The Maze of Stablecoins demystified
A Comparative Analysis with the Gaugecash Monetary System
Introduction
The meteoric rise of cryptocurrencies has ushered in an era of financial innovation, with stablecoins emerging as a prominent force within the landscape. These digital assets strive to maintain a stable peg to a real-world asset, typically fiat currencies or commodities, offering a perceived haven from the volatility inherent in most cryptocurrencies. While stablecoins share the core functionality of facilitating digital transactions, they differ significantly in their underlying mechanisms, risk profiles, and regulatory landscapes. This article delves into a comparative analysis of several prominent stablecoins, ultimately positioning Gaugecash not as a competitor within the stablecoin landscape, but as a distinct and innovative monetary system. The choice of the stablecoins analysed here is somewhat arbitrarily. I tried to find a representative cross section of the broad spectrum of stablecoins. The spectrum of stablecoins is much broader and innovation is running at a fast pace. In this article I try to shed light on the general idea of stablecoins and the concept of Gaugecash as an independent currency. I will show some common goals and will highlight differences.
Understanding Stablecoins:
Types, Use Cases, and Limitations
Stablecoins come in various flavours, each with its unique design and operational principles. The primary categorization distinguishes between:
Fiat-collateralised stablecoins: Backed by reserves of real-world assets, typically fiat currencies held in custodianship by centralised entities. Examples include Tether (USDT), USD Coin (USDC), and TrueUSD (TUSD).
Algorithmic stablecoins: Rely on algorithms and smart contracts to maintain their peg, often through a combination of seigniorage shares and collateral adjustments. Dai (DAI) is a prominent example.
Commodity-backed stablecoins: Their value is pegged to the value of a physical commodity, such as gold or oil. Examples include Pax Dollar (USDP) and Tether Gold (XAUt).
Multi-asset backed stablecoins: These stablecoins are backed by a basket of various assets, aiming for broader diversification and potentially improved stability. Examples include: Reserve (RSV):?Backed by a basket of cryptocurrencies and fiat currencies and OUSD (Origin Dollar):?Backed by a basket of stablecoins and cryptocurrencies.
RWA (Real-World Asset) tokenized stablecoins: This nascent category represents a novel approach where stablecoins are backed by tokenized representations of real-world assets. Examples include: Propine (PROP):?Backed by tokenised real estate properties and Artex (ARTX):?Backed by tokenised fine art pieces.
With innovation evolving, new types may arise. But some commonalities and general limitations can be observed.
Key Limitations of Stablecoins
Stablecoins offer a certain level of stability by pegging their value to a real-world asset, typically fiat currencies like the US dollar. However, this approach comes with inherent limitations:
Inflation Risk:?Since most stablecoins are pegged to a single fiat currency, they inherit the inflationary characteristics of that currency. Over time, the purchasing power of the stablecoin erodes alongside the underlying asset.
Counterparty Risk:?Many stablecoins rely on centralised custodians to hold the reserves backing their peg. This introduces the risk of mismanagement, operational failure, or even potential manipulation by these custodians.
Algorithmic Risk:?Algorithmic stablecoins, while innovative, depend on complex algorithms and smart contracts. These can be vulnerable to unforeseen bugs, exploits, or even attempts to manipulate the peg through oracles or other system vulnerabilities.
Limited Decentralisation:?While some stablecoins strive for decentralisation, many still rely on centralised entities for various aspects of their operation. This can limit their ability to offer a truly trustless and censorship-resistant financial system.
Regulatory Uncertainty:?The regulatory landscape surrounding stablecoins is still evolving, with varying approaches and potential restrictions across different jurisdictions. This uncertainty can hinder innovation and adoption.
Commonalities among stablecoins:
The use cases for stablecoins are diverse
Stablecoins, digital assets pegged to a stable real-world reference point, have transcended their initial purpose of offering stability within the volatile cryptocurrency market. Today, they are rapidly expanding their reach, unlocking innovative possibilities across various sectors. This list explores a selection of the diverse use cases of stablecoins, highlighting their potential to revolutionise how we interact with money and financial services.
Financial inclusion refers to the ability of individuals and businesses to access affordable and suitable financial products and services, such as savings accounts, credit, and remittances. However, a significant portion of the global population remains unbanked or underbanked, lacking access to these essential services. This is often due to factors like geographical remoteness, limited infrastructure, or stringent regulations.
Facilitating cross-border payments:?Faster and cheaper alternative to traditional banking channels for international transactions.
Hedging against volatility:?Provides stability within the volatile cryptocurrency market, allowing investors to park holdings without incurring significant losses.
Enabling decentralized finance (DeFi):?Acts as the lifeblood of DeFi protocols, facilitating lending, borrowing, and various financial services within the decentralized ecosystem.
Remittances:?Significantly reduces the time and cost of sending money internationally compared to traditional money transfer services.
Micropayments:?Well-suited for micropayments often used for online content, gaming, and tipping due to fast and low-cost transactions. The transaction speed fee is dependent on the underlying blockchain. Some blockchains offer significantly faster and cheaper transactions than others.
Access to financial services:?Offers individuals and businesses an alternative way to store value, send and receive payments, and potentially access financial services like lending and borrowing in regions with limited access to traditional banking systems.
Programmable payments:?Enables automated recurring payments or payments based on specific conditions through smart contracts, improving efficiency and reducing the risk of errors.
E-commerce:?Offers a payment option for online purchases, potentially providing both consumers and merchants with faster settlement times and lower transaction fees compared to traditional methods.
Supply chain management:?Integrates into supply chain management systems to facilitate faster and more transparent payments between different actors involved in the process.
Fractional ownership of assets:?Enables fractional ownership of various assets, such as real estate or artwork, potentially improving accessibility and liquidity for these investments.
Gamification and the metaverse:?Used in the development of play-to-earn games and metaverse applications, enabling users to earn and spend digital assets within these virtual environments.
A Closer Look at some Prominent Stablecoins
Stablecoins encompass a diverse spectrum of offerings. To get a sense of this variety, let's delve into a selection of the most prominent?among them.
1. Tether (USDT)
Mechanism: Fiat-collateralised, with USDT supposedly backed by a 1:1 reserve of US dollars.
Purchasing Power Protection and Inflation Tracking: Primarily tracks the US dollar, inheriting its inflation characteristics.
Backup Mechanism: Reserves of US dollars held by custodians.
Decentralisation and Third-Party Risk: Relies on centralised custodians, introducing third-party risk and potential concerns about transparency.
Market Manipulation Risk: Susceptible to manipulation attempts due to its centralised nature.
Regulation: Currently subject to ongoing regulatory scrutiny in various jurisdictions.
Comparison to Gaugecash: While USDT offers some stability, it remains tethered to the inflationary concerns associated with the US dollar. Gaugecash, through its diversified basket of currencies and built-in inflation protection, aims to provide superior purchasing power preservation. Additionally, Gaugecash eliminates third-party risk by operating as a decentralized system.
Additional note: There have been ongoing questions and controversies surrounding Tether's claims about its full 1:1 backing by US dollar reserves. Some experts have expressed concerns that the reserves might not be fully sufficient or might not be held entirely in cash equivalents. However, conclusive evidence to definitively disprove Tether's claims is lacking.
2. USD Coin (USDC)
Mechanism: Similar to USDT, USDC is a fiat-collateralised stablecoin pegged to the US dollar, with reserves held by regulated financial institutions.
Purchasing Power Protection and Inflation Tracking: USDC is pegged to the US dollar, aiming to offer a stable value proposition. However, it's important to note that this stability is relative to the US dollar itself. If inflation in the US economy continues to rise, the purchasing power of USDC (and US dollars in general) will erode over time.
Backup Mechanism: Reserves of US dollars held by regulated financial institutions.
Decentralisation and Third-Party Risk: Similar to USDT, relies on centralised custodians, introducing third-party risk.
Market Manipulation Risk: Similar concerns as with USDT.
Regulation: Subject to ongoing regulatory discussions in various jurisdictions.
Comparison to Gaugecash: Shares similar observations as with USDT. Gaugecash offers a distinct solution with superior purchasing power protection and no third-party risk.
3. Dai (DAI)
Mechanism: An algorithmic stablecoin, where the platform incentivises users to deposit and borrow crypto assets to maintain the DAI peg.
Purchasing Power Protection and Inflation Tracking: Aims to maintain a relatively stable price level, but its effectiveness remains subject to debate and market conditions.
Backup Mechanism: Relies on a system of collateralised debt positions (CDPs), where users deposit crypto assets as collateral to mint DAI. The value of the collateral must always be greater than the amount of DAI borrowed.
Decentralisation and Third-Party Risk: While operating on a decentralised protocol, DAI introduces third-party risk through its reliance on users depositing and borrowing collateral. The health of the CDP system and the behavior of participants can impact the stability of the peg.
Market Manipulation Risk: Although less susceptible than centralised stablecoins, algorithmic stablecoins like DAI can still be vulnerable to manipulation attempts through, for instance, flash loan attacks or exploiting vulnerabilities in the underlying protocol.
Regulation: The regulatory landscape for algorithmic stablecoins like DAI is evolving, with some jurisdictions considering them to be unregistered securities.
Comparison to Gaugecash: While innovative, DAI carries inherent risks associated with its algorithmic approach and dependence on user behaviour. Gaugecash offers a more transparent and predictable mechanism for maintaining purchasing power through its diversified currency basket and built-in inflation protection mechanisms. Additionally, Gaugecash eliminates third-party risk by not relying on user-deposited collateral.
4. TrueUSD (TUSD)
Mechanism: Similar to other fiat-collateralised stablecoins, TUSD is pegged to the US dollar, with reserves held by multiple regulated institutions.
Purchasing Power Protection and Inflation Tracking: Primarily tracks the US dollar, inheriting its inflation characteristics.
Backup Mechanism: Reserves of US dollars held by multiple regulated custodians.
Decentralisation and Third-Party Risk: Relies on centralised custodians, introducing similar risks as with USDT and USDC.
Market Manipulation Risk: Similar concerns as with other centralised stablecoins.
Regulation: Subject to ongoing regulatory discussions in various jurisdictions.
Comparison to Gaugecash: Shares similar observations as with USDT and USDC. Gaugecash offers a distinct solution with superior purchasing power protection and no third-party risk.
5. Frax (FRAX)
Mechanism: Frax utilizes a hybrid approach, combining aspects of both fiat-collateralization and algorithmic adjustments. A portion of its reserves are held in fiat currencies, while the remainder is in a basket of crypto assets. The protocol uses algorithms to dynamically adjust the supply of FRAX tokens to maintain the peg.
Purchasing Power Protection and Inflation Tracking: Frax aims to offer long-term price stability, but achieving this consistently can be challenging due to the complex interplay between its fiat-backed and algorithmic components.
Backup Mechanism: A combination of fiat reserves and crypto assets backs Frax, but the level of decentralisation in how these reserves are held is a topic of ongoing discussion.
Decentralisation and Third-Party Risk: While striving for partial decentralisation, Frax still relies on centralised entities for holding fiat reserves, introducing some level of counterparty risk. Additionally, the hybrid approach introduces complexities that could be potentially exploited for manipulation attempts.
Market Manipulation Risk: While potentially less susceptible than pure algorithmic stablecoins, Frax's hybrid approach introduces additional complexities that could be exploited for manipulation attempts.
Regulation: The regulatory landscape for hybrid stablecoins like Frax is still evolving, with potential implications for both the fiat and crypto components.
Comparison to Gaugecash: Gaugecash takes a different approach, not tracking the US dollar and aiming for transparency and predictability in maintaining purchasing power through its diversified currency basket and built-in inflation protection mechanisms. It also eliminates third-party risk by not relying on centralised entities or complex algorithms.
6. Pax Gold (PAXG)
Pax Gold (PAXG) is a prominent example of a true gold-backed stablecoin. Here's a breakdown of its key aspects:
Mechanism: Each PAXG token represents?one troy ounce of physical gold?held in custody by reputable institutions like Brink's or Brinks Global Services Ltd. The underlying gold is?allocated, meaning individual tokens are linked to specific gold bars, ensuring fractional ownership and potential redemption rights. Regular audits and transparency reports verify the gold reserves backing the PAXG tokens in circulation. PAXG also offers "unallocated" options.
Purchasing Power Protection and Inflation Tracking: PAXG aims to track the price of gold, offering exposure to the potential benefits of gold as a?hedge against inflation?and a?store of value. However, gold prices can be volatile, and past performance doesn't guarantee future results.
Backup Mechanism: The physical gold reserves are held securely in?segregated vaults?under the custody of?insured and regulated third-party custodians. This aims to mitigate the risk of loss or theft.
Decentralisation and Third-Party Risk: While not fully decentralised like some other stablecoins, PAXG offers?greater transparency?and?potential auditability?compared to opaque systems. However, it still?relies on centralised custodians for storing the gold, introducing?third-party risk.
Market Manipulation Risk: The gold market itself can be susceptible to manipulation by large actors, which could indirectly impact the price of PAXG. However, due to its physical backing, PAXG is generally considered less vulnerable to manipulation compared to some other stablecoin mechanisms.
Regulation: The regulatory landscape for gold-backed stablecoins is evolving, with specific considerations for the underlying physical commodity and its custody arrangements.
Comparison to Gaugecash: While PAXG offers exposure to gold, Gaugecash's diversified basket approach?aims to provide a broader hedge against inflation across various asset classes. Additionally, Gaugecash eliminates?third-party risk?by not relying on centralised custodians.
7. Paypal USD
Mechanism: A centralised stablecoin issued by Paypal, pegged to the US dollar.
Purchasing Power Protection and Inflation Tracking: Primarily tracks the US dollar, inheriting its inflation characteristics.
Backup Mechanism: Backed by Paypal's reserves
Decentralisation and Third-Party Risk: Highly centralised, introducing significant third-party risk as it is entirely reliant on Paypal's solvency and regulatory compliance.
Market Manipulation Risk: Less susceptible to direct manipulation due to its centralised nature, but still subject to broader market forces that can impact the US dollar.
Regulation: Subject to regulations applicable to Paypal and other financial institutions.
Comparison to Gaugecash: Gaugecash stands as a distinct monetary system offering decentralisation and eliminating third-party risk through its independent operation. Additionally, Gaugecash realises superior purchasing power protection through its diversified currency basket and built-in inflation protection mechanisms.
8. Liquity USD (LUSD)
Mechanism: An algorithmic stablecoin similar to DAI, but with a focus on borrowing, mainly against staked Ethereum (ETH).
Purchasing Power Protection and Inflation Tracking: Aims to maintain a relatively stable price level, but its effectiveness remains subject to market conditions and the stability of the ETH ecosystem.
Backup Mechanism: Relies on a system of collateralised debt positions (CDPs) similar to DAI, where users deposit ETH as collateral to mint LUSD.
Decentralisation and Third-Party Risk: Similar to DAI, LUSD introduces third-party risk through its reliance on users depositing and borrowing collateral. Additionally, its dependence on a single asset (ETH) introduces further risk factors.
Market Manipulation Risk: Similar vulnerabilities as with other algorithmic stablecoins, potentially compounded by the specific focus on ETH.
Regulation: The regulatory landscape for algorithmic stablecoins like LUSD is evolving, with potential implications for both the protocol and the underlying collateral asset (ETH).
Comparison to Gaugecash: Gaugecash offers a more diversified and predictable approach to maintaining purchasing power through its currency basket and built-in inflation protection mechanisms. Additionally, Gaugecash eliminates third-party risk by not relying on user-deposited collateral or a single asset like ETH.
Regulation
The regulatory landscape surrounding stablecoins is undergoing rapid and dynamic change. Different jurisdictions are adopting varied approaches, with some taking a more cautious stance and others seeking to foster innovation. Key players like the US, EU, and China are actively considering regulations aimed at mitigating potential risks associated with stablecoins, including:
Money laundering and terrorist financing:?Ensuring compliance with anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations is a major concern for regulators.
Investor protection:?Regulatory frameworks aim to protect investors from fraud, manipulation, and other risks associated with stablecoins.
Financial stability:?Regulators are concerned about the potential systemic risks posed by stablecoins, particularly if they become widely adopted and integrated into the traditional financial system.
It's important to understand that even decentralised protocols like Gaugecash are not entirely immune to the reach of regulation. While the core protocol itself may operate outside the traditional regulatory framework, activities related to on-ramping and off-ramping (converting between fiat currencies and Gaugecash) may be subject to regulations depending on the jurisdiction. This highlights the need for continuous adaptation and compliance efforts for projects like Gaugecash to navigate the evolving regulatory landscape.
Here are some potential implications and considerations for the future of stablecoin regulation:
Gaugecash: A Distinct Monetary System Beyond the Stablecoin Landscape
Having explored the landscape of stablecoins and their inherent limitations, it becomes clear that Gaugecash occupies a unique position beyond this category. While stablecoins strive to maintain a peg to a specific asset, Gaugecash functions as an independent monetary system with distinct characteristics and advantages. This section delves deeper into the key differentiators between Gaugecash and traditional stablecoins, drawing upon established economic principles and highlighting Gaugecash's potential to evolve beyond the limitations of its contemporaries.
Common Ground: A Shared Limited Focus on Value Preservation
One limited area of commonality between Gaugecash and some stablecoins lies in their shared attempt to address value preservation. Both offer digital alternatives to traditional fiat currencies, which are susceptible to inflation and depreciation over time. However, it is crucial to recognise that stablecoins typically inherit the inflationary characteristics of the asset they are pegged to. For instance, a stablecoin tethered to the US dollar (USD) will experience similar levels of inflation as the US dollar itself. This limited ability to hedge against inflation distinguishes them from Gaugecash, which employs a more comprehensive approach to value preservation.
Both Gaugecash and stablecoins can be utilised for:
Hedging against inflation: By offering a relatively stable value proposition, they can act as a hedge against inflation, potentially mitigating the erosion of purchasing power associated with traditional fiat currencies. However, stablecoins can only be used as a hedge in region with inflation that is higher than the USD dollar (or any other currency that the stablecoin is pegged to)
Value storage: They can serve as a store of value, allowing individuals to hold their wealth in a form that is less susceptible to fluctuations compared to some traditional assets. The value storage capacity in Gaugecash is more solid than stablecoins, which mostly follow the value of inflationary currencies.
Payments and settlements: Both Gaugecash and certain stablecoins, particularly those designed for this purpose, can facilitate efficient and secure digital transactions. Some stablecoins are built on blockchains with higher fees or slower transaction times. This makes them unsuitable for small payments.
However, despite this shared focus on value preservation, significant distinctions exist between Gaugecash and the broader stablecoin landscape.
How Gaugecash Addresses Stablecoin Limitations
First of all: Gaugecash is not a stablecoin. Gaugecash is an innovative and independent monetary system.
Unlike stablecoins, Gaugecash adopts a fundamentally different approach to digital currency, overcoming many of the limitations inherent to fiat-backed digital assets:
Beyond the Peg: A Superior Approach to Inflation Protection
One of the most fundamental differences lies in the mechanism employed to achieve value stability. Stablecoins typically peg their value to a single asset, most commonly the US dollar. While this approach offers some level of stability, it inherits the inflationary characteristics of the underlying asset. In contrast, Gaugecash employs a diversified basket of 35 major currencies known as the Gaugecash Index. This basket approach aims to mitigate the risks associated with any single currency experiencing inflation or depreciation.
Furthermore, Gaugecash incorporates a built-in mathematical protection mechanism against hyperinflation. This mechanism automatically adjusts the value of Gaugecash based on a predetermined formula in response to extreme inflationary events. Additionally, a 2% annual correction is factored into the Gaugecash Index, aiming to account for “normal” levels of inflation and preserve purchasing power over the long term. These features combined position Gaugecash as offering a superior and more sustainable approach to inflation protection compared to most stablecoins. The chart shown above objectifies this over the last 22 years.
A Fundamentally Distinct Monetary System: Independence from Centralised Control
Another critical distinction lies in the monetary policy framework. Stablecoins, by their very nature, are often extensions of existing fiat currencies. Their value and supply are ultimately determined by centralized entities, such as the issuing institutions or peg management mechanisms. This dependence on centralized control introduces inherent risks, including the potential for manipulation and limitations in adapting to changing economic realities.
Gaugecash, on the other hand, operates as an independent monetary system. While Gaugecash shares certain characteristics with the Austrian School's vision of "hard money," its implementation is innovative and somewhat unconventional. In traditional hard currencies the supply is capped. With Gaugecash it is not and increased supply will never cause inflation, as Gaugecash follows a one on one coupling with the index. This value is backed by the deflationary and capped Gaugefield ($GAUI) asset. In this way liquidity for Gaugecash ($GAU) redemption is always guaranteed.
This independence extends beyond just supply control. Gaugecash is not tethered to any specific technology, such as a particular blockchain, offering flexibility and adaptability in the face of evolving technological landscapes. Such an approach also mitigates the risk of quantum computing, as the Gaugecash Monetary System may switch to a quantum resilient blockchain in time.
This self-contained system equips Gaugecash with the potential to:
Compete in the foreign exchange (forex) market:?As an alternative currency, Gaugecash could potentially challenge the dominance of the USD/EUR pair, which currently accounts for a significant portion of global forex trading volume. This is particularly relevant in regions experiencing high inflation or seeking alternatives to centralized control, where individuals and institutions might be drawn to Gaugecash's potential for stability and independence.
Evolve into a reserve currency:?Over time, with widespread adoption and increased trust, Gaugecash could potentially emerge as a reserve currency. This would involve being held by central banks and other institutions as part of their foreign exchange reserves, similar to the role currently played by the USD and EUR.
Serve as a unit of account:?In regions with weak or unstable local currencies, Gaugecash could potentially become a more reliable unit of account. This would facilitate easier comparison of prices, record keeping, and financial transactions, potentially fostering economic stability and growth in such regions. Adoption in this way would eliminate the need for constant on- and off-ramping between Gaugecash and fiat currencies, further solidifying its decentralised character. Such a scenario would necessitate a reevaluation of the relationship between Gaugecash and governments, potentially paving the way for a more collaborative and mutually beneficial approach.
Conclusion: A New Paradigm in Digital Money
In conclusion, Gaugecash transcends the limitations inherent to stablecoins, establishing itself as a distinct and innovative monetary system. By employing a diversified currency basket, built-in inflation protection mechanisms, and an independent monetary policy framework, Gaugecash offers a superior approach to value preservation and fosters a more predictable and reliable financial environment. Its potential to challenge the dominance of traditional currencies and evolve into a unit of account highlights its transformative potential within the digital finance landscape. While the journey towards widespread adoption may present challenges, Gaugecash's unique characteristics position it as a compelling alternative for individuals and communities seeking a more secure and sustainable path towards financial well-being.
The articles in this series:
1. A New Era for Money:?https://www.dhirubhai.net/pulse/new-era-money-decentralised-digital-stable-currencies-kai-pf%2525C3%2525A4hler-xkwme%3FtrackingId=tvxlouBqRmuK5w6N3m9mrw%253D%253D/?trackingId=tvxlouBqRmuK5w6N3m9mrw%3D%3D
2. Invest in the Future of Money with Gaugecash: https://www.dhirubhai.net/pulse/invest-future-money-gaugecash-worlds-first-monetary-kai-pf%2525C3%2525A4hler-bh0ge/?trackingId=TesvSTQSSNeeDWBjDsxfJg%3D%3D
3. Gaugecash, the next revolution after Bitcoin:?https://www.dhirubhai.net/pulse/gaugecash-next-revolution-after-bitcoin-kai-pf%2525C3%2525A4hler-8v1we/?trackingId=XRQS534JQgaQ6Z5pncTqyw%3D%3D
4. The Maze of Stablecoins Demystified:?https://www.dhirubhai.net/pulse/maze-stablecoins-demystified-kai-pf%C3%A4hler-8qxkf/?utm_source=share&utm_medium=member_ios&utm_campaign=share_via
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10 个月Thomas Jordan is absolutely right. He is being quite unpopular and is going to step down in September, unfortunately.
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10 个月https://dailyhodl.com/2024/04/27/swiss-central-banks-chairman-says-hes-dubious-about-holding-bitcoin-as-a-reserve-currency-report/