Cryptocurrencies have made apparent an amazing technology which I have no doubt will influence many industries in the future. However, as a currency, that success has been less apparent. Sure, it’s wonderful that you can freely transact with Bitcoin, and I do love doing it. It’s far better than solutions like Paypal where you’re subject to the whims of a centralized agent who can charge you whatever they want and can hold your money or even tell you who you can or can’t transact with. You can never be banned from Bitcoin, you can’t be bullied or shut out because someone doesn’t like your business.
I prefer to accept cryptocurrencies for all of my paid work if at all possible because of these reasons. Unfortunately, it also has a number of downfalls which many enthusiasts simply won’t admit. When fees for the network spike they’ll say it’s not that bad or that the transaction times don’t matter, but they do matter. In fact, they matter a lot. Anyone who says this does not matter obviously does not use Bitcoin in their day to day life to accept payments from clients or to pay their bills. If they did then they’d be familiar with many things that are serious problem areas for Bitcoin.
Nowhere are these issues more apparent than with adoption by merchants. Despite existing for almost a decade, adoption has been slow going for Bitcoin. It’s tough to get people to accept a new currency, and there’s still only a small number of major retailers willing to do so. Part of this is due to the fact that the price of cryptocurrencies swing wildly on the day to day. Cryptocurrency enthusiasts will proudly tell you that this is by design and that these currencies are resistant to inflation and that the free market allows for us to have a medium of transaction which is not controlled by governments. All of this is true, but it’s also a double edged sword.
When you have a monetary system with no controller or overseer, it means that people will take advantage of any loop holes in the plan. There is of course nothing wrong with making a profit, but the fact that the price of a currency can swing wildly in value is only good for investors. It’s not good for businesses. Businesses don’t trade cryptocurrencies. They sell goods and services, and the crypto roller coaster is terrifying to them. Many industries have razor thin profit margins, and if they were to take and hold Bitcoin or any other number of volatile currencies from customers, then it’s likely that they would be doing business at a significant loss that day. Most of them can not afford that risk, and so if they take cryptocurrencies at all, they do it using a centralized payment processor such as Bitpay, which will automatically convert those currencies into US dollars, protecting their profit margins.
I also use Bitpay by the way, because while there are a number of great things you can buy with Bitcoin, I still can’t purchase the most important things. I can’t pay my electric bill with Bitcoin. I can’t buy my groceries with Bitcoin. So, while I am perfectly happy to accept Bitcoin all day for my writing work, the transaction can’t be completed without first cashing that cryptocurrency out into US dollars using my prepaid card.
Doesn’t this completely defeat the purpose of having a decentralized currency? We have traded one master for another, and it still isn’t helping the cause of crypto. However, there is a way for decentralized currencies to have their cake and eat it to. They’re called pegged assets.
A pegged asset is a digital currency which is pegged to the value of another asset. In most cases this is the US dollar. This peg is popular for obvious reasons. Many people are very familiar with it, and it’s useful for easy trading. The main issue to be addressed here is how to maintain the peg. Unfortunately, in most cases, the peg is maintained by having a collateral backup of physical US dollars in a bank account. While there are many stable cryptocurrencies which maintain their pegs well with this system and they are totally viable, it’s still centralized. These systems are dependent upon fiat currencies to maintain their peg, because it only works if the currency is redeemable for something of value.
This isn’t always a bad thing, and there are of course other assets which can be pegged as well. Honestly, you could create a peg for literally any commodity if you wanted such as precious metals like gold or even commodities like oil. What if somebody created something called ‘Orange Juice Coin’, a stable coin pegged to the value of, you guessed it, Orange Juice. While this might seem like a ridiculous idea, Orange Juice is a tradable commodity, and a tokenized representation of these assets could actually be well received. While many believe that a pegged asset never changes in value, this is not entirely true. A pegged asset simply has something backing it, normally a real world physical good, which can help to maintain the value.
Way back when, the US dollars was backed by physical gold. If you’ve ever heard anyone angrily rant about the United States leaving the gold standard, they are upset that our fiat currency is backed by, well nothing. Previously, you could redeem US dollars for their value in gold, giving confidence to the market. Stable assets are looking to achieve much the same thing, and I suppose that you could think of them as the new gold standard.
One of my favorite pegged assets is actually Digix, a form of tradable gold that is maintained on the Blockchain. The company behind this project is not exactly decentralized of course, when you have to deal with vaults of gold you’re held to certain standards to do so. However, they have presented a fabulous use case for the Blockchain, and they have simplified the process of trading gold. Anyone can go to one of their cryptocurrency exchange partners and purchase a share of a real gold bar by the gram. A trade like this would take mere seconds, and you would not need to deal with many of the pain points associated with precious metals. There’s no need to find storage for physical gold, there’s no need to pay exorbitant fees to a custodian, you can liquidate your holdings more quickly, and there are no spread fees to speak of like there are when you buy and sell physical gold.
The most appealing thing to me however is how easily these stable assets could be created. While not everyone could create a commodities market in a traditional finance industry, anyone could potentially create a pegged cryptocurrency asset, for any market. This could be more difficult in a heavily regulated market such as precious metals, but what if you avoided those markets entirely? The peg could be created for any commodity, pork bellies anyone?
Though the blockchain also has something to offer to commodities markets as well. Commodities are physical goods that we use everyday like coffee, soy beans or oil, and that means they need to be transported from point A to point B to be sold. The commodities market has long suffered from the problem of accountability in this department, and the Blockchain could greatly assist even existing players. With every action recorded and accounted for in the public ledger, issues like fraud and theft are much more difficult. Investors can partake in these markets with verified data, which they’ve never before had access to.
For cryptocurrencies though, it gives a benefit of something else entirely. It ties them to real world assets. It gives them a value, and it shows everyday people the power that the Blockchain can actually bring to our lives. Tokens are no longer empty assets with no backing, now they are backed by real things that you can hold in your hands. Pegged assets can finally help to cement in the public’s minds that cryptocurrencies are not simply born of nothing, they are just a system which promotes fair, unobstructed and streamlined trade.