The Stablecoin Temptation
By Garett Jones
Bond ratings, movie ratings, Consumer Reports car ratings, CAMELS bank safety ratings: one sign of a mature market is when lots of individuals and organizations take the time to separate the wheat from the chaff, the Yes from the Maybe from the Definitely Not. The world of stablecoins needs just that, especially after the predictable Luna/Terra stablecoin disaster. One message I bring to Bluechip is that the lessons of economic history and economic theory have a lot to tell us about which stablecoins are likely to work and which are likely to fail. A stablecoin that works needs a big pile of wealth to back the coin so that people can really believe that a coin that says it's worth a dollar really will be worth a dollar. But big piles of wealth are tempting—so powerful checks need to be in place to reduce the risk that bad actors come in to steal that pile of wealth.
That’s the heart of the stablecoin problem: Piles of wealth invite predators of wealth.
Nations that run their own currencies face this problem too: to keep their national currency stable, a country’s government needs some mix of a big pile of wealth (hard-currency reserves) or an excellent credit rating (so they can borrow some hard-currency reserves if there’s a run on the currency). And of course they need government employees who don’t raid or “lose” those reserves.
One strength that national currencies have that cryptocurrencies don’t (yet) have: the power to tax citizens enough to build up that pile of wealth or to improve the nation’s credit rating. Bluechip is on the lookout for whether stablecoin projects have deep pockets or empty pockets, because deep pockets are a strong sign that in a financial panic, a currency can, potentially, hold its value.