Crypto Market Commentary
Mav's Daily Commentary
Blockchain ushered in a wave of innovation and disruption.
As Naval Ravikant recently said, “Crypto is spawning a generation of programmers that understand the fundamentals of game theory, finance, and governance.”
With Bitcoin and subsequent other cryptocurrencies, we’ve marveled at the potential of a decentralized currency.
And for a time, it was good.
“But wait”, we said. “This isn’t much of a usable currency if the price is going to fluctuate violently”.
And yes, Bitcoin’s price is the least interesting thing about it, from an academic perspective. But it’s true that when considering real usability we can’t expect people to want to use a currency that has massive price volatility. Merchants want what they ask for — they’re already getting raked over the coals by VISA and MasterCard and Chase and SWIFT. Consumers also want to hold onto an asset that has historically appreciated, and a deflationary by design currency is going to do exactly that over time.
I hate this example, but it shows exactly why that is:
If you had bought a Lamborghini Aventador ($424,845) at the Bitcoin all-time high of ~$20,000, you would have paid 21.2 BTC, compared to the 110.4 it would require today. Should we go back up to 20k per BTC, that 110 BTC would be worth over 2.2 Million dollars. So, you’re definitely incentivized to wait to buy, something that a currency should not encourage you to do.
Moving past Lambos, we can recognize the need for price-stable assets that reflect the needs of a blossoming digital economy. In fact, there are over 60 stablecoin projects in the crypto space today, and that’s only steadily growing.
Most are pegged to the USD, making them understandably hard to differentiate. At a glance, would you know what separates TUSD and USDT and USDC and USC and USDS and GUSD and NUSD?
The answer: not much.
They share similar value propositions. When we see an announcement of another one, it’s perfectly reasonable 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.
What we know is that the derivation of a 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 principle traits are. In the case of stablecoins, we can view them through their utility, demand, and stability.
Regarding utility, it’s important to evaluate how well a currency can be accepted. Can it be used across many merchants? Payment channels? Banking systems?
In the context of stablecoins, I like to think of them as a bridge to other crypto assets. They serve as the figurative Trojan Horse of fiat to crypto.
This ties in very well with the second concept of demand.
If there is a strong demand to accept a currency as a method of transactions because of its expansive utilities, then the currency will start to be more widely used. 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. Even among similarly priced assets, the desire to have one versus another can be distinctly different. That’s evident just based on the trading volume of the different stablecoins out there.
The last piece to consider is stability.
In fiat, we can see this feature implemented when a foreign country pegs its currency to another currency. Doing so and operating under different currencies can safeguard their economic activities and prevent large imbalances in their spending, investment, and trade from foreign exchange risk.
Looking at stablecoins, it’s important to consider how they’ll remain stable. Sounds easy, but is actually an extremely challenging financial balancing act to undergo.
So, as long as any stablecoin exhibits these aforementioned properties, I view this as complementary to building upon the crypto economy, much like how many different currencies exist to fuel the world economy.
But don’t fall under the impression that a universal stablecoin standard would work, as there are too many use cases to serve. This is similar to how a universal fiat currency would not work given the nature of different global economies.
This is why we need to encourage interchangeability between supported stablecoins at the core of driving liquidity within our ecosystem — hence the need for 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 why I’m interested in the Neutral Dollar project.
Their goal is to create a metastable basket which enables users to lessen any reservations they have with any single stablecoin.
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 design allows for better price discovery in crypto.
I’ve already covered a similar metabasket through https://www.tokensets.com/set/stbl and the different asset baskets they have their, but I prefer what I’ve read about Neutral because it’s more intentional.
What’s clear is that they have merits and applications that no individual stablecoin project alone can exhibit, and hopefully everyone can see why the space needs it.