• The inflation explosion is also eroding the value of the stablecoins
• Coinbase CEO proposes linking stablecoins to consumer price index
• So far, however, no steps have been taken in this direction
Coinbase CEO Brian Armstrong is considered one of the most influential crypto enthusiasts. He recently brought an interesting proposition into the debate about the future of stablecoins.
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Inflation reduces the purchasing power of a stablecoin
Inflation is the dominant theme of the year in business circles. In the euro zonethe inflation rate is now 10 percent, in the USA the increase in consumer prices over the year is 8.2 percent. There is no end in sight to the inflationary dilemma. Instead, some experts believe that inflation, at least in Europe, has not yet peaked. Since the largest stablecoins in the world are all pegged to the US dollar and are aiming for parity with it, the currency debasement also affects the stablecoin sector. The four largest stablecoins in the world in terms of their market capitalization are all linked to the greenback: Tether (68.4 billion US dollars market capitalization according to “CoinMarketCap”, as of October 12, 2022), Binance USD (21.6 billion US dollars dollars) and DAI ($6.7 billion).
Armstrong sees big problems with currency-based stablecoins
Stablecoin pegging to fiat currencies was a key topic at an Ask-Me-Anything (AMA) session with stablecoin CEO Brian Armstrong and John O’Loghlen, Coinbase’s country head in Australia. Armstrong surprised many crypto investors with an interesting forecast. The stablecoin CEO assumes that the stablecoins of the future will no longer be linked to fiat currencies. Today’s “Fiat Coins” are also suffering from monetary devaluation and are generally too dependent on the centrally controlled key currencies. The purchasing power of the most well-known stablecoins is actually falling in line with the purchasing power of a dollar. For example, a few years ago you could still buy a hamburger at McDonald’s for one US dollar (equivalent to a tether, a USD etc.), you can now get one for only 1.58 US dollars (or 1.58 tether). Overall, Armstrong thinks stablecoins are an excellent innovation and see great potential for growth, but some issues need to be addressed – such as being pegged to fiat money printed by central banks.
Armstrong: In the future, stablecoins will be linked to the consumer price index
Because of this issue, Armstrong anticipates that stablecoins will no longer be pegged 1:1 to the US dollar in the future. He believes it is more likely to be linked to a consumer price index (CPI), which is less volatile and reflects the purchasing power of consumers. Such a VPI is often calculated using a sample shopping cart. Armstrong explains, “And over time, we might even see stablecoins that are really more like ‘flat coins.’ Coins can buy a McDonald’s hamburger, you should also be able to buy a McDonald’s hamburger with one of these coins in five years’ time,” Armstrong calculates. In this way, the true value of such a “flat coin” is preserved regardless of inflationary tendencies.
Another advantage of being tied to the CPI is that stablecoins can be made more decentralized by being tied to the CPI and are no longer subject to state institutions, as in the case of the US Federal Reserve System.
Link to consumer price index? So far only a hypothesis
However, there are currently no signs that the use of the consumer price index as an underlying for stablecoins is being tested in practice. In addition to the “fiat-backed coins” mentioned (i.e. stable tokens linked to key currencies), there are also stablecoins linked to commodities such as gold (e.g. tether gold) or to a basket of various assets. So far, however, there is no trace of consumer-price-oriented stable tokens. It will therefore only be possible to check in a few years whether Armstrong’s prognosis actually comes true.
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