Crypto has many problems of its own making. Bad user experiences, unsustainable transaction fees, an inability to assess risks in the face of unyielding innovation. But until this year, I doubt anyone would have suggested that an interdependence on the U.S. dollar was one of them.
The introduction of easily tradable, even decentralized, stablecoins has been a godsend for millions of ordinary people. They can now hedge against the constant fluctuations in the price of ETH and BTC. And price stability means global commerce need no longer be obviously deterred in integrating programmable money into their digital operations.
And yet, the land of the dollar is in trouble. The full economic repercussions of shutting down an economy for many months are yet to reach its apex. Debt is being monetized on a huge scale. There are huge wealth divides between generations, races and cities.
Cultural and political divides run equally as deep. The U.S. population is so attitudinally polarized that even wearing a mask is political based on party. And at the top, the country is led by administration intent on stoking more division and taking sides. U.S. politics is so broken, it is not beyond comprehension that full-blown civil strife could break out. In fact, it is something U.S. journalists and generals have openly contemplated in trepidation of the possibility.
And if America is so precariously balanced between further prosperity and potential disaster, so, too, rests the fate of the U.S. dollar for the rest of the world. Just the issue of U.S. Treasury debt issuance alone has had professional money managers warning this month that the U.S.’ reserve currency status is under threat.
Traditional markets have mature financial products to hedge or flee such tectonic shifts. There are plenty of other world currencies or other non-USD denominated assets to transfer funds into should the dollar take a serious tumble.
Crypto lacks those same products, what an economist or trader might coldly describe as “financial instruments to hedge against external political risks." Despite Web 3.0’s aim to be both global in reach and also free of the control of nation states, its fate is still incredibly tied to the U.S. dollar.
The crypto ecosystem utilizes the global reserve currency in almost every facet of its user experience. Of course, there are those BTC or ETH natives who sleep and breathe satoshis and gwei, but go to any exchange, or check gas prices in your wallet: Crypto was built and is used by people who still work in greenbacks.
The most obvious route out of such interdependence would be to adopt euro-, yen- or yuan-backed stablecoins. But where there are more than half a dozen USD stablecoins with trading volumes regularly above $5 million per day, there are no non-USD stablecoins that can compete at that level.
Why hasn’t one taken off as yet? Mariano Conti, formerly of the MakerDAO parish, the group that built the autonomous dollar-pegged dai (DAI) stablecoin, is better placed than most to explain why their team opted for dollars.
Originally, Conti told me, dai was meant to be pegged to the International Monetary Fund’s Special Drawing Right (SDR), which serves as the unit of account between IMF nation state members. The IMF derives SDR by bundling and carefully weighting five major currencies including the yuan, euro, British pound and the yen. But, to put it succinctly, Conti said, “USD was chosen in the end because people think in dollars, not SDR.”
Could this be changed? Could dai transfer to being backed by the euro or yen?
“The protocol is capable of changing its peg to follow another currency if needed,” he said, “although the process would likely be painful.” A better idea is “issuing another currency, say EuroDai or YenDai backed by dai.” In other words, building on success by supporting a new stablecoin with already existing collateral.
“If they start gaining traction, having a DollarDai spin-off and then slowly make the underlying dai drift to an existing or new basket of currencies” would also be workable, he said.
So decentralized, euro- or yen-backed stablecoins are possible, but all of this would take time: Months to create, but perhaps over a year to really gain the trust of a community. And then perhaps even longer to build into the user experience of hundreds of dapps.
A too-tight deadline but, to contemplate the worst, one that crypto might soon have no choice but to embrace.
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