Why Stablecoins Doesn’t Work

By Daniel Mark Harrison on ALTCOIN MAGAZINE

Fiat isn’t so stable when you take away value

It’s quite an irony; what is happening to USDT, the Tether company’s synthetic peg of the US dollar, is what should have happened to, well, the US dollar some time ago: it’s fraying at the edges as a result of a run on the printing press. That cryptocurrencies were supposed to be a solution to the ailments of central banking printers is no small irony. Still, Blockchain is a sort of fish-bowl of the real economy, being much smaller and more contained. As a result of this, things tend to happen much faster than they do in the normal world.

Tether’s USDT token has unhooked itself from its long-held dollar peg in the last couple of days, so that now at the time of writing it’s trading at 0.98 USD/USDT, sinking as low as 0.92 USD/USDT at one point on Monday. By performing a quick analysis of Tether and CoinMarketCap’s index the past year, some revealing facts emerge.

While the market cap of the CoinMarketCap (CMC) index, a digital currency proxy index, rose 304% in Q118 and declined by an average of 28% per quarter since the market cap of Tether rose 218% in Q118 and increased by an average of 28% per quarter since the same period. This should stand out as somewhat eye-opening — after all, any clear counter-trend suggests correlation most of the time.

So we look at the USDT share of the whole market and see that it increased from 0.29% in Oct 1 2017 to 1.3% today. That’s a 333% increase, which is more or less the sort of increase as CMC had during Q417. Meanwhile, USDT volumes plummeted by 16% this month while remaining neutral in the market. This year, CMC has shed around $10bn of average daily volume and approximately $300 billion of market cap since Jan. Meanwhile, USDT has gained $1.5bn in average daily volume and approximately the same in daily market cap.

To suggest there is not a correlation at this point is almost absurd. The implication is that the rising volumes in sell-side crypto transactions are precisely what are causing USDT to remain “stable”. That means the folks at Tether have been mass-selling cryptos all year long just to justify the fiat peg their White Paper promises. Thus, given the relative decline in ETH throughout the year, it is not illogical to conclude that USDT rising volumes are represented in huge sell-side transactions of ETH which then keeps USDT “stable”. Most likely, ETH is an easier target for Tether than BTC, possessing more units to constantly buy and sell (possibly too XRP is another target; hence the massive volatility in that token all year).

How did we get here then? Was it that the Tether boys got greedy and fancied a snack on the crypto exchanges outside the bounds of their dollar peg proposal? That’s certainly a possibility, as Tether is effectively free credit for its issuers. If you think about it, every time a USDT is newly minted, that unit represents an interest-free loan to Tether, which is free to do whatever it wants with the return it gets until such a time as the USDT is cashed back in. More than likely, Tether figured, as many central bankers have before them, that selling USDT at a 20% discount to market to exchanges (who then sell them on marked up at the full dollar value) was a smart trade. In fact, doing such most likely helped keep the Tether at that magical dollar peg.

But that wasn’t the primary cause of Tether’s woes. The principle problem has to do with the fact that currencies are inherently unstable. We can see that in clear daylight from the way that cryptocurrencies trade. Cryptocurrencies, remember, are merely a smaller economic climactic version of fiat currencies, for the most part. The other thing about currencies which this whole sorry state of affairs teaches us is that currencies are naturally inclined to hyper-inflate. The only reason that they don’t is that central banks keep printing new ones by the cartload. The evidence for this is born out by the fact that the market tanked the minute Tether was bought up in any sort of quantity back in January. That means massive selling pressure had to be applied to the entire crypto universe just to keep Tether from hyperinflating along with everything else, or else the hyperinflation of other cryptos would start to make Tether boom, and Tether’s value proposition is that it’s the one thing that is “stable” (in US dollar terms, anyway).

So, why, you ask, didn’t Tether become its own central bank and start printing as many USDT as it wants, and then the price of USDT will remain stable at a dollar? Well, that is exactly what they did, and they sold them for a mark-down to the exchanges. The issue with this strategy is you need massive amounts of production for it to work. In the actual US economy, there is enough production to soak up the excess flotsam of greenbacks swirling around the global economic kitchen sink.

The problem is that Blockchain isn’t innovative at all, and produces next to nothing right now. It’s a hell-hole for imaginative technology, largely flooded with copycat innovators and undisruptive disruption. There is negative production in other words. At the root of production lies innovation. The mere acceptance of such a huge negative externality (there is a nice definition of that here if you are unsure of what that is) inherent in falling crypto prices all year long due to Tether sales without there being much of a fight to challenge the selling is in fact evidence of this.

Tether, the most unimaginative possible crypto ever, holds a massive sway over the entire market. In this sense, it is as great an example of the lack of real innovation in crypto as anything else. Now the company is starting to feel the pinch of printing without production of value to support the paint work.

Brock Pierce, the child star who founded Tether (and other projects low on innovative strategy but nevertheless, top of the leaderboard in market cap measurements, such as EOS) may now sympathise more with the dictators of totalitarian countries than he ever expected to, for his present woes are the same and for the same exact reasons. He wanted to own a bigger piece of the pie than anyone else, whatever the cost.

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The purpose of ALTCOIN MAGAZINE is to educate the world on crypto and to bring it to the hands and the minds of the masses. This article was written and composed by Daniel Mark Harrison on ALTCOIN MAGAZINE.