Stablecoins: level pegging (part 2)





The simplest method for creating a stablecoin is to peg it to a stable real-world asset.

If you have a pile of dollars, or a hoard of gold bars, you can issue a token representing them, which are a digital version of the receipts and promissory notes issued by goldsmiths in the middle ages.

The downside of this is that the assets backing the stablecoin require auditing to provide confidence in the validity of the stablecoin, and the temptation to create extra “money” out of thin air through something similar to fractional reserve banking or to use the reserves as collateral for multiple debts, will arise.

This is exactly what we’ve seen with the Tether stablecoin and its affiliated cryptocurrency exchange Bitfinex, which has suffered hacks, been sued by the New York Attorney General, and is now being investigated by the US Department of Justice.

In other words, asset-backed stablecoins tend to suffer from exactly the same problems and flaws of the conventional banking system, but what’s worse, without the regulation that has been put in place to address these problems.

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