The rise of decentralized money on Polkadot


Last month, I wrote about the rise of stablecoins – from the USDT, with a market cap of $ 70 billion, and from the USDC, with a market cap of $ 32 billion, to sponsored digital currencies. by the government – notably the Chinese digital renminbi and the Cambodian Bakong. In many ways, this appears to be the era of the “crypto-dollar,” which, like the petrodollar before it, could be another funnel for global hyper-dollarization. And because the majority of stablecoins are still backed by fiat, they are hampered by flaws in the centralized legacy financial system and by any US regulatory oversight. The USDC, for example, allows Circle to blacklist accounts if regulators so request, which limits the token’s use as a fully decentralized collateral.

However, a new wave of algorithmic stablecoins is looming on the horizon, enabling a digital and stable unit of account that is not hampered by a dollar-backed collateral. Some promising examples of recently launched projects include OHM by Olympus, FLOAT by Float Protocol, RomeDAO, and most recently XST on SORA, built into the nascent Polkadot ecosystem and integrated with Polkaswap.

Dollar-based inflation is a century-old threat

Although the US dollar has served as the de facto world reserve currency since the Bretton Woods agreements in 1944, inflation is not a new problem for the dollar. In 1911, the dollar faced inflation due to fluctuations in the price of gold. Stoic proponents of gold as a store of value can often ignore its tendency towards volatility and its historical reputation for instability. The dollar was taken off the gold standard both in 1933 by FDR, to help America finance itself out of the Great Depression, and again in 1971 by Richard Nixon, to finance increased spending on spending. to the Vietnam War.

Today, in part due to increased spending as the economy reopens after the pandemic, we are seeing the highest rates of inflation in more than a decade. Despite claims by U.S. Treasury Secretary Yellen that inflation is under control and the Federal Reserve’s promise to reduce emergency asset purchases, the U.S. dollar continues to fluctuate, ultimately hurting consumers due to price increases associated with stagnant or falling wages.

Stablecoins become part of the crypto-ecosystem

In 1913, the American economist Irving Fisher proposed for the first time a stabilized alternative dollar, observing the lack of stability of the dollar then backed by gold. Instead of being supported by a fixed weight of gold, with varying purchasing power, Fisher proposed that the dollar be fixed in purchasing power and pegged to a basket of goods (i.e. , An index), effectively stabilizing its value.

While Fisher’s ideas weren’t adopted in his day, they paved the way for blockchain-based digital stablecoins. By nature “stable” (that is to say linked to an index or a stable asset), stablecoins are different from other cryptocurrencies, the value of which fluctuates enormously. Bitcoin, for example, can fluctuate 30-60% in a single week, depending on market sentiment, regulatory announcements, or even a flawed tweet from Elon Musk. Stablecoins, on the other hand, are “a blockchain-based token that is derived from another and aims to hold a stable unit of value.”

Because money must be a store of value, in addition to being a unit of account and a medium of exchange, cryptocurrencies are seen as too speculative to replace silver unless their volatility can be mitigated or made predictable. By reducing intense exchange rate fluctuations while avoiding the pitfalls of the traditional financial system, stablecoins offer a potential avenue for finance – but only if they really are. decentralized stable coins.

Algorithmic stablecoins promise innovation beyond the dollar

Unlike stablecoins backed by trust funds, algorithmic stablecoins offer the promise of collateral diversification, which can create resistance to hyperinflation and instability in financial markets. Additionally, decentralized stablecoin users invest in the value of transparent protocols set in immutable code, rather than having to trust a central bank, business, or government. This allows users to innovate and compose the future of money, without being hampered by legacy system blockages.

The newest addition to the algorithmic stable coin market, SORA Network’s XST is based on Polkadot (Parity Substrate) technology and is backed by an algorithm that guarantees token value. Synthetic assets derive their value from smart contracts tied to oracles that determine current prices, such as financial instruments and securities, rather than the value of fiat money. While algorithmic stablecoins, such as MakerDAO’s DAI on Ethereum or Karura’s kUSD in the Kusama ecosystem, require oversizing (up to 180% in the case of kUSD) in order to maintain their value, SORA XST ( “XOR SynThetics”) is backed by a smart contract that hits or burns the XOR token, given the exchange rate of a price oracle. This allows XOR holders to convert to synthetic XST tokens without 1: 1 oversizing, nodding to Fisher’s century-old ideas of pegging tokens to an index to maintain desired value.

In theory, algorithmic future stablecoins can be pegged to any value index, not just the US dollar or other fiat currencies. A proposal in the SORA ecosystem is to use an oracle to create an XST token linked to the Unidad de Fomento, which is an inflation-corrected commodity price index maintained by the Bank of Chile. In the future, other stablecoins could, in theory, keep their own basket of goods to further decentralize the concept. After all, money is only as useful as what you can buy with it, so having stable purchasing power could greatly improve the reserve property of stablecoins.

Stable coins are systemically important

Algorithmic stablecoins offer the advantage of being transparent about the internal logic of tokens and any collateral used to maintain their value. Just last month, Tether was fined $ 41 million for making “false” claims about its fiduciary-backed reserves. With over $ 120 billion in stablecoins pegged to the U.S. dollar, they have become a cornerstone of the cryptocurrency markets, making collateral transparency a pressing issue for users and regulators.

As more and more new entrants bring to the market a wide range of and varied stablecoin options – from government and business support to decentralization – consumers will have the opportunity to choose from a menu and will be the final decision-makers on the question of what is considered “healthy money”. Stablecoins serve a real and underserved human need. So much so, in fact, that even a century ago, economists were discussing many of the same concepts that are finally implemented today. Given the continued volatility of cryptocurrencies like Bitcoin, stablecoins do not seem likely to go extinct, but on the contrary, new innovations in this area will continue to create exciting new opportunities for the future of money.


About Sharon Joseph

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