Bitcoin and Ethereum : we start to stabilize Crypto-Assets
News
of Bitcoin and Ethereum is everywhere these days. The two
cryptocurrencies have had returns over the past year that make a
big-time hedge fund manager look like he’s running a lemonade stand in
front of his parent’s house.
Since last year, Bitcoin is up (at the time of this writing) 390.55 percent and Ethereum’s currency, Ether, is up a mind-blowing 1,896.13 percent.
New money is pouring into the cryptocurrency space, with one investment fund announcing a raise of $400 million dollars. Though talk of the inevitable Tulip mania and Internet 1.0 bubble burst abounds (and has for years), it does not feel a burst is likely anytime soon. (Note: not investment advice.) And that is actually kind of a problem.
If you go back to the Bitcoin whitepaper (everyone should read it, it’s fairly consumable), the title is very clear about its intent: “A Peer-to-Peer Electronic Cash System.”
Bitcoin, Ether and a host of other currencies are faced with hourly and daily price volatility (in relation to the US dollar). It is not uncommon to see drops of $50-$100 in Bitcoin and $30-$50 in Ether in a day, even if the overall trend line is up. On multiple occasions, we have seen drops of 10 and 20 percent in one day.
What this means in practice (and I know from firsthand experience) is that the earrings I bought for my wife with Bitcoin that cost $13 at the time of purchase were worth $16 a few hours later and today are the equivalent of $28. My wife is worth it, of course, but such volatility can wreak havoc on people. Even more so on companies, which desire stability for financial planning purposes.
The Bitcoin believer’s mantra of “HODL” or “Hold On For Dear Life” is precisely the opposite of what you want in a system designed to encourage people to treat digital currency like cash.
The need for crypto-stability True believers in blockchain and decentralization recognize that these new technologies and monetary systems will never achieve mass mainstream adoption with these kinds of violent swings.
Ethereum’s creator, Vitalik Buterin, identified this challenge back in November, 2014 in his post “The Search for a Stable Cryptocurrency.” It’s a very long and complex read (as are many of his writings), but he ends it with a fairly prescient prediction:
Many of the advanced financial instruments that Wall Street uses and that are familiar to many of us through the 2008 housing crisis and the book/movie The Big Short have achieved some degree of notoriety. Still, we don’t want to throw the baby out with the proverbial bathwater.
Vitalik further wrote that “One of the main applications of Ethereum that people have been interested in is financial contracts and derivatives … [and] the underlying concept in fact has a number of legitimate uses, some of which actually help people protect themselves against the volatility of financial markets.”
A new crop of startups is emerging to do just that with “smart contracts.”
Smart contracts: The foundation of stability In simplified terms, the smart contract takes the “if/then” statements that form the basis of legal and business rules and puts them into computer code. Then, with the security of the blockchain behind it, the contract is executed automatically without any human interference or risk of tampering.
Ethereum was built to support smart contracts in a way that Bitcoin was not (though a recent release by Rootstock is seeking to make it easier to run smart contracts on the Bitcoin blockchain). This fact explains why almost every new crypto-token being issued today happens in the ERC20 format, which is designed specifically for the Ethereum blockchain. It may also be a core driver of the huge Ethereum price run-up.
By relying on smart contracts, in theory, we have the ability to remove centralized systems (like banks), which introduce risk and lack transparency, and lower fees significantly. Venture capitalist and thought leader Vinay Gupta highlights that smart contracts can reduce “the 7 percent margins taken by all manner of middlemen to a more realistic 0.07 percent margin.”
If you can reduce the cost of executing contracts by 99 percent AND do it with increased confidence that the assets are not going to be highly volatile, that would be fairly appealing to an extremely large number of people.
The goal of each of these smart-contract-driven projects is to bring some degree of financial stability to the crypto-asset market.
Over the next few posts, I’ll profile 3 of the efforts that have come to my attention to address this challenge.
Whether they can or not (execution wise and team wise) and leaving aside any hype, I find them interesting for the innovative approaches they are suggesting.
Since last year, Bitcoin is up (at the time of this writing) 390.55 percent and Ethereum’s currency, Ether, is up a mind-blowing 1,896.13 percent.
New money is pouring into the cryptocurrency space, with one investment fund announcing a raise of $400 million dollars. Though talk of the inevitable Tulip mania and Internet 1.0 bubble burst abounds (and has for years), it does not feel a burst is likely anytime soon. (Note: not investment advice.) And that is actually kind of a problem.
If you go back to the Bitcoin whitepaper (everyone should read it, it’s fairly consumable), the title is very clear about its intent: “A Peer-to-Peer Electronic Cash System.”
Bitcoin, Ether and a host of other currencies are faced with hourly and daily price volatility (in relation to the US dollar). It is not uncommon to see drops of $50-$100 in Bitcoin and $30-$50 in Ether in a day, even if the overall trend line is up. On multiple occasions, we have seen drops of 10 and 20 percent in one day.
What this means in practice (and I know from firsthand experience) is that the earrings I bought for my wife with Bitcoin that cost $13 at the time of purchase were worth $16 a few hours later and today are the equivalent of $28. My wife is worth it, of course, but such volatility can wreak havoc on people. Even more so on companies, which desire stability for financial planning purposes.
The Bitcoin believer’s mantra of “HODL” or “Hold On For Dear Life” is precisely the opposite of what you want in a system designed to encourage people to treat digital currency like cash.
The need for crypto-stability True believers in blockchain and decentralization recognize that these new technologies and monetary systems will never achieve mass mainstream adoption with these kinds of violent swings.
Ethereum’s creator, Vitalik Buterin, identified this challenge back in November, 2014 in his post “The Search for a Stable Cryptocurrency.” It’s a very long and complex read (as are many of his writings), but he ends it with a fairly prescient prediction:
“There would then be multiple separate classes of cryptoassets: stable assets for trading, speculative assets for investment, and Bitcoin itself may well serve as a unique Schelling point for a universal fallback asset, similar to the current and historical functioning of gold.”The groundwork for this environment is being laid right now, as the number of new crypto-tokens continues to grow into the thousands. The second part, however, the “universal fallback asset” has not materialized fully. The SchellingCoin is the search for the stability.
Many of the advanced financial instruments that Wall Street uses and that are familiar to many of us through the 2008 housing crisis and the book/movie The Big Short have achieved some degree of notoriety. Still, we don’t want to throw the baby out with the proverbial bathwater.
Vitalik further wrote that “One of the main applications of Ethereum that people have been interested in is financial contracts and derivatives … [and] the underlying concept in fact has a number of legitimate uses, some of which actually help people protect themselves against the volatility of financial markets.”
A new crop of startups is emerging to do just that with “smart contracts.”
Smart contracts: The foundation of stability In simplified terms, the smart contract takes the “if/then” statements that form the basis of legal and business rules and puts them into computer code. Then, with the security of the blockchain behind it, the contract is executed automatically without any human interference or risk of tampering.
Ethereum was built to support smart contracts in a way that Bitcoin was not (though a recent release by Rootstock is seeking to make it easier to run smart contracts on the Bitcoin blockchain). This fact explains why almost every new crypto-token being issued today happens in the ERC20 format, which is designed specifically for the Ethereum blockchain. It may also be a core driver of the huge Ethereum price run-up.
By relying on smart contracts, in theory, we have the ability to remove centralized systems (like banks), which introduce risk and lack transparency, and lower fees significantly. Venture capitalist and thought leader Vinay Gupta highlights that smart contracts can reduce “the 7 percent margins taken by all manner of middlemen to a more realistic 0.07 percent margin.”
If you can reduce the cost of executing contracts by 99 percent AND do it with increased confidence that the assets are not going to be highly volatile, that would be fairly appealing to an extremely large number of people.
The goal of each of these smart-contract-driven projects is to bring some degree of financial stability to the crypto-asset market.
Over the next few posts, I’ll profile 3 of the efforts that have come to my attention to address this challenge.
Whether they can or not (execution wise and team wise) and leaving aside any hype, I find them interesting for the innovative approaches they are suggesting.
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