Watching the HiveFest recordings today I was shocked when one of the speakers stated that the US dollar is currently the most stable asset that a stable coin can be pegged against.
It's a sound I've heard more, mostly from americans, and I think its a subject we may want to look into a little bit, because fiat currency is never a stable resource. Let's explore.
Fractional reserve banking
So what is the main reason that fiat can't ever be a stable coin. Many people wrongly assume it's the abandonment of the gold standard in 1971. There is something much more fundamental, something that is actually the reason a gold standard can't be maintained, and that's the concept of fractioanl reserve banking.
The concept is as follows. If you have money in your chacking account, you expect that you can take it out of your account at any moment that you like, right? And you can. But you only can because not everybody will do that at the same time. Meanwhile the bank can take your much of everybodies money and lend it out to someone who needs it for something. An investment, a car, a house, as long as they keep a fractional reserve. But what happens to the money they lend out? That too will end up in someones bank account, maybe an other bank, maybe the same bank. For the sake of demonstrating how it works, lets pretend there is only one bank in the whole world. that money in that other bank account also can be lended out, most of it anyway, even if in fact it's the same money. Repeat the process and in the end almost all the money in existance will be at the bank as their fractional reserve.
Let's say the bank is required to have a 10% fractional reserve, and let's say the cental banks have created a total money supply of one trillion dolar.
It could be that 900 billion dollar of that is at the bank as fractional reserve that can not be lended out, 100 billion is in circulation as paper money and coins, and at the same time the bank has 8,100 billion in outstanding money that is collecting 4% anually, more than 300 billion a year in interest. Much of that 300 billion will flow back into bank accounts of bank employees and companies providing services or goods to the bank, but a substantial part of it won't , and that part needs to come from somewhere for the system to keep running. The only place it can come from in the end is the central bank.
The whole existence of fractional reserve banking in combination with non zero (and non-negative) interest rates makes devaluation of the currency an absolute requirement. Inflation and the need to abandon pegging to something like gold are the inefetable concequence of a banking system that allows for fractional reserves.
And you may think this is a problem that crypto doesn't suffer from, but you would be wrong. Exchanges could do similar things with your crypto. While you are trading, they are reaping the benefits from long term staking of your coins, and with all the new financial products like leveraged trading its more complex cousins, how far are we truly from exchanges being fractional reserve banks?
Dropping the gold standard
So in the early 70s the gols standard was dropped, as you now understand, this was inevetable, a concequence, not a cause, a concequence though that wasn't without concequences of itself. That is, while releasing a gold standard is inevetable because of fractional reserve banking, trying to hold on to a gold standard at least acts as an achor. Rebase and retry remains the best option given fractional reserve isn't going anywhere, even if we know you will eventually have to let go of the peg again.
1973 .. 2023
Now as for stable coins. I've put some data into the table below for some different assets. Look at it like this. If right now, in 2023 you have 100 units of this asset, and we look at general inflation, inflation how many units of this same asset would you have needed to have had back 10, 20, 30, 40 or 50 years ago to represent the same value?
| asset | 2013 | 2003 | 1993 | 1983 | 1973 |
|---|---|---|---|---|---|
| USD | 131.80 | 166.86 | 212.47 | 308.26 | 691.50 |
| Eur | 132.47 | 162.37 | - | - | - |
| GBP | 146.63 | 202.29 | 260.63 | 431.74 | 1,547.33 |
| Gold | 96.05 | 31.40 | 39.57 | 67.71 | 34.73 |
| Silver | 133.65 | 34.71 | 39.03 | 148.62 | 75.16 |
| Bitcoin | 0.51 | - | - | - | - |
| Crude Oil | 149.26 | 46.60 | 31.49 | 88.98 | 25.87 |
| Bacon | 94.64 | 92.63 | 66.50 | 89.0 | 86.42 |
In the first three rows we see fiat currency, and we see inflation at work pretty hard. USD is at a seventh of its valu half a century ago and the british pound less than half of that. Euro is still too young, but in the last 20 years it has performed in line with the US dollar.
Gold is doing better than inflation, and in that it hasn't quite been stable, jumping around and often outperforming inflation hedging needs by quite, making it exactly as unsuitable as a peg for a real stable coin. Fiat isn't stable, but neither is gold. Silver is arguably doing even worse for stable coin requirements.
We all know that bitcoin, while young compared even to the euro has been performing really well in the last decade, so also the digital gold is completely unsuitable.
Energy maybe? No. Crude oil jumps around just as irradicly as pewcious metals do.
But look what we found, bacon, the inflation corrected price of bacon has been relatively stable compared to all our stable coin pegging candidates.
I hope everybody realizes the bacon-pegged stable coin idea is just a joke, but the idea of peg linked to a truly stable asset, or better yet a small set of weighted assets could be really interesting.
An index of commodities would almost certainly have more stability than any single commodity and it's not really all that much more complex to peg to an index.
We could easily come up with 10-100 such commodities and peg to that. The only realistic difficulty would be people bikeshedding on what commodities should be included.
https://peakd.com/hive-111111/@demotruk/4-steps-to-repeg-hbd-as-a-commodity-currency
Finding a set of commodities could possibly be done by lineair fitting against historical data, pre-setting a weight range for individual commodities.
You can look to minimize the sum of square error for the recorded inflation over the last 50 years vs the yearly price development of 10 commodities over the same 50 years each with a weight factor between maybe 5 and 15 that needs to add up to a hundred.
It will take some brute forcing, but the computer could likely pick the historically best ten commodities plus weight factors.
Fascinating stuff. Get a neural net going afterwards with the reward function set to minimise that sum of square error you mention. Surely there's enough econometric data out there to train something like that.
Then you could sidestep the whole obsession with trivialities that @demotruk is talking about.
Sounds good to me haha! 1HBB redeemable at any time for 3 bacon rashers.
I have to laugh at that speaker, confidently miles off-base.
Congratulations @pibara!
You raised your level and are now a Minnow!
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