The dollar is going crypto. Coinbase has joined forces with Goldman Sachs backed Circle to launch a new ethereum based token that is pegged to the dollar.
The system is simple. You give a guy/girl your dollars, they give you the token. Now you can do whatever you want with USDC, just like eth. Once you fed up with it, you give the USDC back and you receive commercial bank account dollars.
This is a trusted system. The guy/girl could give their friends USDC, for example, without requiring commercial bank dollars. They could be hacked, even Swift was once. They could be running on fractional reserves. They could be doing a lot of things.
So auditors have to come in now and then to check everything, but Enron was probably audited before it went bankrupt. So one can’t quite be sure the token does have a bank dollar, but considering it is Coinbase and Circle, one can be reasonably sure they’ll take all measures to do it all properly.
Not least because there’s a lot of money to be made. Just keeping the bank dollars in a savings account would give them some decent returns. Eventually, once they get out of the honeymoon, they might keep the fiat in bonds, or stocks, maybe a small part of it even in cryptos.
That’s on top of whatever they might charge for the conversion, eventually. In the honeymoon period it would probably be close to zero, but if/once near monopoly, then a fee here, a fee there, might be expected.
One fee they can’t escape is whatever the ethereum network/miners/stakers charge. That means they need eth to pay for the gas, so ethereum gets something out of it.
The biggest one is of course prestige. All of these new stable coins are running on eth. That’s because a lot is happening on ethereum, with kitties and all the rest, so they want their token to have a chance of being part of it. To be incorporated in the decentralized exchanges (dex) for example, or so that tokenized racing digital cars can accept USDC or whatever other stablecoin (so named ironically presumably because the dollar has lost 90% of its value in the past decade or so).
Meaning ethereum is where all the action is currently taking place, but if you can use tokenized dollars to buy kitties or to send them across the world or to use them in all ways eth can be used, then what’s the advantage of eth?
The simplest answer is that ethereum is needed to pay transaction fees so as to move around all these stable coins. Meaning the more network usage, the more demand for eth.
So things like tokenized dollars are less of a competitor to eth, and more of a customer. At least for some aspects. For other aspects, like international payments, you’d probably use tokenized dollars rather than eth.
Eth, however, has far more liquidity and is far more widely used currently than any tokenized dollar. With the selling point of the latter mainly being to more easily exchange it for cryptos, at least for now.
That presumably adds some efficiency because rather than having to slowly deposit funds through banks, you’d have instant conversion from tokenized dollars to cryptos.
Plus, considering the inflationary nature of fiat, cryptos may be more appealing as a sort of savings account, especially once ethereum launches Proof of Stake which will give a circa 5% yearly return on top of whatever price gains there may be, or indeed losses.
Because cryptos are risky, but compared say to Venezuelan Bolivar, cryptos have been very safe. That fiat currency has now effectively seized to function, but it is probable that the dollar is just the first to be tokenized, with others to follow.
Euro, the Pound, CNY, Russian money, Yen, as well as other smaller currencies, will also probably be tokenized in the future if not by central entities then by something like DAI.
DAI is currently algorithmically pegged to the dollar in a trustless way, but there is no reason why it can’t be pegged say to Gold, Yuan or indeed to the price of Apple stocks.
It is actually probable that eventually anything which can be tokenized will be tokenized. That’s because the efficiency gains and the benefits are self evident and numerous.
You can not easily, for example, buy an actual Apple stock. You have to go through many intermediaries, which means many fees. Nor can you really buy a fraction of a stock, while a token can be very divisible.
Transferring the stock is then just as difficult. With a token it is pretty easy. Furthermore, just how many stocks Apple has really issued, no one knows with a degree of certainty. With a smart contract, it is not a matter of trust, but a matter of fact.
Those qualities and others mean tokens handle far more trading volumes than even trillion dollar stocks. That’s because tokens are global, can be traded on many exchanges, can be exchanged very easily, and can be held on a smart wallet without paying anyone any fees as opposed to whatever fixed or percentage yearly fees brokers charge.
So this trend towards stablecoins may be just the beginning of a far bigger trend whereby everything is digitized.
That should make global markets far more efficient than they currently are, and may make saving and investing cool again.
That all will potentially run on ethereum, which is miles ahead of any other blockchain. So it can only be good for eth. Not least because all the middlemen are replaced with just one eth “middleman,” with that eth middleman being all of us who want to take part.