
Episode 50
Are Stablecoins Possible? | Nevin Freeman on the Reserve Protocol

Episode 50
Nevin Freeman
Are Stablecoins Possible? | Nevin Freeman on the Reserve Protocol
summary
This is the year of the stablecoin, or so says Nevin Freeman, the founder of a new stable-value cryptocurrency project based in the San Francisco Bay area. In order to understand what stablecoins and how they work, we first need to understand money.
In order for something to qualify as money, it has traditionally needed to function as both a store of value, and as a medium of exchange for goods and services. The medium of exchange component of money allows it to function as a vital coordination mechanism for society, allowing humans and international governments and organizations to collaborate on a massive scale. Money is thus an intrinsic part of our capitalist infrastructure and, without currency, many of our most important institutions and organizational structures would collapse.
Yet, our system of money and credit is not without its share of problems. Middlemen, financial intermediaries, and other central organizations often charge exorbitant fees for their services. These same intermediaries often function as “gatekeepers,” permitting or preventing access to financial counterparities at their discretion. The mismanagement of our financial system by such institutions has become a major source of systemic risk, the brunt of which is disproportionately carried by those at the bottom of the economic pyramid.
Cryptocurrencies offer a possible solution to many of the most prominent problems associated with fiat currency systems. However, there are significant roadblocks on the path to widespread adoption. As we mentioned, in order to qualify as money, a currency needs to both the medium of exchange and store of value functions. This becomes difficult to do when currency volatility can wipe out 50% of your net worth in a single day or double the cost of your company’s inputs overnight.
It is no secret that crypto markets are remarkably volatile. Even the most prominent cryptocurrencies – Bitcoin and Ether – fluctuate wildly. Unfortunately, it’s impossible for a decentralized currency to function as an effective store of value if its price varies by as much as 15% on any given day and in any given direction. Even if the cryptocurrency in question were rarely to drop in price, upside volatility can create a speculative feed-back loop that discourages anyone from actually using it as a medium of exchange. Why would you pay someone’s salary in bitcoin if you expected the currency to be worth more after you sold it? In this sense, even a highly volatile asset with little downside risk that serves as a great store of value can still be a poor medium of exchange.
Until cryptocurrencies are able to function as both a store of value and as a medium of exchange, they are unlikely to become truly mainstream or see real-world adoption. Yet, as previously mentioned in the case of bitcoin, a cryptocurrency’s capacity to store value directly undermines it’s use as a medium of exchange. How do we resolve this paradox?
This is where stablecoins come in. They aim to solve the problems of our volatile crypto markets by establishing price-stable cryptocurrencies that are pegged to some other stable asset, for example, the US dollar. Notably, these pegs are not determined by supply and demand. Instead, stablecoins effectively “price themselves” by making a standing promise to fulfill any buy or sell order at a set price, regardless of changes in demand for the currency by market participants. In traditional currency pegs and exchange rate mechanisms, currency boards manage the value of the peg by overseeing the promise to buy or sell at a preset conversion price. So, how does a currency peg work in the case of stablecoins?Here is an overview of how the most prominent stablecoin projects on the market promise to do this today:
Traditional asset-backed stablecoins: In short, under this system, each unit of the particular stablecoin is backed by a corresponding unit of fiat currency. Let’s use the US dollar as an example. According to this system, a third-party issuer sells tokens for one dollar each. The issuer then keeps all the dollars taken in from these sales in an account. If an individual holding a unit of the stablecoin wishes to cash out, the third party gives a US Dollar to the holder and removes a unit of the stablecoin.
The problems with this method loom large. First, there’s the obvious fact that, at any moment, the organization or individual issuing the stablecoin can abscond with all the money that’s supposed to be in the bank account. Second, a government or other centralized organization could freeze the aforementioned account of the issuer, which would grind the project to an abrupt halt. In short, there’s a lot of risk and a lot of trust needed for this method to function properly.
Collateralized Debt Stablecoins: Under this system, instead of attempting to back units of a stablecoin one-to-one with a fiat currency, the stablecoins hold a ratio greater than one-to-one of a crypto asset (or more commonly, various kinds of crypto assets). The way this works is rather simple. An individual who holds a crypto asset can deposit this asset into a smart contract, which creates a stablecoin for them.
The peg (the value of the stablecoin) is primarily maintained by the promise of future redemption for collateral if the stablecoin price diverges from the target for too long or the value of the collateral begins to drop. In either of these cases, all of the stablecoin holders can trade their coins for $1 worth of the collateralized crypto assets. In theory, speculators will step in to buy stablecoins below the target price based on this promise of future redemption and that will keep the price stable all of the time. The primary problem with this system is that that the underlying collateral is, by its very nature, volatile. As a result, in order to ensure itself against significant price drops, the system needs to hold a significant amount of collateral (often two-to-one, or even more). This is also a much more complex system, making it difficult to implement in a way that is efficient.
Future Growth-Backed Stablecoins: According to this system, the value is maintained by neither fiat or cryptocurrency holdings. Instead, a central account is created that uses algorithms to maintain the stability and manage the supply of the cryptocurrency in the face of fluctuating demand. It accomplishes this by increasing the number of stablecoins when the price goes up and decreasing the number when the price goes down. The increase in stablecoin supply is meant to reduce the market price of the coin to its target level. Conversely, when the price of the stablecoin drops below its target price, the system will reduce the supply of stablecoins and increase the price of the coin so that it returns to its target level. The primary issue with this method is tied to speculators. If they happen to lose interest in purchasing or actively begin to short the stablecoin, then the peg eventually breaks because the entire mechanism becomes worthless.
At the moment, it remains unclear which system, if any, will work. History has not been kind to currency boards, and the challenges of implementing a purely digital version of a currency peg has never before been tried until now.
In order to better understand the nature of stablecoins, and the promise that they have, Nevin Freeman joins us for a conversation about money and the fundamental properties of currency.
Ultimately, this is an exploration of how we can make cryptocurrencies a true store of value, while at the same time enabling these decentralized currencies to function as real and viable mediums of exchange.
Producer & Host: Demetri Kofinas
Editor & Engineer: Stylianos Nicolaou
Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod
bio
Nevin Freeman began life as an environmentalist in southern Oregon, where he studied wilderness preservation, thought about climate change, and considered ways of producing energy more efficiently. He stuck with this theme in college, studying mechanical and transportation system engineering in Portland, Oregon, in hopes of producing more efficient vehicles. But upon graduating, Nevin realized his understanding of the global ecosystem was simplistic and he was not on track to single-handedly solve global climate change the way he had imagined as a child.
After reflecting on why he wanted to preserve the ecosystem on the planet in the first place and realizing the thing he valued was flourishing of conscious beings, Nevin took a much broader approach to thinking about global problems and opportunities, integrating himself into the Future of Humanity Institute community, and co-creating the Effective Altruism movement – a group of people relying on reason and evidence to find the highest leverage ways of improving our world. He co-produced the first Effective Altruism Summit, directed the second one, and facilitated its transition to what is now Effective Altruism Global.
Nevin has spent his recent years building Paradigm Academy, a company builder in the Bay Area that specializes in recruiting and training ambitious, altruistic founders. Last year, Nevin left his full-time role at Paradigm to spin off Reserve, a full-stack open currency designed to bring economic stability to regions in the world with inflation problems. The Reserve team comes largely out of the Effective Altruism community, where many people aim to earn profits in order to fund the most important causes in the world.
Nevin’s mission in life is to solve the coordination problems that are stopping humanity achieving its potential, and he’s particularly concerned about averting the long-term risks posed by the development of artificial intelligence. You can reach him through LinkedIn.
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Lorem ipsum dolor sit amet, consectetur adipiscing elit. Et quidem iure fortasse, sed tamen non gravissimum est testimonium multitudinis. Duo Reges: constructio interrete. Hoc enim constituto in philosophia constituta sunt omnia. Non quaeritur autem quid naturae tuae consentaneum sit, sed quid disciplinae. Nihilne est in his rebus, quod dignum libero aut indignum esse ducamus? Illis videtur, qui illud non dubitant bonum dicere -;
Gracchum patrem non beatiorem fuisse quam fillum, cum alter stabilire rem publicam studuerit, alter evertere. Quodsi ipsam honestatem undique pertectam atque absolutam.
Etenim si delectamur, cum scribimus, quis est tam invidus, qui ab eo nos abducat? Sed non alienum est, quo facilius vis verbi intellegatur, rationem huius verbi faciendi Zenonis exponere. Huic mori optimum esse propter desperationem sapientiae, illi propter spem vivere. Quid, si non sensus modo ei sit datus, verum etiam animus hominis? Roges enim Aristonem, bonane ei videantur haec: vacuitas doloris, divitiae, valitudo; Suam denique cuique naturam esse ad vivendum ducem. Atque ab his initiis profecti omnium virtutum et originem et progressionem persecuti sunt. Respondeat totidem verbis.
Paulum, cum regem Persem captum adduceret, eodem flumine invectio? Quae si potest singula consolando levare, universa quo modo sustinebit? Nunc de hominis summo bono quaeritur; Et quidem, inquit, vehementer errat; Immo vero, inquit, ad beatissime vivendum parum est, ad beate vero satis. Quippe: habes enim a rhetoribus; Quod autem ratione actum est, id officium appellamus. Quod autem ratione actum est, id officium appellamus. Ita prorsus, inquam; Ne amores quidem sanctos a sapiente alienos esse arbitrantur. Apud ceteros autem philosophos, qui quaesivit aliquid, tacet; Cum id fugiunt, re eadem defendunt, quae Peripatetici, verba.
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Lorem ipsum dolor sit amet, consectetur adipiscing elit. Qui est in parvis malis. Aliter enim explicari, quod quaeritur, non potest. De ingenio eius in his disputationibus, non de moribus quaeritur. Et quidem, inquit, vehementer errat; Sic enim censent, oportunitatis esse beate vivere. Duo Reges: constructio interrete. Nam ista vestra: Si gravis, brevis; Quis animo aequo videt eum, quem inpure ac flagitiose putet vivere? Est autem etiam actio quaedam corporis, quae motus et status naturae congruentis tenet; Non quaeritur autem quid naturae tuae consentaneum sit, sed quid disciplinae.
Quodsi ipsam honestatem undique pertectam atque absolutam. Eorum enim est haec querela, qui sibi cari sunt seseque diligunt. Non quaero, quid dicat, sed quid convenienter possit rationi et sententiae suae dicere. Nec vero sum nescius esse utilitatem in historia, non modo voluptatem. Putabam equidem satis, inquit, me dixisse. Ipse Epicurus fortasse redderet, ut Sextus Peducaeus, Sex.
Estne, quaeso, inquam, sitienti in bibendo voluptas? Paupertas si malum est, mendicus beatus esse nemo potest, quamvis sit sapiens. Quid, si etiam iucunda memoria est praeteritorum malorum? Ab his oratores, ab his imperatores ac rerum publicarum principes extiterunt. Hosne igitur laudas et hanc eorum, inquam, sententiam sequi nos censes oportere? Nihil minus, contraque illa hereditate dives ob eamque rem laetus. Quid ad utilitatem tantae pecuniae? Quem Tiberina descensio festo illo die tanto gaudio affecit, quanto L.
Quod autem ratione actum est, id officium appellamus. At multis se probavit. -, sed ut hoc iudicaremus, non esse in iis partem maximam positam beate aut secus vivendi. Aut unde est hoc contritum vetustate proverbium: quicum in tenebris? Quas enim kakaw Graeci appellant, vitia malo quam malitias nominare.
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Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sint modo partes vitae beatae. Hoc est non modo cor non habere, sed ne palatum quidem. Tertium autem omnibus aut maximis rebus iis, quae secundum naturam sint, fruentem vivere. Quid iudicant sensus? Ex quo illud efficitur, qui bene cenent omnis libenter cenare, qui libenter, non continuo bene.
Duo Reges: constructio interrete. Sed ad haec, nisi molestum est, habeo quae velim. Qui ita affectus, beatum esse numquam probabis; Nihil opus est exemplis hoc facere longius. At tu eadem ista dic in iudicio aut, si coronam times, dic in senatu. At ego quem huic anteponam non audeo dicere;
Dicimus aliquem hilare vivere; Cum autem negant ea quicquam ad beatam vitam pertinere, rursus naturam relinquunt. Ergo adhuc, quantum equidem intellego, causa non videtur fuisse mutandi nominis. Universa enim illorum ratione cum tota vestra confligendum puto.
Et harum quidem rerum facilis est et expedita distinctio. Cur deinde Metrodori liberos commendas? Quod autem principium officii quaerunt, melius quam Pyrrho; Quid, de quo nulla dissensio est? Quamquam ab iis philosophiam et omnes ingenuas disciplinas habemus; Philosophi autem in suis lectulis plerumque moriuntur. Qui enim existimabit posse se miserum esse beatus non erit.
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Lorem ipsum dolor sit amet, consectetur adipiscing elit. Id enim natura desiderat. Callipho ad virtutem nihil adiunxit nisi voluptatem, Diodorus vacuitatem doloris. Duo Reges: constructio interrete. Illa tamen simplicia, vestra versuta. Non quaero, quid dicat, sed quid convenienter possit rationi et sententiae suae dicere. Sic exclusis sententiis reliquorum cum praeterea nulla esse possit, haec antiquorum valeat necesse est. Igitur neque stultorum quisquam beatus neque sapientium non beatus. Cur igitur easdem res, inquam, Peripateticis dicentibus verbum nullum est, quod non intellegatur? Eadem nunc mea adversum te oratio est.
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Quis Aristidem non mortuum diligit? Quo modo autem optimum, si bonum praeterea nullum est? An vero, inquit, quisquam potest probare, quod perceptfum, quod. Sedulo, inquam, faciam. Deinde prima illa, quae in congressu solemus: Quid tu, inquit, huc? Itaque contra est, ac dicitis; Quantum Aristoxeni ingenium consumptum videmus in musicis? Sint ista Graecorum; Huius ego nunc auctoritatem sequens idem faciam.
Stuprata per vim Lucretia a regis filio testata civis se ipsa interemit. Est enim effectrix multarum et magnarum voluptatum. Quid ergo aliud intellegetur nisi uti ne quae pars naturae neglegatur? Consequens enim est et post oritur, ut dixi. Atqui reperies, inquit, in hoc quidem pertinacem; Quamquam tu hanc copiosiorem etiam soles dicere.