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James Olstein


“Stablecoins” are trending, but they may ignore basic economics

Pegging cryptocurrencies to “real” money could stabilize them—or ruin them entirely.

Spend enough time investing in (or reading about) the cryptocurrency world, and it’s easy to become a bit jaded about the wild, unpredictable price swings that seem to come with the territory. But it doesn’t necessarily have to be this way, say some blockchain developers. The trick, they argue, is to peg the price of a crypto-token to that of a fiat currency like the US dollar.

“Blasphemy! Heresy!” come the cries from the crypto-originalists, the hard core in the community who hopped on board this careening bandwagon in the conviction that cryptocurrencies were invented to replace fiat money, not coexist with it. And there is plenty of legitimate criticism to be leveled at “stablecoins.” Some say the concept as a whole simply isn’t viable. Nevertheless, of late it has drawn plenty of interest—and venture capital. So let’s investigate.

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The schemes: The idea of a stablecoin is in fact several years old, and dollar-pegged tokens(for example, Tether and TrueUSD) are already available on some cryptocurrency exchanges. But the recent mania around initial coin offerings has seeded a new crop, giving rise to different approaches to building a stablecoin. These fall into three broad categories:

Failing econ 101: Perhaps the most vocal critic of stablecoins is Preston Byrne, a founder and former COO of the early blockchain startup Monax. Byrne, who has written extensively about the topic, said in an e-mail to MIT Technology Review that developers of stablecoins fail to account for basic economic principles by assuming that they will always be able to “incentivize users of their systems to purchase their coins at an arbitrary price.” This “ignores that in all market-based exchange, price is determined by a meeting of the minds of a buyer and seller, not by an algorithm,” Byrne says. “All that is required for these systems to fail is for people not to buy the product.