Stablecoins for Skeptics
The last crazy idea from cryptoland may be crazy enough to work
Editor’s note: Next week’s article (available for all subscribers) is moved to Thursday the 19th, for reasons that will become aparent then ;)
Stablecoins are the ultimate ledger.
A tool that moves money globally, quickly and cheaply. A transfer irrevocably linked to a piece of software that serves as the payment contract. No lawyers, no bankers, no humans inbetween two parties exchanging value for goods and services.
Like that’s ever gonna happen.
Reality is much more surprising and interesting than a completely human-less money movement infrastructure can model. Human beings, even bankers and lawyers, will always be involved, because money is a game of trust.
And trust is inherently human.
A game in which trust is fundamental will always have humans at the center. You can have decentralized transfers; but you can’t have decentralized finance.
Stablecoins are the latest attempt at bridging the world of crypto, with programmable money, full transparency and non-reversibility, and the real world, with taxes, fraud and honest mistakes.
But they’re not going to deliver on a machine-only finance.
In fact, stablecoin isn’t meant to do that. I’d say that stablecoin aims at implementing as much as possible of the crypto world in a way that’s practical in the fiat one, but no more.
Which is probably the best move possible.
I’m Alvaro Duran, and this is The Payments Engineer Playbook. You’re already subscribed to free newsletters that “teach” you how to get a job as a software engineer.
But you don’t want to get a job; you already have one. What you want is to learn how to get promoted. Especially as a payments engineer, where stakes are sky high, and the margin for errors is razor thin.
In The Payments Engineer Playbook, we investigate the technology that transfers money. All to help you become a smarter, more skillful and more successful payments engineer. And we do that by cutting off one sliver of it and extracting tactics from it.
In this article, I’m going to assume that you’re as skeptic about crypto as I am. Sure, I’ve bought Bitcoin in the past (who hasn’t?). But it’s been 18 years since the Bitcoin paper was published, and since then, it has failed to live up to the expectations.
Plus, there’s also the grift, the scams and the speculation.
So what I’m going to do today is to explain what stablecoins are, while being realistic about what can be done with them. You don’t have to trust me, or agree with me. But here’s the thing: that’s the whole point of crypto anyway.
Here’s what you can expect below:
What makes stablecoins fast, cheap, global, and programmable
What’s stable about them
Where do they fit in the history of moving money, both domestically and internationally
What can we do with stablecoins that we wouldn’t be able to do otherwise
Stablecoins aren’t going to give us a world without bankers and lawyers. What they’re going to give us, if they become a significant chunk of the money flow worldwide, is a different kind of bankers and lawyers.
More cerebral, more technical, and less sales-y.
Tech-savvy lawyers and bankers
Stablecoin is programmable money.
They’re digital tokens designed to maintain a 1:1 value relationship with an established asset, typically the US dollar. The two largest are Tether (codename USDT, with $184 billion as I’m writing this words) and USDCoin (USDC, with $73 billion as of right now).
Which sounds like a lot except both combined are roughly one tenth of a percent of the $200 trillion global payments market. Still, adoption is growing, but unlike cryptocurrencies, stablecoins’ adoption is driven not by speculation, but by practical usage.
And it’s the stable side of things that makes a dramatic improvement over “classic” cryptocurrencies:
How would you send somebody money internationally if you couldn’t use a bank?
Cash over email, or over a handcuffed briefcase might work, but you run the risk that it gets lost. No problem; you get creative. How about you buy shares of Apple, and instruct the recipient to short sell them, and then you can just transfer those shares to them?
That works. That’s actually brilliant. But the transaction costs are probably too high: there’s the difference between the buy and sell price, the broker’s comissions, etc.
Let’s go crypto, then: you buy some Bitcoins, they sell a bit of theirs, and then you can transfer those Bitcoins to them. The transaction costs are somewhat fixed, and low, so this is an improvement. But Bitcoin’s price is much, much more volatile than Apple’s. The risk of having to offset the price difference makes this approach unwieldy at scale.
The good thing about crypto, and the reason why the transaction costs are so low, is because there’s nothing central about it. The recipient may be on the other side of the world, and they have the same level of access and visibility to it than you. It may be slow, but not SWIFT slow. And it’s way cheaper.
So what we probably need is something that’s crypto-like, to retain the global aspect of such a ledger, but without the volatility of crypto currencies. One way to do that is to have a blockchain that distributes the value of a predefined pool of resources, something that doesn’t change in value against a fiat currency.
So that’s what stablecoins really are.
Stablecoins are programmable because they’re fiat represented in a crypto form. Unlike cash, and also unlike money deposited in a bank, stablecoins can be controlled by code.
You can write smart contracts that controls whether money can be moved, or is forcefully moved. Sure, this opens a can of worms: we’re opening the door to strict adherence to rules, no matter how absurd or immoral.
But it also opens the door to a few interesting products that we’ve never had access to, because of the number of intermediaries involved in moving money in the fiat world:
Conditional payments: Insurance payouts come to mind, but also gambling. There’s an active community of people "predicting” outcomes at sites like Polymarket, and stablecoins are often used to enforce that the money is paid appropriately.
Lending: For the longest time, we’ve needed banks to intermediate between lenders (who lend short time with their deposits) and borrowers (who borrow long with their loans). But we can now aggregate pools of money into stablecoins, and securitize a loan among many lenders, who earn interest on a pro-rata basis.
Compliance: Programmable money means money that can blacklist certain senders or receivers, bringing KYC to a whole new level.
This list isn’t exhaustive, by the way. Crazier use cases will probably spring up as stablecoins gain further adoption.
Stablecoins are Triffin Stable
The world unpegged from the gold standard in the 1970s, and we’ve tried to go back to it ever since.
And the reason the US abandoned the gold standard was because at the core of every currency used for international trade resides a paradox that no one has really figured out how to solve.
Here’s the issue: gold is impractical to move, for obvious reasons. A much better alternative is to have some pointer to it that’s easier to move, so that everyone can trade knowing that what they’re really exchanging isn’t the pointer itself, but the underlying gold it represents.
After World War II, due to the fact that virtually all the gold was in the US, the world came to accept dollars (which were pegged to gold) as that pointer.
Now, the problem is that, in order to supply the world with enough dollars so that they can trade with each other, the US had to incur trade deficits consistently. There had to be a net outflow of dollars so that everyone could participate in the new era of globalization.
At this point, the US government had an incentive to issue dollars, even if they weren’t really backed by gold, because the expectation was that a) nobody really needed the gold, and b) everybody trusted that if they went to the Fed, they could get gold in exchange for their dollars.
As time went by, that consistent trade deficit bubbled up into a sudden crisis of confidence. Both a) and b) suddenly weren’t true anymore. And like a bank run, everyone tried to get their dollars exchanged for gold.
And that’s how the gold standard was abandoned.
The story has happened before (with the Roman empire) and after (with the Argentinian peso). And the reason I’m telling you this story (and why this article was published so late in the day) is because something similar may happen with stablecoins as well.
Let me explain.
There are two ways in which stablecoins are stable. One could be called price-explicit, the other price-implicit.
Tether and USD Coin are price-stable. They’re accepted as if they were dollars, and in a legal sense, they are1. The price is enforced explicitly. Then, there are all the smaller stablecoins issued as staged, close loop wallets, which are pointers to a pool that’s dynamic in nature, but that maintains a 1:1 relationship because the tokens minted and burned correspond to the amounts of dollars deposited and withdrawn. They price is enforced implicitly.
And while stage, close loop wallets have existed for a while now, and Starbucks is the clearest example that, should you have a tight ledger that controls that there are no cents dancing around, you’re fine, history says otherwise about currencies that keep a 1:1 relationship to another asset by the sheer force of the law.
A peg is a story about why two things which are not the same are, in fact, similar enough to be treated interchangeably.
— Patrick McKenzie, Stablecoin mechanisms and use cases
The paradox between having to supply the world with a currency for trade purposes, and the loss of confidence on that currency because of the trade deficits required to do so is called the Triffin Dilemma.
As stablecoins gain adoption and become a significant chunk of money movement worldwide, storing a sufficient amount of dollars to back them up will be increasingly difficult.
By then, we will have to come up with a contingency plan. Or else.
I’m so excited about crypto
Nevertheless, my enthusiasm outweights my skepticism.
True, there’s risk in assuming that we won’t find problems as stablecoins start running more of the international trade show.
But there’s a lot to be said about moving smaller amounts of money around without the need to deal with banks. There are simply too many intermediaries going on. Sure, they’re doing work that’s necessary. But that’s only because the current design makes them so.
Stablecoins can change all that overnight.
I’m skeptical about stablecoins conquering the world. Cash isn’t going away, and neither is SWIFT. But I’m hopeful about stablecoins being tremendously useful for a huge chunk of the day to day economy.
You can’t have decentralized finance. But you can have decentralized transfers.
That’s it for this week in The Payments Engineer Playbook. I’ll see you next week (on Thursday).
Don’t ask me, I’m now a lawyer.