This blog post is about why you should care about having a stable cryptocurrency. As the author says, “there is no substitute for security when you are storing your wealth.”
The author of this blog post has a long list of other good posts on the topic. The most recent one is: “What to Know Before Investing in Crypto”.
A stable cryptocurrency is one that contains some quantity of actual currency, rather than being backed by nothing at all. That is, it is a coin that you can use to buy stuff. The most stable ones are the ones that have some quantity of actual currency in them, and no more. Because it will start collapsing if more people try to buy it than are willing to sell.
To understand why this might be important, think about how money works in your world. When you pay for a pizza with cash, you get change. And when you pay for a pizza with a credit card, you spend the whole balance.
The reason for this is that cash has two uses: it’s an investment (you want to hope your pizza gets eaten) and an instrument (you want to use it as money). The problem with credit cards is that they are both instruments and investments. Your credit card balance isn’t an investment; it’s just a way of keeping tabs on how much you owe. So if your credit card balance is increasing in line with the amount of stuff you’re buying, then something must be going wrong: either those things aren’t getting eaten at all or else the stuff isn’t getting priced right.
It’s possible that what’s really happening is that
It’s easy to argue that a stable cryptocurrency is unimportant. In principle, you could just make up a name like “Bitcoin”, print up some paper wallets with that name in them, and people would be happy to use that as their “Bitcoin”.
If you want to understand what an important thing is, however, you have to see how it compares to other important things. You have to see how your idea compares to the standard.
You can see the importance of Bitcoin by comparing it to other wildly successful ideas. One of the reasons why I chose Bitcoin (and not namecoin) was that Bitcoin has more in common with gold than any other payment system. Both are currencies: systems for exchanging value for value. Both are used as stores of value: ways to protect your wealth from inflation or confiscation.
I have been a big fan of Bitcoin for a long time. I buy and sell things on the bitcoin market, and have made some money on it. I have also invested in some altcoins, to try to make a profit. But I do not believe that any of these things is likely to lead to a stable cryptocurrency.
If you are like me, then you are waiting for one of the large governments to ban Bitcoin, or to crash the price by printing more money, or both. You may think that it is impossible for any government to ban Bitcoin: there are too many people holding on to their coins; they cannot all be arrested; it would be an impractical distraction from other important things; and so on. Probably most of us think that we can avoid paying taxes either by using Bitcoin or by doing something else clever with our assets.
A stable cryptocurrency is one which has a predictable value. Often, this is the same as a stable price, so it makes sense to call a cryptocurrency stable if it has a price that stays pretty much the same over time.
But not all coins and tokens are stable. A coin that is designed to go up or down by a certain amount, like Bitcoin or Ethereum, is volatile; its value changes every day. If you want to trade in and out of that coin on an exchange, then you may want to check what the price of the coin is at other times so that you can get in at the right price.
But the beauty of cryptocurrency is that people can use it to transfer wealth. What are you going to do with your money if you don’t have any? If you have a lot, it is tempting to spend it. But if you have a lot and no way of getting more, it will be hard to avoid using your wealth as a medium of exchange.
A stable currency is one that retains its value against other currencies even when the price of gold goes up or down. Bitcoin offers an advantage over traditional currencies in that it has no government which can inflate or deflate its supply.
The bitcoin protocol makes it easy for people to transfer their wealth between different currencies, but the bitcoin protocol does not make it easy for them to keep their wealth safe. The main problem is hacking: how do you keep bitcoins out of the hands of hackers if they are digital?
It is hard to tinker with a cryptographically secure digital currency, because it’s so hard to break the cryptography.
But easy to sneak in some bugs, perhaps. And if you make your software just good enough, you can get away with it. And if someone figures out how to use the sly tricks you’ve used to accumulate vast amounts of wealth, it will be too tempting to leave them in place.
The only way for a cryptocurrency to work securely is to have an entrenched group of people who are willing and able to defend it against attack. This is what we call the “core development team.”