Stablecoins Programmability is Needed to Compete with CBDCs

Stablecoins and central bank digital currencies (CBDCs) may seem similar in their ability to offer stable value, but they have distinct differences. Stablecoins have an advantage in providing unique use cases, thanks to their programmability through smart contracts. This programmability enables asset backing and decentralization, which are not feasible in current CBDC models. Instead of competing with CBDCs, developers should focus on leveraging stablecoins programmability opportunities.

Stable-asset providers assert that they can improve the current monetary system in three main ways. Firstly, stable assets can lower the costs of traditional financial activities such as decentralized lending/borrowing via decentralized finance (DeFi) and remittances. Secondly, people in nations experiencing hyperinflation can use stable assets to safeguard their income and stabilize payments, such as through the Reserve protocol in Venezuela. Finally, stablecoins can facilitate privacy-focused payments, like MobileCoin (MOB).

Although these three use cases for stable assets address problems within the present-day financial system, it is worth noting that CBDCs could theoretically solve them too.

The Importance of Asset-Backing

Asset-backing is a crucial aspect of stable assets, which has traditionally relied on financial reserves. Tether and USD Coin, for instance, are backed by financial assets such as U.S. dollars, commercial paper, and U.S. Treasurys. In contrast, Dai is backed by stable assets like USDC, Ether, and Bitcoin. However, stable assets can also comprise assets with direct utility that aren’t typically part of the financial system, such as real-world assets. This approach can promote the use cases of stable assets and enable features that central bank digital currencies cannot offer.

For example, Kolektivo aims to create community currencies backed by natural capital assets such as tokenized land and food forests. This concept has been previously advocated by philosophers like Charles Eisenstein, who argue that it can incentivize environmental conservation. Additionally, communities can tokenize their local assets to create community stablecoins linked to the wider financial system.

Grassroots Economics utilizes Community Inclusion Currencies in Kenya, backed by local goods and services, donor funds, cash, and vouchers. In response to recent banking crises, Coinbase proposed “flatcoins” tracking inflation rates, which could comprise a bundle of utility assets like commodities and real estate.

Flatcoins came about in 2022, as rising inflation rates continued to impact cryptocurrency values. Coinbase recently stated that it is now “more important than ever” to develop a stablecoin that tracks inflation and eliminates economic unpredictability caused by the traditional financial system.

Stable assets require robust and diverse reserves to maintain stability. By incorporating other real-world assets and deploying them on a transparent, open blockchain infrastructure, stable assets can offer much more than traditional currencies.

Decentralization: Trust and Programmability

The fundamental technical value of blockchain technology is decentralization. However, the degree of decentralization can vary among stablecoins. For instance, USDT and USDC, being centralized, demand trust in their issuers, Tether and Circle, respectively, to maintain adequate reserves and handle issuance in good faith. DAI, on the other hand, is a more decentralized stablecoin. Its issuance operates through an overcollateralized system, and its governance token MKR empowers anyone to mint DAI and govern the protocol. Governance token holders can vote on decisions such as investing $500 million of protocol-held DAI in U.S. Treasurys and corporate bonds.

Moreover, decentralization can stimulate programmability. The ability to govern the execution of programmable money is given to users. For instance, a community could create a stablecoin that automatically allocates funds to a community investment vehicle governed by a local DAO. GoodDAO of GoodDollar is a prime example of governance over the protocol’s distribution of universal basic income, which is backed by DeFi rewards for price stability. Similarly, governance token holders can decide to invest returns from the underlying stable asset collateral in positive climate action, as demonstrated by the Spirals Protocol.

By giving more power to stable-asset holders, decentralization can foster transparency in issuance and management, including independent decision-making, as well as the development of new features driven by users’ needs.

Stablecoins Programmability: Moving Ahead with Programmable Money

As the world of cryptocurrencies continues to grow, there lies an immense opportunity for both centralized and decentralized bodies to explore innovative ways of asset-backing and decentralization. However, in the United States, regulatory clarity remains a major challenge, with the failure to differentiate between blockchain technology’s utility and its speculative aspects. With a potential moratorium on new stable asset issuance in the U.S., there may be a need for innovation to happen overseas.

The focus should now be on developing novel tools that encourage innovation and facilitate the real-world adoption of blockchain technology. Rather than competing with CBDCs or traditional payment systems, stable assets should serve as something entirely unique. For this to happen, the industry needs to move beyond the existing monetary designs and leverage the fundamental pillars of asset-backing and decentralization.