Stablecoins Aren't Stable

We assume the earth beneath our feet is stable because we can walk across it without detecting any underlying movement. In fact, the earth is rotating at 1,000 miles an hour, but we don’t discern this because we’re moving aboard it at the same speed. It’s a similar story with stablecoins, whose stability is not quite what it seems. Officially, a stablecoin such as USDT is always worth a dollar (give or take a cent), but that doesn’t mean the value of your Tether holdings remains constant, because the dollar itself is constantly shifting in value versus other global currencies.

This is a matter that the team behind Saga (SGA) have been at great pains to stress: that what we perceive as stable isn’t really stable at all. Rather, dollar-pegged stablecoins – as well as those pegged to other national currencies such as the euro – move in the same way as cryptocurrencies, gaining and losing value every single day.

Ido Sadeh Man, founder and chairman of Saga.org, explains, “Stablecoins are not stable because the value of the stablecoin is simply linked to the value of an asset such as currency.” As Man points out, the value of the underlying currency is not stable. This leaves such instruments “stable until it’s suddenly not.”

While one US dollar will always equal one dollar, just as one dogecoin will always be worth one DOGE, intra-currency moves make it hard for the average layperson to discern which of their assets is retaining value – and which are silently bleeding out.

The Fundamental Instability of Stablecoins

Stablecoins are unstable for two reasons. The first is because of underlying issues on the crypto side (see MakerDAO’s recent slip-up by way of example); these lapses are easily identifiable, although not always easily resolved. Any time a crypto collateralized or fiat-backed stablecoin slips from its dollar peg is a clear sign that something isn’t quite right. The second reason for stablecoin instability lies on the fiat side due to the price movements of the national currency it’s anchored to.

The cause of this can be traced back to the transition away from the gold standard in the 1970s, at which point fiat currencies became free-floating. As a result, their value can only be measured against that of other fiat currencies, rather than in ounces of gold. The absence of a universally agreed measure of value has forced economic thinkers to devise composite substitutes that can counteract the movement in single currencies. The best example to date is the IMF’s special drawing rights (SDR), which forms a basket of currencies. The current weighting comprises 42% USD, 31% EUR, with the remainder made up of RMB, JPY, and GBP.

SDR does not stand still either, since each of its composite currencies is undergoing its own market movements on a daily basis. However, because no single currency possesses a majority weighting, SDR remains far less dependent upon the actions of nation-states and their respective currencies. As an example of this, note how USD has dropped in value relative to SDR over the past month, despite the latter being constructed of over 4/10 USD.

The Relativity of Stability

The team behind Saga, whose SGA token is designed to mimic the SDR, complete with the same currency backing and weighting, have been at pains to raise awareness of the instability of stablecoins. Their goal is not to send traders scurrying to dump their stablecoins, but rather to inform them of better stores of value. Naturally, Saga is keen to position SGA as the ideal solution to this problem.

Were these calm times, with low volatility, steady economic growth, and a robust US dollar bolstered by strong oil prices, Saga’s plea may have fallen on deaf ears; when the market mood is bullish, there’s little need for stablecoins. But these are dark times, when the entire crypto market – like global markets – has become a giant casino. Stability has never been more in demand, and yet paradoxically it has never been harder to find.

Gold hasn’t proved the store of value its proponents thought it would during a financial crisis; nor has bitcoin. It may be the case that both of these assets rally in the months ahead, just as gold did in November 2008, six months after the last economic crisis began. In the here and now, though, the most valuable assets are those that can hold their value, or better still provide a modest yield. That’s not the current crop of stablecoins, and it’s certainly not conventional cryptocurrency either.
 

Photo by Valentin Salja on Unsplash