A professor of economics at UC Berkeley, Prof. Barry Eichengreen, has reportedly stated in an ep-ed published in The Guardian that though he has some optimism in stablecoins such as tether (USDT) and its possibilities of stability in value as well as being attractive as units of accounts, although they are defective. This publication came after the Winklevoss duos’ project, Gemini dollar (GUSD) launch.
Stablecoins; Not a Cure for Crypto Instability
Left to some investors, a perfect investment would mean; holding a stablecoin owing to its capacity to connect the cryptocurrencies with the fiat currencies like United States Dollars but some investors, on the other hand, it is considered absurd to keep a stablecoin as an investment. To latter kind of investors, they share the opinion that the stablecoin will unlikely trade at a premium for the fiat currency it tracks even though it might hold its value over a period of time.
In the Prof. Barry Eichengreen publication, he clearly stated various factors cum elements responsible for Stablecoins’ inability to solve the price instability in the Bitcoin market. He further explained the multiple challenges in the various types of stablecoins as well as those that are fully collateralized, partly collateralized, and uncollateralized.
Fully and Partly Collateralized Stablecoins
According to the economics professor, one of the most crucial challenges of the fully collateralized stablecoins is the high cost due to the fact that operators’ requirement of equal or more reserves than the value of the coins in circulation which is often a price too high for organizations to pay. On these grounds, Eichengreen expressed his uncertainty as to the scalability of the model and the ambiance of uncertainty hovering around the regulation of this sector.
The perfect example of a fully collateralized stablecoin is Tether (the world’s largest stablecoin) standing at ration 1:1 to the United States Dollar, however, there are speculations going around that tether’s parent company does not hold reserve equivalent to the value in circulation.
On the other hand, partly collateralized Stablecoins has an arrangement where the platform holds 50% of the total value of tokens in circulation, the professor expressed that FUD might spell doom for the coins. The frequent argument is usually that, when this doom occurs, the platform decides to purchase the tokens back with the little reserve kept in order to prevent a nose-diving of price, he countered this by stating that the fact that the reserve is limited implies that investors will scramble to leave the platform and might consequently “lead to the collapse of the peg.”
Uncollateralized Variant of Stablecoins
According to the Eichengreen, the Uncollateralized Stables such as Basis are the worst of all forms of Stable coins based on the grounds that the platform does not reserve dollar to back up the currencies thereby staying at the mercy of the forces of demand and supply to determine and keep the value of the stablecoins.
In uncollateralized Stablecoins, the platform issues the tokens and also the crypto-bond, crypto-shares. Bonds is being used for facilitating token supplies. The platform encourages users to spend their token in return for interest to the bondholders.
The professor expressed displeasure with the arrangement of the platform, especially the fact that issuers can only service the bond when the platform grows which isn’t certain. The platform might then resort to the issuance of more bond to the ecosystem, and this could lead to a nose-dive in the price of the bonds, repeating the same process of issuing more bonds will consequently reduce the chances of the platform to meet interest obligations owed to users.
The Gemini Exchange GUSD Launch
This week practically started with the announcement made by the Gemini founders Cameron and Tyler Winklevoss that they will be launching a new initiative named; Gemini dollar, a stablecoin working towards a reputation in “trusted and regulated digital representation” of the United States Dollar. The Gemini dollar being a tether regulator though with a higher regulatory framework than other variants of stablecoins the existing before it.
There have been times where the eight-largest cryptocurrency in the world, Tether was criticized by users due to its lack of transparency and a close affiliation with the crypto exchange Bitfinex. Gemini dollar could be capitalizing on these criticisms thereby improving on its transparency policies amongst other regulatory precautions, with this it stands a chance to compete with the eight-largest cryptocurrency in the world or even displace it.