This piece is full of the vacuous optimism that has plagued the cryptocurrency space, even in the face of incredible material evidence to the contrary. Let’s begin with the very first paragraph: “In cryptocurrency, most avid traders prefer having an option for stability to trade out of their volatile holdings while still maintaining decentralized assets that avoid the need to exchange into Fiat currency. We traders sometimes need a period of rest for our crypto portfolios to not have the potential to significantly increase or decrease in value. This is exactly what the appropriately named stablecoins allow us to accomplish.” This seems prima facie to be true, but we are immediately struck with several questions, or at least I am. First, why trade into a stablecoin instead of fiat? The obvious answer is that you are trying to make an in kind change and hopefully avoid a tax burden, however, I am not convinced the government will see it this way. Second question, which stablecoin are you using that is decentralized? True or Tether with their centrally controlled bank accounts? Basis which in their own simulations breaks peg? Dai which is incredibly vulnerable to a black swan event? The honest truth is if you are decentralized you are vulnerable to uncommon events, and if you are centralized you should probably just use fiat.

After this we segue into a flat out lie: “The availability of stablecoins is still just two and a half years old” Tether was released on February 25th, 2015. That is THREE and a half years ago. Nubits, another stablecoin (which famously broke peg), was released in 2014. Bitshares (which famously broke peg and had to be restarted), also released in 2014.

Next, we move into the part I skip in every stablecoin whitepaper I read. Namely the part that claims stablecoins are the solution to finally have merchants adopt cryptocurrencies for payment with this great quote, “A fixed price cryptocurrency would enable a greater number of use cases than current cryptocurrencies allow. At the moment, cryptocurrencies are primarily held by investors and speculators seeking to profit from price appreciation. Few people hold and use cryptocurrencies like they would US dollars (receiving a salary, paying for groceries, etc.) because prices fluctuate significantly day-to-day.” Guys, you are solving a problem that does not exist. The advantage of cryptocurrencies over most other forms of currency is the censorship resistance. There is no advantage to your coffee shop in accepting dai instead of the good old dollar. Yeah, I know I’m breaking with the cryptocurrency creed, but I do not believe merchant adoption is our solution. Especially since our choices for stablecoins are vulnerable or centralized.

There’s another paragraph in here we need to pull out in full because it shows one of my biggest issues with stablecoins: “Why is USDT so highly exchanged when its value intentionally doesn’t garner a profit or loss? Well, stablecoins are, by design, not the roller coaster ride in value the way most other cryptocurrencies are, and that is precisely what gives them appeal. If you are riding recent highs in Bitcoin and decide it’s time to sell off a portion of them temporarily, Tether allows you to do so at Bitcoin’s market price. If BTC loses 15% of its value relative to the dollar the following day, your holdings that were converted to Tether did not actually lose any value.” This is again prima facie true, however, we are again neglecting the potential for significant negative events. Tether could be frozen tomorrow by the Feds, and then you have nothing. Basis could break its peg. If Ethereum value plummets then dai forces a mass liquidation and you are lucky to collect a fraction of what you had. Stablecoins will never be as stable as a well managed fiat currency like USD (that line is going to piss people off). You are running a low probability risk of total ruin trading into a stablecoin.

Next we have this line, “There are no money transmission laws applicable to sending cryptocurrency from one location to another. The same cannot be said about the dollar.” Uhh… just gonna leave these references for you guys here and here. (Note: these are not directly applicable but shows that the US government is willing to apply traditional interstate transaction laws to cryptocurrency.)

Now we get into the Tether part and this is my specialty. Suffice it to say I do not believe Tether is safe. It has been subpoenaed, the auditor they fired for being too thorough has been subpoenaed, the only reason they have banking is their cofounder founded a bank, and there is good research suggesting they are responsible for price manipulation. For more complete thoughts check here.

Other note I did not really discuss in that article, there is significant reason to doubt the volume of any Tether exchange. Bitforex puts up numbers that are flat out unbelievable, Kraken seems to be wash-trading the USDT/USD pair, and Bitfinex has been caught saying they alow some very shady things that sound a lot like wash trading (here (thanks Bitfinex’ed)). What this would seem to suggest together is that there is much less liquidity in the crypto marketplace than commonly assumed. If you are curious, look into Bitforex volume and watch your world shatter.

Next, I am going to summarize my criticism of the two primary types of stablecoin, asset-backed and algorithmic.

Asset-backed: vulnerable to asset seizure, needs to be regularly audited and exchangeable or is inherently suspicious.

Algorithmic: subject to Black Swans.

In summary, stablecoins are a solution looking for a problem. The only problem they really solve is allowing exchanges to avoid KYC/AML laws and best case you trade a tax burden for a regulatory risk and attack surface.

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