When it comes to providing stable value, stablecoins and central bank digital currencies (CBDCs) seem to serve as two sides of the same proverbial coin. However, crypto-stable assets can provide completely different use cases, and CBDCs simply cannot compete.
The key is programmability: smart contracts that automate and add new features to money. Programmability allows for asset backing and decentralization that is not possible with current CBDC designs. Developers should take advantage of the programmable opportunities that stablecoins offer instead of trying to compete with CBDCs.
Stable asset issuers say they can improve the current monetary system in mainly three ways.
First, stable assets can help reduce the costs of traditional financial activity, such as decentralized lending/lending through decentralized finance (DeFi) and remittances.
Related: CBDCs Will Lead To Absolute Government Control
Second, people in countries experiencing hyperinflation use stable assets as a means to protect their income and stabilize payments, such as through the Reserve protocol in Venezuela.
Third, stablecoins can be used for more privacy-oriented payments, such as MobileCoin (MOB).
These three purposes for stable assets fall within the framework of the current financial system. Therefore, it is worth noting that the problems that stablecoins address could also, in theory, be solved with CBDCs.
Asset backing with utility assets
Currently, asset backing for most stablecoins relies heavily on traditional finance. That is, its reserves are purely financial assets. Tether (USDT) and USD Coin (USDC) are backed by financial assets including commercial paper, US dollars, and US Treasuries. Dai (DAI) is backed by USDC, Bitcoin (BTC), Ether (ETH), and other stable assets. However, stable assets can also include assets with more direct utility that are often not part of the financial system in your reserve, such as real-world novelty assets. The result is additional features that promote real-world use cases of the stable asset itself that cannot be realized by CBDCs.
Kolektivo, for example, plans to create natural capital community currencies in which tokenized land assets and food forests back stable assets. Backing a financial system with natural capital is not a new concept, but one articulated by philosophers, such as Charles Eisenstein, who argue that this monetary system would encourage environmental conservation.
Similarly, communities could tokenize other real-world assets in their local region to create community stablecoins that link their assets to the broader financial system. Grassroots Economics uses Community Inclusion Coins in Kenya, which are supported by pooling of local goods and services and donor funds in the form of cash and vouchers. In the wake of the recent banking crises, Coinbase requested “flat coins” that track the rate of inflation; this could use a package of utility assets, such as real estate and commodities.
Related: Flatcoiners Should Follow TerraUSD’s Fate’s Lead
Stable assets, of course, will need robust and diverse assets in their reserves to maintain stability. By including other real-world assets and placing those assets on an open and transparent blockchain infrastructure, stablecoins can do much more than currencies today.
Trust and programmability through decentralization
The core technical value of Blockchain technology is decentralization. USDC and USDT largely represent the antitheses of decentralization. Users trust and should trust that the issuers of each other, Circle and Tether, respectively, are good players that properly manage issuance and reservations. DAI, on the other hand, represents a more decentralized effort. Anyone can mint DAI by borrowing it through an overcollateralized model and govern the protocol through the MKR governance token (MKR). Governance holders vote on any changes or actions committed by the protocols, such as investing $500 million of DAI held by the protocol in US Treasury bonds and corporate bonds.
Decentralization also encourages greater programmability. Users determine and govern the execution of programmable money. For example, a community could design a stablecoin that automatically diverts a certain amount of funds to a community investment vehicle governed by a DAO made up of local members. GoodDollar’s GoodDAO governs the universal basic income distribution of the protocol, which is backed by reward-generating DeFi to ensure price stability. Similarly, governance holders may choose to direct the underlying stable asset collateral returns towards positive climate action (eg, the Spiral Protocol).
Decentralization can give greater power to holders of stable assets. This, in turn, can encourage transparency in issuance and management (including independent decision-making), as well as the development of new features driven by user needs.
Lessons for programmable money in the future
The crypto industry, with both centralized and decentralized bodies, has an opportunity to design newer functions through asset backing and decentralization. In the United States, a key challenge has been a lack of regulatory clarity, including the failure to distinguish between blockchain technology and its usefulness versus speculation. And going forward, issuing new stablecoins in the US may only become more difficult with a possible moratorium, so innovation may have to happen abroad.
The focus on fostering innovation and bringing the use of blockchain technology into the real world requires a new way of building novel tools. Stable Assets are not meant to compete with CBDCs or even traditional payment systems, but function as something else entirely. But they will only do so if the technology is used to innovate beyond current currency designs. Asset support and decentralization are two fundamental pillars to improve this work.
Nikhil Raghuveera is head of strategy and innovation at the Celo Foundation, a non-profit organization that supports the development of the Celo blockchain. He is also a senior fellow at the Atlantic Council’s Center for Geoeconomics. Nikhil has previously worked in management consulting, nonprofit management, and economic consulting. He graduated with an MBA from The Wharton School and an MPA from the Harvard Kennedy School.
The author of this column has not been compensated for any of the projects mentioned. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This post Stablecoins must be programmable to counter CBDCs
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