Neutral

@neutralproject

The Need for Many Stablecoins and a Metastable Basket

February 14th 2019

There’s no doubt that the crypto-verse, and internet as a whole, has been buzzing about stablecoins and their role in the future of digital currency. In fact, since 2014, over $350mm in funding has gone into backing north of 60 stablecoin-specific projects across the world.

Source: blockchain research

Recently, an influx of projects pegged to the U.S. Dollar have been popping up all over and it’s understandably become hard to differentiate them from each other. After all, many have similar value propositions. With all of this in mind, it’s perfectly reasonable for someone to wonder what the need for yet another stablecoin project is. To get the answer, we can draw parallels from use cases in fiat currencies.

As a refresher, we’ve addressed properties and qualities of an effective stablecoin here (such as a medium of exchange and unit of account). This holds true in the fiat sense as well. The derivation of currency’s usefulness comes more from its perceived value rather than its intrinsicality. For a currency to be effective for transactions, we need to understand what the desirable traits are; in this case, it can be described through its utility, demand, and stability.

When we think of utility, it’s important to evaluate how well a currency can be accepted by a community. Can it be used across many merchants?; Payment channels?; Federated reserves?; Banking systems? In the context of stablecoins, we can consider these tokens as a means to enable access to other crypto assets. We can also extend its utility by understanding what exchanges it is listed on, and which merchants accept this as appropriate tender.

This ties in very well with the second concept of demand. If there is strong demand to accept a currency as a method of transactions because of its expansive utilities, then it’s likely the demand for such a currency can only grow based on this attractiveness. This is why we can expect different interest rates across assets in the debt markets — the demand estimates the measure of utility which can be expressed. Liquidity, price elasticity, monetary policies, and debt activity are appropriate measures of popularity for a specific currency. Even among similarly priced assets, the desire to have one versus another can be distinctly different.

The last piece to consider is stability. We can find effective illustrations of encouraging stability when considering one of the most traditional examples: when a foreign country pegs their currency to another reference. When countries conduct activities within their economy in differently denominated currencies, they can safeguard their economic activities and prevent large imbalances in their spending, investment, and trade from foreign exchange risk. When deciding how to prop the value of their own capital, the first choice is the reference the U.S. Dollar, due to its large representation and trusted worth in the world economy. Because of how fragmented the crypto markets are, we want a means of reference that is stable and accepted on a widespread basis. Stablecoins can prove their efficacy and help other crypto-focused businesses grow or adopt practices using blockchain. Otherwise businesses focused heavily on crypto can be exposed to headwinds beyond their core control. If a stablecoin which loses stability loses its inherent purchasing power, it incurs a loss in its perceived value for transactions. This is when the redeemability comes into play — to ensure the value preservation of a stablecoin can exist and be traded into another asset of equivalent worth in a timely manner. It’s a core reason why many stablecoin projects have been accumulating their reserves and choosing their reference peg to be the U.S. Dollar. By doing so, a stablecoin project can propagate an emphasis of stability that has expansive influence extending beyond country borders.

All these principles are all interrelated, which is why we think it is important for a stablecoin to exemplify all these traits on top of properties we’ve mentioned in our previous articles. More stability can draw in more demand, and with that can procure more utility. While we think Bitcoin is a good store of value, we don’t think it can be a standard for every means of transactions in the form of a currency. An inherently deflationary asset cannot maintain stability in tandem with demand, even if there is sustained perceived value and exceptional utility. This is why we see stablecoins as important — to serve as a bridge into crypto from ideas seen in the traditional world. By design, stablecoins can complement inflationary and deflationary activity unlike other cryptocurrencies, and exist to ensure perceived value preservation to concepts that people have historically had an easy way to interpret. Presently stablecoins represent more than 25% of daily volume through crypto markets while only representing 2% of the total market capitalization, while most other cryptocurrency activity has only dampened. As a matter of fact, stablecoins are becoming larger candidates to facilitate transactions in crypto, experiencing especially explosive growth in 2018 and the start of 2019.

Growing Adoption of Stablecoins by Market Capitalization and Trading Activity

Source: stablecoin index and coinmarketcap

Stablecoins can even be used as a quicker and more inexpensive form of cross-border payments than fiat mediums, making them one of the best methods for remittance — an industry that, was standardized by the U.S. dollar, but still has its shortcomings.

Source; The high fees reflect the cost of transactions from regulations, taxes, and operations. Stablecoins have the ability to transfer funds with less friction, time, and opacity

In essence, stablecoins are one of the most tangible methods that someone can understand and participate within the global community, impacting both fiat- and crypto-denominated use cases. They are a core driver in understanding how blockchain can be applied to different use cases to address overarching problems especially in transactional businesses.

As long as any stablecoin exhibits these aforementioned properties, we view this as complementary to building upon the crypto economy, much like how many different currencies exist to fuel the world economy. More than that, we think a universal stablecoin standard would not serve all use cases, similar to how a universal fiat currency would not work given the nature of different global economies. Because of this parallel, the requirement for many stablecoins to promote a whole ecosystem becomes clearer. Yet we’re agnostic to the competition of individual projects, which is why we enable interchangeability between supported stablecoins at the core of driving liquidity within our product constitution. This is how we’ve been building our token — as a metastable basket.

The need for such a concept comes from the lack of infrastructure and approach to a nascent industry. Particularly, the roadblocks of fragmented liquidity and difficult accessibility can be addressed through a reserve, a service, and a tradable asset rolled into an open-ended metastable solution. This idea has been floated around and experimented, but in practice is extremely complicated to construct properly if people’s needs and wants are not well understood. Today, it’s very apparent that an effective metastable design is needed for such a core part of the crypto markets to mature and flourish.

And that’s exactly why we are building the Neutral Dollar. Our goal is to create a metastable basket which enables users to lessen any reservations they have with any single stablecoin, while allowing them to take advantage of any constituent through our enabled stablecoin swap. By satisfying the need for a metastable design, we can offer better stability as a stablecoin. We hope to improve utility by expanding our services and partnerships in order to increase overall demand. A Neutral Dollar holder not only inherits all of the benefits of the basket itself, but can also take advantage of any underlying token to address whatever stablecoin use case is needed. The open-ended design allows for an unprecedented price discovery mechanism in crypto, providing transparency to better understand the market-driven strengths and weaknesses of similarly valued components that result from collective retail and institutional activities.

By positioning the Neutral Dollar this way, we have merits and applications that no individual stablecoin project alone can exhibit, exemplifying our desire to promote crypto on the whole. We’re excited to bring you a solution like the one we’re designing and hope everyone can see why the space necessitates it.

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