A lot is made about the stablecoin market, which is growing very nicely. This is establishing itself as a medium of exchange that is proving effective. Volatility is greatly reduced against the likes of Bitcoin and other currencies.
Money is necessary for trade. This was true ever since we left the barter system. It was an innovation that was required for merchants and business. This is why currency is not wealth. Instead, it is a tool used to generate it.
It is, however, an asset. According to basic accounting principles, it does go on the left hand side of the balance sheet. This means it has properties that are beneficial to an economy.
Cryptocurrency is in need of a major problem it can solve. This is one that is affecting most everyone across the globe.
Unfortunately, the path of assets backed stablecoins is not going to fixed what is ailing us.
Monetary Expansion Through Algorithmic Stablecoins
The world is in need of a massive amount of monetary expansion. This might seem crazy in light of the situation with central banks and the "money printing". The issue here is central bank reserves are not legal tender. In other words, it is not currency the average person can hold or spend. Thus, the impact on the economy is negligible at best.
This gets even more severe when we enter the Eurodollar System. Here we see where the overwhelming majority of global trade is funded. The challenge is the financial institutions involved here are balance sheet constrained, a fancy way of saying there is not enough money available.
Stablecoins that are asset backed are simply tapping into the same supply. Those that are tied to a currency, mostly U.S. dollars, are simply transforming what the commercial banks created. They are not expanding the money supply.
Ultimately, this goes no further to solving the problem than what we have now.
It is also where algorithmic stablecoins can enter the picture. Since this is not dependent upon any of the traditional assets, either cash or U.S. Treasuries, it can fund a great deal more. This means the value these bring, in USD denomination, is much bigger than anyone expects.
Trillions Of Dollars
The reality is that we are falling behind in economic productive. In the U.S. alone, this is already at trillions of dollars per year. Globally, it is tens of trillions.
This is derived by looking at the long term growth of 2.3%. Since the Great Financial Crisis, the U.S. is running around 1.75%. This might not sound like much but when dealing with an economy over around $25 trillion, this is significant.
At the core of this, in my view, is the fact the Eurodollar System encountered issues. Without going deep into it (something done in other articles) we are dealing with a collateral crisis. This is the basis of the balance sheet contraction.
In short, there is not enough money to fund a decent growth rate on a global economy near $100 trillion. Basically, more money is needed.
This is where an algorithmic stablecoin such as the Hive Backed Dollar (HBD) enters. Since we are dealing with something that can be expanded, we see how the ability to generate trillions in this sector is possible. This is "backed" by the value derived from the value capture token. At the same time, value is also created through the utility of the coin itself.
$1 Quadrillion
If you wan to see how this works, consider this fact.
Many claim the U.S. dollar is going to decline because it is the petrodollar and countries are moving away from trade in that currency. The entire oil market is roughly $8 billion per day. With the countries involved in the change, we are looking at roughly $2 billion that could ultimately be sold in a non-USD currency.
Over the course of a year, that is $730 billion. That is a hefty sum.
However, we have to keep things in perspective.
The Federal Reserve offers the U.S. banks a payment system called FedWire. They recently went live with an updated version named FedNow. It is something that could potentially expand the usage.
Do you know what FedWire did in 2022? It processed over $1 quadrillion in transactions. That is not trillions but a quadrillion. That is how big the utility is on the USD.
Global trade is in need of funding. It is ailing and this will not be resolve until someone comes up with another funding mechanism. Wall Street wanted to claim that mortgage backed securities (MBS) were the answer. Obviously they were not.
From my research, there doesn't seem to be anything on the horizon that will solve the problem. Central bank digital currencies (CBDC) come with their own issues, most notably trust amount the different players.
This is where digital assets are required. It is a new system that can pumped the require money, either medium of exchange or assets, into the economy. The central bank system was torched at the end of the World War 2. That is why the Eurodollar System arose. It was making up for the shortcomings that the central banks were operating under.
Now it is time for another evolution. This is going to have to come from algorithmic stablecoins since that is the one area that can provide the expansion along with price stability required to operate as a proper medium of exchange.
It is also the one area that can grow in the numbers required.
logo by @st8z