Bootstrapping trust: What stablecoins say about the value of money
The goal of a stablecoin is to reverse engineer monetary value. It's worth looking at how they do it.
A currency is only as good as its trustworthiness, so one of the key challenges in cryptocurrencies is "bootstrapping" that trust and instilling confidence in its value out of nothing. In some respects, this was bitcoin's biggest challenge. It took years – and quite a bit of market manipulation – but bitcoin eventually managed to form a self-sustaining foundation of trust in its own value.
Now bitcoin is valued because it's valuable and valuable because it's valued. Its journey is just beginning though, and other cryptocurrencies also have to make the same journey. Which brings us to stablecoins.
A matter of trust
Utility tokens have a measurable value because they provide useful functions. They can be trusted to be valuable because they provide certain functions with a certain price tag. Even if all that speculation in the background is ruining our baseline, we can still say with certainty that they will provide a measurable function that will determine their correct dollar value. The trust is in their function.
Pure currency cryptocurrencies have a much harder time of it, and trying to objectively valuate them tends to lead to impossible questions like "how much is a Diet Bitcoin worth and why?"
The best place to look for answers, then, might be stablecoins. This is because they start by setting the desired value and then reverse engineering the trust needed to drive that value.
And the best place to look for this might be the recently published Sammantics stablecoin surveys, carried out by George Samman as part of a wider PwC stablecoin report. In the survey, a wide range of stablecoin developers, working with all different kinds of stablecoins, explicitly describe how they bake trust into their systems.
Among many other questions, the survey asks stablecoin teams to answer the following:
- What does the market need to be confident in the stability of your token?
- How are you bootstrapping to that level of confidence?
Framed this way, you can get some insight in the form of very concrete and specific answers to the very fuzzy question of what drives trust in the value of money.
What gives money value?
Many people regard regulatory compliance, and the adherence to a central authority that entails, as antithetical to the nature of cryptocurrency. However, the largest stablecoins by market cap, and many of the smaller ones, explicitly mentioned regulatory compliance as one of the factors that's bootstrapping trust in their system.
Circle's USDC stablecoin, for example, puts compliance and licensing front and CENTRE.
"CENTRE members, such as Circle, who implement the fiat stablecoin framework and become token issuers are governed across several vectors: that they are properly licensed to meet applicable financial service regulatory requirements (e.g. hold money transmission licenses in the US) in relation to stablecoins; that they are in compliance with applicable laws and regulations; and that they can provide regular and transparent attestations of balances held in US Dollar reserves," Circle explained.
Although a lot of people will hold up blockchain verification as an alternative to trust in authorities, regulatory compliance adds a solid element of trust to any currency and carries a value in itself.
Regulatory compliance is an efficient and relatively straightforward way of bolstering trust in a cryptocurrency.
Transparency in backing
All survey respondents strongly emphasised their transparency. Collateralised stablecoins spoke of the cash or gold or other backing assets in a vault and stressed that they would be undergoing audits. The crypto-backed stablecoins took pains to make their collateral as visible as possible, and the more exotic algorithmic stablecoins pointed at their transparent economic models and issuance schemes.
But how do you translate this transparency to other currencies and assets?
In the case of US dollars, the transparent backing is the country itself. Police cars on the roads, the dignified design of bank notes, armed security guards accompanying reinforced cash trucks and so on, all work to convey the currency's "backing." Even as you go about your day, you can't escape these cues.
The trust in the disproportionate value of gold is also baked in by similar self-sustaining cues. Between pirate treasure in cartoons, gold star stickers, gold medals for winners and everything else, we learn that gold is valuable before we can walk.
Do you remember how old you were when you first learned that gold was valuable, or is it just one of those things you've always known? Weird, right?
As such, the equivalent of transparent backing in other currencies might be these kinds of ever-present "value cues." But naturally, it's much trickier for digital currencies.
Trust in bitcoin's value was baked in during its well-publicised ascent in late 2017, and then quite abruptly yanked away in the equally-publicised fall of 2018. Today, the general public consensus is that bitcoin was a fad that's now ended. It's an incredible shift in awareness and sentiment for an asset that's currently sitting at US$4,000 per unit – quadruple the value of two years ago.
The reason for the fickleness may be a lack of these "value cues" in plain sight. Signs saying "cryptocurrency accepted here," tasteless bitcoin-themed novelty license plates on expensive cars and similar can all contribute to the awareness and perception of bitcoin's value, while having cryptocurrency hardware wallets in stores helps create the perception of crypto as a treasure to be protected.
One of the biggest developments in this space might be that the Samsung Galaxy S10 will come with a cryptocurrency hardware wallet. It's helped by the growing acceptance of the value of digital assets, the growing public perception of data being valuable, and the spreading realisation that personal information is something worth protecting.
It's also helped along by the fact that millennials are the first generation to really grow up in a digital world, where not being able to touch something is no obstacle to valuing it.
It's taking time but the perception of value is being baked into cryptocurrency in a much deeper and more significant way than the bubble of 2017 could, as the analog world keeps giving way to a digital one.
Cryptocurrency presents new ways of thinking about money, and stablecoins offer a unique window into some of them.
Disclosure: At the time of writing, the author holds ETH.
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