Throughout human history, rai stones, cowrie shells along with a lot of other things served as money. That’s hard proof that the actual currency could be anything. It can exist in the form of a physical item or be fully digital. Following this logic, bitcoin and other cryptocurrencies can also be considered money.
Cash is the most commonly used monetary aggregate to date (unless a worthy alternative is offered…). However, the current trend is a mistake. Sorry to destroy your view of the world, but traditional money has no intrinsic value. Face it: you can’t eat dollars, and a $100 bill is not a lot different than the $20 one. It is rather sad, but still a reality, that сash is fast becoming a museum piece. This unexpected discovery raises an important question: what makes money good money? Let’s compare four different types and figure out whether something ever replaces fiat currency. With that said, let’s jump right into it.
We think all of you have some money in your pockets or purses. Do you ever wonder how much it is actually worth? Well, the only thing that springs to mind for most people is some figure. However, no matter how many banknotes you have, they are just pieces of paper with a number attached to them. Their value is determined by government promises and our belief that these promises can provide them with the purchasing power. That’s the point of fiat money.
Now consider this: the world GDP reached $127 trillion in 2017. The blood of a giant organism called the global economy is an overwhelming mass of cash backed by nothing. Market participants just made an agreement on the value of paper money. The implementation of this kind of agreement hangs on nothing but trust in the State that issues money.
According to the National Bank of Poland, fiat money is not secured by tangible property such as precious metals. Its value is backed exclusively by the monopoly on being the only legal tender on the territory of a country, as well as confidence in the issuer. To maintain the demand for traditional money, the state collects taxes.
In most fiat definitions, the governmental bodies play a crucial role. This is natural since the effective performance of paper money is supported only by the mechanisms of political power. The emergence of cryptocurrency can pose a threat to the established order. Bitcoin itself bears some resemblance to fiat that is backed by nothing. However, it is not issued by the state but by a computer complex that saves all your operations using blockchain. Cryptocurrency is built on cryptography. It is not secured by people or trust but by math. More about that a bit later on.
Everybody knows that gold is not only a precious material mostly made into jewelry but also a good investment. It is a symbol of personal wealth, and, of course, an indicator of the economic stability of any country. It is used in international trade in natural resources and interstate settlements. It is accumulated by countries as a reserve currency and kept in special vaults in the form of the gold reserve.
As a currency, the “noble” metal even has its own XAU code along with the dollar, euro, and other national units. This is assigned to it by the SWIFT.
Thus, gold performs monetary, commodity, and currency functions. But how does gold, as a currency, differ from the dollar or euro? As a matter of first importance, it does not have a national origin. Its use as a global currency unit does not raise any extraneous questions and does not give any individual advantages.
Second, unlike America’s currency, which is in fact just paper, gold has the properties and value of a real commodity. For example, when conducting currency transactions on the Forex market, brokers just pay a certain amount of one paper with “a promise” for a certain amount of another. This asset bubble is growing too big and can burst at any moment. When we buy/sell gold (or a gold-backed currency) we make transactions with a real material object which has mass and volume. What is more, its value remains stable for millennia.
Gold, being both a universal commodity and real money, creates a reliable guarantee of exchange. The same cannot be said about the paper currency which offers just empty promises.
The one question that is on everyone’s lips: is bitcoin money? Well, we ask another question back, to get out of it: are emails letters? Translating the decentralized super organism into plain English, it is a digital asset that can be bought, earned, traded, and spent. It lives on the internet and is controlled by its community of users. But actually, none of that matters. What matters is what you can do with bitcoin. That’s what matters, that’s a lot of what matters. Call emails whatever you want as long as the email works. The same goes for digital gold. If you can use it the same way you use money, then you can call it money. And what economists or critics think has nothing to do with the overall picture.
There are several challenges associated with cryptocurrency though. They make the public reluctant to accept and support it. The major one is volatility. Large price fluctuations certainly don’t increase the reputation of bitcoin.
Stability and security aren’t going to appear out of nowhere, obviously. Maybe we need to find a decent alternative just in case one day the public will be in favor of crypto. This is where the beauty of stablecoins comes into play! They combine the relative stability of traditional currency with security and innovation. Let’s go into great detail.
This high-yielding alternative asset class is now gaining popularity worldwide. It’s all thanks to the promise to provide a person with a more stable version of the cryptocurrency. Their price will not decline sharply so you can place safe bets in the crypto market. But stablecoins don’t stop there, of course. In general, they become more and more attractive to users. This means that they have all chances to take root in our society. This will reduce the risks to investors and early adopters, who think that the money they invest in the coin can just disappear overnight.
Although there are many stablecoins available today, we narrowed our list to three, taking into account popularity, size, and uniqueness.
• Tether (USDT) is a big shot on Olympus of stablecoins. It outshines all of its competitors in terms of volume, market capacity, and availability. In fact, this coin is so widespread that its daily trading volume currently exceeds all cryptocurrencies except bitcoin. It is issued by Tether Limited and pegged to the US dollar. Each USDT is equivalent to $1 and must be backed by real dollars in the company’s account. This asset was created to simplify the work of exchanges with fiat money. Tether is built on the basis of the Omni Layer protocol, which provides the issue of tokens based on bitcoin. It works according to the Proof of Solvency (PoS) scheme. The coin allows you to quickly fix what you earn, but problems with the law continue to adversely affect its reputation.
• DAI is the brainchild of the MakerDAO project. What makes it stand out from the crowd is its unique approach to guarantee the stability of the price. Unlike most other projects, which are backed by currency reserves on the bank account, DAI relies on Collateralized Debt Position (CDP). The latter is a smart contract based on the Ethereum blockchain.
• The last but certainly not the least is the USD Coin. This is another project aimed at further promoting its position in the market of stablecoins. It was launched by Coinbase and Circle. USDC is an ERC20 token. On a one-to-one basis, it is pegged to the United States dollar.
Once the public knows about a particular stablecoin, its dissemination and impact become wide, since a specific tangible asset stands behind it. It is easier for the average user to trust the analog of a dollar than some ephemeral virtual coin. It’s a perfect opportunity for those who do not take the idea of crypto seriously. A new class of digital currencies turns a weird technology into something that even your grandmother can use.
In addition, it is worth noting that these coins are a more suitable solution for fast transactions than bitcoin and a dizzying buffet of alternatives. Stable price, rapid turnover, and accelerated processing make stablecoins convenient for everyday grocery shopping or pizza orders. We hope to see them taking root in everyday life. Making stablecoins work for the user is the main way to catalyze greater attention on the market. So far, we have had good results.
The grand takeaway here? Fiat money isn’t as good as you think it is. Using it, in the long run, has serious side effects. Inflation and rapid depreciation of the national currency is a case in point. Luckily, bitcoin turns out to not be the only option that can replace cash. The popularity of stablecoins continues to grow at a breakneck pace. This is confirmed by the increase in the market cap. The market capitalization of USDT alone increased by 350% from $4.7 billion to $21.4 billion in 2020. To do away with cash, stablecoins need to go to places where they benefit society for our future sake. That will not happen overnight, of course. But big things have small beginnings, remember?