There has been much buzz in recent years around cryptocurrencies: decentralized, digital currencies that use distributed ledger technology rather than trust in a central party such as a government to secure financial transactions. However, despite being potentially valuable investments, their price is far too volatile to be used for day to day transactions, such as buying a cup of coffee, or in the case of Consilience Ventures, providing a token users can have faith will retain its value in the growing Consilience Ventures marketplace and which is resistant to negative speculation. In order to transition from being merely investments to becoming genuinely useful as currencies, price stability is a key component in achieving the functions of money Consilience Ventures requires: acting as a medium of exchange that all parties involved in a transaction agree is worth buying and selling, a store of value for people seeking to hold their assets in a safe and liquid form and as a unit of account to provide useful information on the relative values of almost all assets in our economy. Digital currencies that seek to maintain a stable price are known as stablecoins and could well be the next step in this transition. In this article we will be focusing on non-collateralized stablecoins, which achieve price stability in a unique but potentially highly cost-effective way for Consilience Ventures investors.
Most stablecoins are collateralized in some way in order to achieve stability, in the simplest examples, to purchase stablecoins one must deposit an equal value in US dollars as collateral to a centralized authority, thereby enabling stability but sacrificing the decentralization which is core to the cryptocurrency philosophy. Other stablecoins attempt to circumvent this by having the collateral be in the form of other cryptocurrencies held on a blockchain rather than by a central authority but these lose a great degree of capital efficiency as cryptocurrencies are prone to huge fluctuations in value, meaning far more than an equivalent dollar amount needs to be used as collateral in order to shore up potential drops in price.
Non-collateralized coins take an entirely different approach, inspired by Quantitative Easing, a monetary policy popular among central banks across the world to maintain the stability of fiat currencies. Central banks purchase assets such as corporate bonds from banks, injecting them with capital and allowing them to increase investment and issue more loans, hopefully increasing liquidity and spending across the economy. Increasing the supply of, say, dollars in the economy lowers their value and stimulates inflation when it falls too low. Similarly, when demand for a non-collateralized stablecoin is too low and the price falls below its target value, a decentralized algorithm lowers the supply of coins being traded on the market by issuing bonds and purchasing back coins, thereby raising the price, whereas when demand is too high and the price rises by too much, the algorithm begins to buy back the bonds, flooding the market with more coins and bringing their price back down. A tidy concept, non-collateralized coins are perfectly capital efficient as they require no collateral to be held in reserve whatsoever and are decentralized, although they do still require one to have faith in the algorithm.
Such a system manages to retain the most useful properties of fiat currencies: being liquid in the relevant marketplace, being reliable as a long-term store of value and being resistant to price adjustments whilst keeping the decentralized nature cryptocurrencies and Consilience Ventures investors value. Consilience Ventures itself is in an ideal position to leverage the stablecoin system as it is a selective marketplace built on trust and credibility, and faith in its reliability is the most valuable tool a cryptocurrency can use to retain long term investments and prevent negative speculation.