Game Theory Group

The Blockchain Brief

Un-Stable Coins

Good afternoon crypto world. For those of you still waiting in line to get your Consensus tickets, maybe this post will help you kill some time. 

Bitcoin prices are still volatile: I recently gave a blockchain 101 presentation to a private market research company on the east coast. I decided to include a slide that described the use-cases of bitcoin at a high level: storing value, transacting, and investing. Sure, many can (and do) use bitcoin for some mix of the three. But it's difficult to debate in favor of these cases against educated opponents, even if you're Joseph Lubin

For example, few would buy a pizza and pay the average transaction fee of bitcoin over the last 3 months. And if you forget the pizza and decide to hold your life-savings in bitcoin, you're riding a mega daily volatility train (~5%) compared to gold (1.2%) or successful currencies (negligible). Finally, I would imagine that the 'investment' thesis would hold up simply based on performance, but try explaining that to first-time crypto buyers of late December (2018).

But there's a lot to love about the basic tenets of cryptocurrency, so how does one play the game without the heavy action?

Enter, stablecoins!

What is a stablecoin? When it's working, a stablecoin provides all of the benefits of cryptocurrency without the volatility. Thus, a stablecoin, ostensibly, trades within a very narrow band of value. Read on to see how this can be achieved.

Dollar backed: I first wrote about stablecoins when I covered the demon-coin Tether in January. Against my best efforts (one blog post), the Tether stablecoin continues to thrive, claiming to hold $2,200,000,000 in some bank, a network of banks, or perhaps a moon-base. This $2.2B is then used to back one unit of Tether dollar-for-dollar. A Tether costs a dollar. A dollar is worth a dollar. Voila! 

The truth is of course rather different. While the price of Tether has indeed remained close to a $1, the phantom assets backing this coin may not even exist. Even if they are indeed real, then Tether has found a way to build a completely centralized system for stablecoins -- something that is rife with opportunity for fraud.

Thankfully, other smart people have jumped into the fray with their own solutions. 

Crypto backed: BitShares, for example, uses cryptoassets to back their stablecoin. Because we can see the crypto in a trustless smart contract, we know it really exists to back the coin). The problem with this approach is that cryptoassets are volatile, and even a mixed bag of big name coins can collapse without a moments notice. MakerDAI, I believe, is backing every stablecoin with a multiple of cryptoassets tied up in a smart contract. Approximately 2x the value of assets held back for every stablecoin. Sounds a little safer.

Not really backed: And now we have Basis, a stablecoin that recently raised $133M from the top venture capitalists in the world to create the "worlds first algorithmic central bank." The theory behind Basis is incredibly simple: forget backing your stablecoin with crypto or with dollars, and just control the supply and demand. This works by centrally releasing more stablecoins when the price is going up and centrally buying back existing stablecoins when the price is going down.

There's more to this story, as Basis is using a modified version of the Seigniorage System to derive profit from the creation of new stablecoin issues. The very short, simple version is that if demand for Basis is hot, hot, hot (let's say $1.05) they can start releasing coins and making a profit until the value is back to a $1. And if the demand for Basis is lacking, they can sell the promise of sharing in this future profit (the profit made when Basis is hot, hot, hot again) and use the money made selling the promise to fund the purchase of Basis coin until it's back to $1.

Of course, if Basis fails to become hot, hot, hot for a prolonged period of time, the promise of future profits might become a hard sell indeed. That said, I am bullish on the trajectory the Basis team is taking and am looking forward to seeing this thing hit the market.

Go forth and crypto.


Boris Revsin