This is a three-part series which serves as a primer for understanding the fundamentals surrounding stablecoins and the MakerDAO Ecosystem. The first post in our series addresses the fundamental question of “Why do Stablecoins Matter? ”
To fully understand stablecoins, we must first address the promise of blockchain.
When Satoshi Nakamoto revealed the Bitcoin protocol, it unleashed a powerful vision for a decentralized future. This revealed a future with true peer-to-peer exchange through a distributed database using modern cryptography. Today, people from around the world celebrate the great potential that blockchain has to revolutionize the global economy. This has paved the way for us to build platforms for ultimate truth and trust, as well as facilitate collaboration and transactions.
So many of the modern services we use are run by centralized entities, powerful intermediaries we rely on to authenticate information and settle transactions. These intermediaries are often inefficient middlemen or even worse, corrupt entities. Blockchain changes all of that. Blockchain has the potential to disrupt many of the core functions that we rely, enabling truly secure, efficient and decentralized platforms and technologies, independent of any centralized party.
We have seen many new cryptocurrencies come out of this once novel concept. In fact, Bitcoin, Ethereum and altcoins have grown exponentially over the past few years. The combined market cap has expanded over to over $300 billion, with some predicting that the total market capitalization could hit $1 Trillion by the end of the year.
However, despite this rise in price and interest, cryptocurrencies are still primarily used only for speculation. The frequent spikes and crashes, as well as day-to-day fluctuations, have many concerned about actually using these currencies in everyday transactions, such as buying goods or services.
For there to be a modern financial system on the blockchain, there needs to be a stable medium of exchange, a truly stable currency.
Introducing, the stablecoin, a fundamentally new approach to the idea of digital money.
A stablecoin is a cryptocurrency that has low volatility against the world’s most important national currencies, potentially unlocking large benefits for a decentralized Internet.
In short, a stablecoin is a cryptocurrency with a fixed price. A reliable stablecoin enables a greater number of use cases than what we see today on the blockchain.
No longer do people have to worry about the daily fluctuations of their cryptocurrency when deciding to make a purchase. In the short-term, stability allows for people to transact in a practical way, and the long-term stability enables other important financial functions such as loans and credit.
The true key to unlocking the great potential of blockchain will come with the widespread adoption of stablecoins.
Additionally, a stable digital and decentralized currency could become a global medium of exchange. For those who don’t want to rely on the centralized forms of currency, stablecoins are available for trustless, cross-border transactions.
This will be especially important for people living in countries with unstable monetary systems, such as Argentina, where residents are often exposed to rampant inflation and uncertainty. Even when these citizens seek to move their capital to more stable stores of value, restrictive capital control laws often prevent them from using non-native currencies in transactions outside the country.
Stablecoins usher in a new option for those who want to transact through a global currency, allowing access for all, but especially the unbanked, to the world’s financial systems.
Stablecoins are well on their way to unlocking the unique benefits of a modern, decentralized Internet. Their adoption will support capital market formation and usher in new applications for decentralized finance on the blockchain, such as lending and derivatives markets.
For example, decentralized cross-border lending can occur through the introduction of a stable cryptocurrency. This removes the problems seen with popular high volatility cryptocurrencies which creates an uncertain lending environment as borrowers and lenders cannot comfortably plan for the future. This has the potential to transform many industries including supply chain, exchanges, shipping and more. Another example is financing and financial planning. Ethereum and the crypto-ecosystem, at large, proved the large scale potential for global crowdfunding campaigns. However, many projects face uncertain accounting procedures as they struggle to manage a predictable financial plan due to volatility of their assets.
Ultimately, decentralized currencies pave the way for a modern financial revolution that will remove inefficiencies, reduce risk stemming from centralized parties and change the way we transact.
This important work on creating a decentralized stable currency is already underway. If you enjoyed this piece, please stay tuned for the second part of our series which introduces Dai, the first fully decentralized stable currency.
Read Part Two: A Primer on Dai