Stablecoins must be programmable to counter CBDCs

Decentralization enables programmability — and that allows stablecoins to wield a key advantage over central bank digital currencies.

When it comes to providing stable value, stablecoins and central bank digital currencies (CBDCs) appear to serve two sides of the same proverbial coin. Crypto stable assets, however, can provide entirely different use cases — and CBDCs simply cannot compete.

The key is programmability — smart contracts that automate and add new features to money. Programmability allows for asset backing and decentralization that is not possible under current CBDC designs. Developers should be taking advantage of the programmable opportunities that stable assets offer rather than trying to compete with CBDCs.

Stable-asset issuers articulate that they can make the current monetary system better — primarily in three ways.

First, stable assets can help reduce the costs of traditional financial activity, such as decentralized borrowing/lending via decentralized finance (DeFi) and remittances.

Second, people in countries experiencing hyperinflation use stable assets as a means to protect their income and stabilize payments, such as through the Reserve protocol in Venezuela.

Third, stablecoins can be used for more privacy-oriented payments, such as MobileCoin (MOB).

These three purposes for stable assets fall within the framing of the present-day financial system. So, it is worth noting that the problems stablecoins address could also be solved, in theory, by CBDCs.

Asset-backing with utility assets

Asset-backing for most stable assets today is modeled largely after traditional finance. That is, their reserves are purely financial assets. Tether (USDT) and USD Coin (USDC) are backed by financial assets including commercial paper, U.S. dollars, and U.S. Treasurys. Dai (DAI) is backed by USDC, Bitcoin (BTC), Ether (ETH) and other stable assets. Stable assets, however, can also include assets with more direct utility not often part of the financial system in their reserve, such as novel real-world assets. The result is additional features that promote real-world use cases of the stable asset itself that cannot be done by CBDCs.

Kolektivo, for example, plans to create natural capital community currencies in which tokenized land assets and food forests back stable assets. Backing a financial system with natural capital is not a new concept, but one articulated by philosophers, such as Charles Eisenstein, who argue that this monetary system would incentivize environmental conservation.

Similarly, communities could tokenize other real-world assets in their local region to create community stablecoins that link their assets to the broader financial system. Grassroots Economics utilizes Community Inclusion Currencies in Kenya, which are backed by pooling local goods and services and donor funds in the form of cash and vouchers. In the wake of recent banking crises, Coinbase called for “flatcoins” that track the rate of inflation — this could use a bundle of utility assets such as real estate and commodities.

Stable assets, of course, will need robust, diverse assets in their reserves that maintain stability. By including other real-world assets, and bringing those assets on a transparent, open blockchain infrastructure, stable assets can do far more than currencies today.

Trust and programmability through decentralization

Blockchain technology’s core technical value is decentralization. USDC and USDT largely represent the antitheses of decentralization. Users rely on and must trust that the issuers of each — Circle and Tether, respectively — are good actors adequately managing issuance and reserves. DAI, on the other hand, represents a more decentralized effort. Anyone can mint DAI by borrowing it through an overcollateralized model and govern the protocol via the governance token MKR (MKR). Governance holders vote on any changes or actions committed by the protocols, such as investing $500 million of protocol-held DAI into U.S. Treasurys and corporate bonds.

Decentralization also fosters more programmability. Users determine and govern the execution of programmable money. For example, a community could design a stablecoin that automatically diverts a certain amount of funds to a community investment vehicle governed by a DAO consisting of local members. GoodDAO of GoodDollar governs the protocol’s distribution of universal basic income, which is backed by reward-generating DeFi to ensure price stability. Similarly, governance holders can choose to direct returns from the underlying stable asset collateral toward positive climate action (e.g., Spirals Protocol).

Decentralization can give greater power to stable-asset holders. This, in turn, can foster transparency in issuance and management (including independent decision-making), as well as the development of new features driven by the needs of the users.

Lessons for programmable money moving forward

The crypto industry, with both centralized and decentralized bodies, has the opportunity to design more novel functions through asset-backing and decentralization. In the United States, a key challenge has been a lack of regulatory clarity, including failures to distinguish between blockchain technology and its utility versus speculation. And moving forward, new stable asset issuance in the U.S. may only become more difficult with a potential moratorium — so innovation may have to happen abroad.

The focus on encouraging innovation and bringing real-world use of blockchain technology requires a new way of building novel tools. Stable assets are not meant to compete with CBDCs or even traditional payment systems but rather to function as something entirely different. But they will only do so if the technology is used to innovate beyond current monetary designs. Asset-backing and decentralization are two fundamental pillars to hone in on this work.

Nikhil Raghuveera is head of strategy and innovation at the Celo Foundation, a nonprofit organization supporting the development of the Celo blockchain. He is also a senior fellow at the Atlantic Council’s GeoEconomics Center. Nikhil has previously worked in management consulting, nonprofit management and economic consulting. He graduated with an MBA from The Wharton School and an MPA from the Harvard Kennedy School.

The author of this column has not been compensated by any projects mentioned. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.