cryptocurrency, though. F.A. Hayek theorized that the most successful, privately issued money in an economy of competing paper currencies would be the one with the most stable value, the one that maintains the most stable price ratios with a basket of goods.

Unfortunately, Hayek’s vision of competing currencies could never materialize in the real world, since it relied on governments abolishing their own monetary monopolies. However, the advent of cryptocurrency has given Hayek’s vision a better chance of being realized. Now, competing currencies can emerge from the bottom up, without the permission of governments.

The problem, though, is that it is not practically possible to keep the purchasing power of a currency stable. Doing so relies on precise calculations of demand for the currency, which is a tall order even for the most advanced computer. Demand can change instantly, in fractions of a second, and it can change an infinite number of times in one day. No economic variables are constant enough to be measured with the exactness required for maintaining something as fickle as a currency’s value.

The economic consequences of tampering with the supply of a currency are severe. Stabilization requires that money be created out of thin air to match the rise in demand, so that prices stay the same. Those who follow the Austrian school of economics know that this kind of money creation is the root of the business cycle. Therefore, even if it were possible to achieve purchasing power stability, it would be at the expense of overall economic stability.

Thus, the difficulties involved in stabilization schemes will ultimately render stablecoins unsuccessful.

The Economic Difficulties of Stablecoins

money-printingTo see an example of a stablecoin concept that employs the flawed economic goal of stabilization, let’s look at the seigniorage shares scheme devised by Robert Sams. This idea is one of the more sophisticated stablecoin schemes in that it actually has a way to decrease the supply of a coin, unlike other coins that can only realistically control the rate of increase.

The seigniorage shares scheme regulates a coin’s supply distribution by using two tokens, coins and shares. Coins are the actual currency used for transactions, and shares are kind of like bonds. If the coin supply needs to increase, then an auction is initiated where bidders have to trade their shares for new coins. If the coin supply needs to decrease, the auction happens in reverse — bidders trade their coins for shares, and those coins are destroyed. Therefore, the shares represent ownership over the future growth in coin supply, which is what makes them loosely similar to bonds.

Applying our economic knowledge about purchasing power stabilization, we will see that this scheme has a fundamental flaw.

First, in order to know how much the cryptocurrency supply needs to be increased or decreased, we have to have an accurate measurement of demand. This means that we have to use some kind of price index to find an aggregate measurement of purchasing power, thereby informing us of the currency’s demand. This is an issue because the nature of price indices obscures the important factors that must be considered when trying to stabilize demand.

When we construct a price index to give us an aggregate price level in order to gauge purchasing power, we gain macro data at the expense of micro reality. In daily life, there is no single purchasing power of a currency; there are as many purchasing powers as there are people and goods in the market. Price aggregates gloss over this very practical fact. An index can rise, even if many individual prices fall — and vice versa. Thus, a price index can show that some abstracted, aggregate purchasing power increased or fell, while individual experiences contradict the index.
How does this flaw apply to a stablecoin scheme that requires an aggregate measure of purchasing power? A flexible supply may keep the index constant, but alter individual prices to a great degree. Falling individual prices will be returned to normal by an increased supply. However, prices that have simultaneously remained constant will end up increasing. The inverse is true as well; rising prices will be brought back to normal by a monetary contraction, but prices that have not changed will fall. Looking at the aggregate, though, it will appear as if the abstracted price level is kept totally constant. If a stablecoin scheme uses a price index, then, it will be keeping an arguably useless aggregate constant while individuals will continue experiencing fluctuations in their individual purchasing powers. This will of course indicate that the scheme has failed to truly keep the currency’s value stable.

yellen_janet_040512_8x10The Federal Reserve has ran into this problem in using various readings of the CPI and other CPI-based indices to measure the country’s aggregate price level. Because of these difficulties, the Fed has resorted to targeting low rates of yearly inflation instead of stability. The seigniorage share system will undoubtedly meet the same fate. Upon failing to keep purchasing power truly stable, the system’s protocol will have to be patched to take on the task of inflation targeting.

The second aspect of the seigniorage share system’s fundamental difficulty is much more straightforward, and does not need much elucidation. By electing to make the supply of a currency flexible, we must accept the consequential business cycles that will follow. Any time the money supply arbitrarily expands, a boom and bust cycle will occur — albeit of varying lengths and intensities. When considering implementing a scheme such as seigniorage shares, then, we have to ask ourselves: do we value “stable” purchasing power more, or would we rather have an economy without destructive business cycles?

The Imperfections in a Fixed Supply Monetary System

Gold coinsOf course, having a currency with a rigid supply comes with flaws of its own. In theoretical economic models of purchasing power, we assume that nominal wages and prices freely adjust to changes in a currency’s value. From a theoretical perspective, then, a fixed supply system seems perfect; if purchasing power goes up, nominal wages and prices go down, and vice versa. However, in the real world, wages and prices tend to be “sticky,” meaning that it takes time for them to adjust to changes in purchasing power. For wages, rigidity is due to unions and governments — among other things — supporting practices that keep nominal wages constant. Prices are generally sticky due to information lags and the costs involved in changing listed prices. So if purchasing power rises or falls, and nominal wages and prices cannot immediately adjust, there may be a shortage or surplus of labor and goods.

The solutions to these problems are not nearly as complicated as the ones involved in a flexible supply monetary system. On one hand, workers will likely decide at some point that a fluctuating nominal wage is preferable to long stints of unemployment. On the other hand, advances in technology will shorten information lags on the market and will make it cheaper to re-list prices.

Conclusion

It seems that, in my opinion, we have to choose between two systems. We can choose a sound money system with a few fairly solvable issues, or we can have a system that gives us business cycles and pseudo purchasing power stability. I think that, if people can wade through the rhetoric, the former will tend to be preferable.

Do you think digital currencies with flexible supplies can work? Let us know in the comments below!

This author’s views do not necessarily reflect those of Bitcoinist.net

The post The Economics of Stablecoins appeared first on Bitcoinist.net.

The Economics of Stablecoins

Stablecoins are a new idea that is being advanced by some people in the cryptocurrency community. A stablecoin is a digital currency with a flexible supply. The idea behind such a coin is simple: we create a cryptocurrency that uses some kind of metric to track demand for the coin, which will trigger an automatic increase or decrease in the coin’s supply. This is supposed to keep the purchasing power of the currency stable — hence the term “stablecoin.”

Also Read: Thoughts on Bitcoin Blocksize Economics

The Economic Reasoning Behind Stablecoins

HayekThe motivation behind the idea of a stablecoin is the belief that low purchasing power volatility will be the main driver behind mainstream demand for a cryptocurrency. This idea is not exclusive to cryptocurrency, though. F.A. Hayek theorized that the most successful, privately issued money in an economy of competing paper currencies would be the one with the most stable value, the one that maintains the most stable price ratios with a basket of goods.

Unfortunately, Hayek’s vision of competing currencies could never materialize in the real world, since it relied on governments abolishing their own monetary monopolies. However, the advent of cryptocurrency has given Hayek’s vision a better chance of being realized. Now, competing currencies can emerge from the bottom up, without the permission of governments.

The problem, though, is that it is not practically possible to keep the purchasing power of a currency stable. Doing so relies on precise calculations of demand for the currency, which is a tall order even for the most advanced computer. Demand can change instantly, in fractions of a second, and it can change an infinite number of times in one day. No economic variables are constant enough to be measured with the exactness required for maintaining something as fickle as a currency’s value.

The economic consequences of tampering with the supply of a currency are severe. Stabilization requires that money be created out of thin air to match the rise in demand, so that prices stay the same. Those who follow the Austrian school of economics know that this kind of money creation is the root of the business cycle. Therefore, even if it were possible to achieve purchasing power stability, it would be at the expense of overall economic stability.

Thus, the difficulties involved in stabilization schemes will ultimately render stablecoins unsuccessful.

The Economic Difficulties of Stablecoins

money-printingTo see an example of a stablecoin concept that employs the flawed economic goal of stabilization, let’s look at the seigniorage shares scheme devised by Robert Sams. This idea is one of the more sophisticated stablecoin schemes in that it actually has a way to decrease the supply of a coin, unlike other coins that can only realistically control the rate of increase.

The seigniorage shares scheme regulates a coin’s supply distribution by using two tokens, coins and shares. Coins are the actual currency used for transactions, and shares are kind of like bonds. If the coin supply needs to increase, then an auction is initiated where bidders have to trade their shares for new coins. If the coin supply needs to decrease, the auction happens in reverse — bidders trade their coins for shares, and those coins are destroyed. Therefore, the shares represent ownership over the future growth in coin supply, which is what makes them loosely similar to bonds.

Applying our economic knowledge about purchasing power stabilization, we will see that this scheme has a fundamental flaw.

First, in order to know how much the cryptocurrency supply needs to be increased or decreased, we have to have an accurate measurement of demand. This means that we have to use some kind of price index to find an aggregate measurement of purchasing power, thereby informing us of the currency’s demand. This is an issue because the nature of price indices obscures the important factors that must be considered when trying to stabilize demand.

When we construct a price index to give us an aggregate price level in order to gauge purchasing power, we gain macro data at the expense of micro reality. In daily life, there is no single purchasing power of a currency; there are as many purchasing powers as there are people and goods in the market. Price aggregates gloss over this very practical fact. An index can rise, even if many individual prices fall — and vice versa. Thus, a price index can show that some abstracted, aggregate purchasing power increased or fell, while individual experiences contradict the index.
How does this flaw apply to a stablecoin scheme that requires an aggregate measure of purchasing power? A flexible supply may keep the index constant, but alter individual prices to a great degree. Falling individual prices will be returned to normal by an increased supply. However, prices that have simultaneously remained constant will end up increasing. The inverse is true as well; rising prices will be brought back to normal by a monetary contraction, but prices that have not changed will fall. Looking at the aggregate, though, it will appear as if the abstracted price level is kept totally constant. If a stablecoin scheme uses a price index, then, it will be keeping an arguably useless aggregate constant while individuals will continue experiencing fluctuations in their individual purchasing powers. This will of course indicate that the scheme has failed to truly keep the currency’s value stable.

yellen_janet_040512_8x10The Federal Reserve has ran into this problem in using various readings of the CPI and other CPI-based indices to measure the country’s aggregate price level. Because of these difficulties, the Fed has resorted to targeting low rates of yearly inflation instead of stability. The seigniorage share system will undoubtedly meet the same fate. Upon failing to keep purchasing power truly stable, the system’s protocol will have to be patched to take on the task of inflation targeting.

The second aspect of the seigniorage share system’s fundamental difficulty is much more straightforward, and does not need much elucidation. By electing to make the supply of a currency flexible, we must accept the consequential business cycles that will follow. Any time the money supply arbitrarily expands, a boom and bust cycle will occur — albeit of varying lengths and intensities. When considering implementing a scheme such as seigniorage shares, then, we have to ask ourselves: do we value “stable” purchasing power more, or would we rather have an economy without destructive business cycles?

The Imperfections in a Fixed Supply Monetary System

Gold coinsOf course, having a currency with a rigid supply comes with flaws of its own. In theoretical economic models of purchasing power, we assume that nominal wages and prices freely adjust to changes in a currency’s value. From a theoretical perspective, then, a fixed supply system seems perfect; if purchasing power goes up, nominal wages and prices go down, and vice versa. However, in the real world, wages and prices tend to be “sticky,” meaning that it takes time for them to adjust to changes in purchasing power. For wages, rigidity is due to unions and governments — among other things — supporting practices that keep nominal wages constant. Prices are generally sticky due to information lags and the costs involved in changing listed prices. So if purchasing power rises or falls, and nominal wages and prices cannot immediately adjust, there may be a shortage or surplus of labor and goods.

The solutions to these problems are not nearly as complicated as the ones involved in a flexible supply monetary system. On one hand, workers will likely decide at some point that a fluctuating nominal wage is preferable to long stints of unemployment. On the other hand, advances in technology will shorten information lags on the market and will make it cheaper to re-list prices.

Conclusion

It seems that, in my opinion, we have to choose between two systems. We can choose a sound money system with a few fairly solvable issues, or we can have a system that gives us business cycles and pseudo purchasing power stability. I think that, if people can wade through the rhetoric, the former will tend to be preferable.

Do you think digital currencies with flexible supplies can work? Let us know in the comments below!

This author’s views do not necessarily reflect those of Bitcoinist.net

The post The Economics of Stablecoins appeared first on Bitcoinist.net.