Understanding Stable Coins and Stable Tokens:A Key to Bitcoin's Wealth Capture
Operational Concepts: IOU and Algorithmic Stables
Stable coins are tokens that aim to replicate the value of underlying assets. These assets can range from fiat currencies like the euro, real, dollar, or peso, to commodities like oil, gold, silver, or corn, and even indices, stocks, or any other assets.
Stable Coins can be Collateralized by Either:
(a) deposits of the original asset or equivalent redeemable assets in the case of bank-backed or IOU stables, or (b) they can be created as synthetic versions of the original assets, simulating their financial variations, and backed by sufficient liquid assets to enable margin calls (liquidation) if the collateral value approaches the issued value.In other words, the collateral and capacity of the system to settle shorts before negative equity is the foundation for creating algorithmic stable coins.
The latter system is more complex but can mitigate or eliminate legal risks and custody risks by enabling the use of smart contracts and regulatory arbitrage on the ultimate collateral, which is Bitcoin (BTC) in this context.
For instance, if we consider dollar-backed stable coins, in the case of bank-backed stables, they represent a promissory note or IOU, backed by the possibility of redeeming the tokens in bank dollars, such as USDT.
Another example is Tether Gold (XAUT), a stable token backed by the possibility of redeeming theoretically deposited and audited values.
The business model of bank-backed stables revolves around profiting from the capitalization of the assets that underpin them (since stables do not capitalize after issuance) and capitalizing on discounted token purchases when significant market variations occur.
The relative risk associated with this model stems from the fact that the token is a credit promise against assets held by third parties, thus multiplying the custody risks among the platform, issuer, intermediaries holding the issuer's deposits, and debtors of these values. Moreover, there is also the legal risk of activity prohibition, fines, and suspensions.
On the other hand, the business model of algorithmic stables, such as DAI from MakerDAO, operates differently.
Instead of capitalizing through the yield of assets held as collateral, these tokens are issued against overcollateralized deposits, effectively charging a loan fee without risk to the creator/minter of the tokens, who can destroy or "burn" them at any time.
A secondary source of revenue for these stable coins is the transaction fees associated with trading on the platform, voluntary or involuntary (in the case of liquidation).
By creating a non-bank lending market with no risk of default by the borrower (due to overcollateralization), it eliminates legal risks and the compounded custody risks present in the bank-backed model.
As evident, IOU stables financially support governments and the legacy financial system (regulated and taxed by governments) by capitalizing on deposits in public and regulated institutions. In contrast, algorithmic stables, especially when overcollateralized with Bitcoin, do not financially support the legacy system; rather, they dilute the replicated asset by increasing the supply of its equivalent.
Synthetics - A Gateway to Financial Freedom
Synthetic stable coins, backed by various assets, offer a viable solution to people living under financial totalitarianism and control. These coins open up new avenues for individuals to transact freely and engage in financial activities without the need for trust in traditional banking systems.
Overcoming Financial Totalitarianism: With Bitcoin held in self-custody, individuals can maintain balances immune to capital controls, expropriation, and dilution. However, stable coins extend these properties to assets correlated with Bitcoin, providing a safeguard against market volatility. For instance, the approximately two billion unbanked individuals worldwide can now receive, save, and send stable coins without the need for KYC/AML requirements.
Empowering Victims of Totalitarian Regimes: Citizens of countries like China, Venezuela, North Korea, Cuba, or Argentina, where international remittances are costly and restrictive, can use stable coins to facilitate cross-border transactions. The government of China has even identified most internet fraud to occur with USDT, rather than BTC.
Protecting Citizens in Failed States
Citizens in countries with failing economies, like Sri Lanka, Iran, or Lebanon, who lack a reliable local currency and access to USD, can turn to stable coins as a means of preserving their wealth. The premium between stable coin rates and official exchange rates measures the cost of capital controls imposed by each country.Enhancing Financial Markets and Wealth Creation
Unlocking New Trading Opportunities: Early experiments by visionaries like Mircea Popescu with his MPEx in 2012 demonstrated the possibility of trading synthetic traditional financial products, collateralized and guaranteed by a margin call system, in Bitcoin.
These experiments paved the way for trading futures on indices, commodities, stocks, and even bonds. Such markets enable participants to hedge and trade between BTC and other assets, fostering new businesses and creating wealth through increased voluntary transactions.
Conclusion
Stable coins and stable tokens offer exciting possibilities for transforming the financial landscape. Bank-backed stables (IOU) entail multiple trust risks, custody risks, and contribute to the financing of the legacy financial system.
In contrast, algorithmic stable coins, especially when overcollateralized with Bitcoin, present a potential superior alternative for individuals and governments seeking to transact in assets without relying on issuer trust, avoid financing antagonistic entities, and eliminate legal risks associated with sanctions.
By embracing algorithmic stables, users can potentially liberate themselves from financial totalitarianism, opening the door to new markets and wealth creation.
FAQs
1: How do algorithmic stable coins differ from bank-backed stable coins?
- Algorithmic stable coins are collateralized through overcollateralized deposits and smart contract systems, eliminating the need for issuer trust. On the other hand, bank-backed stable coins depend on trust in the issuing institution.
2: Can algorithmic stables offer financial freedom to individuals under oppressive regimes?
- Yes, algorithmic stable coins provide a means for individuals in oppressive regimes to transact freely and securely without relying on traditional banking systems.
3: What advantages do algorithmic stables offer over bank-backed stables for governments?
- Algorithmic stables do not financially support the legacy system and enable governments to transact in assets without the risk of funding antagonistic entities or facing legal sanctions.
4: How can stable coins enhance wealth creation?
- Stable coins can unlock new trading opportunities, allowing participants to hedge and trade between BTC and other assets, fostering wealth creation through increased voluntary transactions.
5: What role does Bitcoin play in the stability of algorithmic stable coins?
- Bitcoin's overcollateralization in algorithmic stable coins ensures the stability and value of the tokens, reducing the risks associated with custody and legal sanctions.