Ever since the colossal spike of most major cryptocurrencies in December of 2017, blockchain technology has been dragged out of the obscure and thrown into the public spotlight.
With Bitcoin achieving mainstream public awareness, many new consumers and would-be users started to question whether or not there would be long term stability or security in funneling their hard earned capital or savings into such a product.
Concerns seemed vaguely reminiscent of when the US dollar was taken off the gold standard and when most currencies became floating.
You could argue that these concerns were well founded, as over the following 4 months, the volatility and following price drops, gave validity to people’s fears about whether cryptocurrencies had any real and intrinsic value to them.
Stablecoins were conceived, created and introduced to combat one single problem.
As the name suggests, they are designed to achieve stable prices with extremely little to no volatility. Without the worry of fluctuating prices, consumers and vendors can freely transact with stablecoins without having to worry about whether they are selling themselves short of future growth, and with no need to fret about whether their holdings will dive in value.
Stablecoins are typically designed to have similar or the same fluctuations as a fiat currency. Most stablecoins are effectively pegged to the US dollar. That is to say that if a coin is worth $1USD today, it should be worth the same in a month from now, regardless to how the US dollar has moved in relation to other currencies.
A Complicated Process
Maker Dai is a good example that comes to mind when thinking of stablecoins.
Maker works through a reasonably complicated process, that when simplified goes something along the lines of the following:
If a consumer owns $150 worth of Ether, they can exchange that in exchange for $100 worth of freshly created Maker Dai. The additional $50 serves as security against deflation in the value of Ether. While Dai is held, the number of tokens may be automatically increased or reduced by an Ethereum smart contract so that the value of each token stays at $150USD. If the price of Ether deflates beyond the $50 worth of security, the Dai is destroyed and the original Ether is returned via smart contract to the owner.
It’s quite a canny system that allows for stability in prices of a particular coin. It’s very complicated though, so the question arises about whether such a system is worth it.
Stablecoins: A Fundamentally Flawed System
Stablecoins are without a doubt, an amazing feat of ingenuity and a triumph of engineering.
With that said however, I can see 4 primary reasons why they are a flawed concept and these 4 are hard to overlook.
A stablecoin by definition has to be fixed relative to something. In almost all cases this is the US dollar or other major fiat currencies.
As described above, this is very convenient and worthwhile in terms of being able to make purchases or to sell items in exchange for these coins. However, this defeats the “whole point” of cryptocurrencies.
Because these types of coins and tokens rely on a fiat currency, it takes away from the whole aim of cryptocurrencies trying to achieve decentralization and to not be reliant on government issued promissory.
Given the option to purchase something in US dollars that the buyer already possesses or having to guy through the arduous task of buying Ether and creating Maker Dai or something comparable, it would seem to be better to just use fiat money.
Economically vulnerable. As we saw in 2008 and following years, the American local economy dragged down its own dollar relative to other currencies. The US dollar is now worth approximately 135 Australian cents, but there were times during the GFC when it was only worth around 60 cents. Less than half its previous value.
If similar things were to happen again, any coin or token linked to the value of the dollar would take an equal dive. In the case of Maker Dai, this would exceed the 50% security value and the whole project would be dissolved with the coins reverting back to Ether. This is not a situation you want to be in if you thought you were holding something of fixed value.
As we know from basic macroeconomic theory, in times like these, the value of gold would likely go up.
So if you ask yourself whether you’d prefer to have a depreciating coin with the risk of being dissolved or a holding of gold that is increasing in value, it’s a very easy decision to make.
Floating currencies such as the US dollar have no intrinsic value outside of the fact that the government tells us that its value will always be honored.
What this means is that the dollar is no longer relative to gold stores held by the government, but its value comes from the fact that it’s in circulation and everybody uses it.
Where most cryptocurrencies come into question, including the majority of stablecoins, is the fact that there is no physical or tangible asset linked to its value.
Bitcoin has value due to its wide circulation and use. If its value were to fall too low, people would simply stop using it and revert to the government guaranteed dollar. WHile this is unlikely in theory, it is certainly possible for less widely circulated tokens and stablecoins.
Anyone who has been proactive enough to look into cryptocurrencies and blockchain technology the level where they’ve come across this article, probably understands the risk in having their life’s worth tied up in something like the dollar.
Normal currencies such as the US dollar which can simply be written into existence by the government, will always suffer deflation. Sometimes at an alarming rate such as what we have seen in the earlier half of this last decade.
For this reason alone, it is very unwise to hold the majority of your net worth. If you have enough money to be considered middle class, 20 years of inflation may be enough to put you into a position of poverty. This is not a position you want to be in after spending your whole life working towards a better future.
Any stablecoin linked to the US dollar or any comparable currency, must by definition also be subject to the exact same level of depreciating value.
It’s well known that having your money in a term deposit, high interest savings account is often not enough to even keep up with inflation. Imagine how bad this would be if you weren’t even getting interest on your money.
This is all separate to whether that coin continues to last.
How Jinbi Fixes the Problem
By now, you’ve probably realised the inherent risks associated with stablecoins. While they certainly have their uses and shouldn’t be totally disregarded without further research, their long term benefit seems to limited.
With Jinbi essentially just being a blockchain based proof of ownership for gold, its value is intrinsically linked to the value of gold.
Now that we’re aware of gold’s potential as one of the most recession-proof, deflation-proof and long enduring assets, it’s easy to see the potential it has compared to any stablecoin.
Jinbi does even better. Due to it being more than simply just the ownership of gold but rather involvement in the whole production and supply chain aspects, it also provides the ability to collect dividends. It’s the best of both worlds.
Jinbi Fixes Short Term and Long Term Aspects of Crypto Ownership
As we know, conventional cryptocurrencies have flaws when it comes to everyday use as a currency. You would have been mad to spend your Bitcoin on consumer items in December of 2017 considering the staggering levels of growth that it was achieving. The story of the $130 Million pizza is a good reminder of that lesson.
During times of volatility, cryptocurrencies lose their use for transacting and become purely a speculative holding.
Stablecoins were designed to fix this, but fall short due to the reasons that we discussed above.
Jinbi seems to have struck the perfect compromise and balance between these ideas. It fixes the long term downsides to owning stablecoins while it at the same time, fixes the lack of short term application for volatile cryptocurrencies.
Is Jinbi the way of the future? Only time will tell.
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