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Cardano and stablecoins will be the financial backbone of the future

Published 6.2.2023

There is nothing in the Bitcoin white paper that says the goal of the project is to make people rich. However, analysis of cryptocurrency holders shows that most people expect exactly that. Can an alternative financial world emerge from speculation? At this point, it seems unlikely. Algorithmic stablecoins will be a very important part of the financial future. They need decentralized smart contract platforms like Cardano to exist. They use native coins like ADA and deliver real use cases. Satoshi's vision of an alternative financial world can come true through Cardano and projects like Djed.

TLDR

  • Some cryptocurrency fans are its biggest enemies if they show people charts and promise the impossible.
  • The most appropriate technology for building an alternative financial world will be one that insulates users from volatility.
  • One day there may be more users of stablecoins than there are holders of volatile cryptocurrencies.
  • If people really care about decentralization, they need to start preferring it to financial speculation.
  • People need to start looking beyond the contents of their own wallets.

Speculation is the killer of utility

Cryptocurrency fans who show people charts and promise them riches are perhaps unwittingly their biggest enemies. They give the impression that cryptocurrencies must be bought and then wait for a new wave of buyers. With this approach, they have essentially put cryptocurrencies on par with stocks. If you feel the same way about cryptocurrencies, you will have a hard time listening to other fans' advice that you should spend cryptocurrencies on goods and services.

The problem is that if holders buy cryptocurrencies and then wait to see what happens next, they are very likely planning to sell them. Watching the charts encourages this. Most influencers sell part of their portfolio on the new ATH and make videos about it. This behavior causes high volatility.

Certainly don't expect a new financial world to emerge on this speculative basis. People are forced to continue to use fiat currencies. There are even narratives that cryptocurrencies are better money and you need to spend the worse ones. They can lose money on cryptocurrencies if they don't behave like professional investors. And a professional investor will always sell if it is profitable. A crypto holder who doesn't sell on ATHs doesn't use fiat currencies, and spends cryptocurrencies without hesitation is a mythical hero who almost doesn't exist in the real world. Some people might even call such a hero a fool.

The only utility that people perceive, and many even claim it is the only possible utility, is speculation on market value growth. Let me tell you a secret. No cryptocurrency can make everyone in the world rich.

If a particular cryptocurrency becomes too big, investors will find new horses to bet on. This is not at all about a particular technology that is best suited to digital gold or things like that. This is about the rational economic behavior of large investors who can manipulate the media and the market.

The most appropriate technology for building an alternative financial world will be one that insulates users from volatility and is useful.

Algorithmic stablecoins

Algorithmic stablecoins are a brilliant technological advance. They can create a stable value pegged to, say, the USD, or anything else that has a relatively stable value. Ideally, it would be best to use a basket of assets, their value balances each other.

Imagine once we tokenize the stocks of the big companies you find in the S&P index. These tokenized stocks can be used to create some sort of stablecoin whose value will be based on the performance of existing companies. People want the money to be backed by something real. Is this a good direction? We don't have a clear answer.

Crypto assets such as ADA or BTC can be used as collateral. The stablecoin algorithm can handle volatility. The less volatile cryptocurrencies are, the more stable the values of stablecoins will be. An important aspect is that ADA, which is the native coin of the Cardano project, is used as collateral. Cardano enables the creation of stablecoins and is the necessary infrastructure for the entire mechanism.

Algorithmic stablecoins are decentralized and a third party has no control over them. Stablecoins retain all the properties of cryptocurrencies. They allow self-custody. They can be used by anyone in the world without permission from a third party. Transactions cannot be censored. With the development of other networks and sidechains, we can expect lower fees and private transactions. Projects like Hydra and Midnight are being built in the Cardano ecosystem.

Most important of all, stablecoins separate speculators from users. Users of stablecoins do not need to have ADA coins in their wallets. Cardano will allow you to pay transaction fees in native assets. The speculative nature of cryptocurrencies and the use of stable purchasing power or DeFi services will be two entirely separate worlds.

One day there may be more users of stablecoins than there are holders of volatile cryptocurrencies. It's the equivalent of far more people on the planet using the Windows operating system than there are holders of Microsoft stock.

It will be possible to speculate on the success of stablecoins through ADA or the SHEN reserve token (and other similar tokens). Those who don't want to speculate don't have to. On the other hand, this option is open to everyone without distinction.

Thanks to stablecoins, DeFi services can emerge that will be completely insulated from volatility. Once decentralized identity (DID) becomes more widely used and regulation sets rules for its use, the door will be open for new decentralized banks to emerge.

Satoshi's vision can be realized through stablecoins. Decentralized banks will not be able to abuse their position and change the terms of agreements. DeFi will remain available to all people without discrimination. Decentralized banks will not be able to charge excessive fees and, in many cases, collect client data.

Changing minds will be the hardest part

People need to start looking beyond the contents of their own wallets. If they only care about financial speculation, it will slow the pace of the blockchain revolution.

Expecting wealth from cryptocurrencies and seeing financial speculation as the biggest use case is to some extent a trampling of Satoshi's vision and ideals. Bitcoin may be a solution in the long run, but at the moment it certainly doesn't solve any of the things that bothered Satoshi the most. Bitcoin and all other cryptocurrencies are volatile and not suited for any financial operations. They are, however, suitable as collateral for creating stablecoins.

People need to understand that what matters most is technology, not false ideology. The principles of decentralization are what must prevail and it doesn't matter the specific implementation. Changing the perception of some parts of the Bitcoin community will be very difficult. They perceive everything that is not Bitcoin as unwanted competition. Using BTC as collateral for stablecoin is not seen as a suitable use case simply because it is needed to use another blockchain to do it.

Anyone who understands that principles and the financial revolution are what matters cannot be a maximalist at the level of technology. Some will understand, and others will not. Technology will triumph over propaganda and maximalism. People will use what is convenient for them without the risk of losing their wealth. Stablecoins will offer useful use cases that cryptocurrencies will not offer for a long time and perhaps never. If people really care about decentralization, they need to start preferring it to financial speculation and use stablecoins instead of fiat currencies.

Stablecoins and DeFi are not competition for Bitcoin, so Cardano can't be either. Satoshi would definitely not be opposed to using DeFi and it's likely he would like it. Stablecoins may not 100% solve everything Satoshi wanted to fight, but it solves a significant part. Plus, it may only be an intermediate step.

The current algorithmic stablecoins are pegged to the USD value so they do not address long-term inflation. There are voices that there should be a stablecoin pegged to the value of gold. Maybe this is the way to go.

Conclusion

People want to make smart decisions from which they can profit. Their behavior is logical and pragmatic when it comes to buying cryptocurrencies. However, the speculative nature of cryptocurrencies prevents the building of an alternative financial world, as financial speculation is fundamentally the opposite of stability. "Buy low, sell high" is the opposite of "use without risk whenever you need to".

The algorithmic stablecoin DJED, which was created on Cardano, is one more attempt to address the high volatility of cryptocurrencies. It is a very elegant solution as it makes use of ADA coins which play a significant role in the Cardano ecosystem. The ADA is becoming a reserve currency and can be seen as a new use case for a volatile asset.

People can start using DJED for payments. The question arises why people should use DJED when they can use fiat currencies. The reality is that the USD is much more stable than many fiat currencies, so the user base can be huge. Why should westerners use DJED? How about the fact that they can hold the dollar value without a bank in their own wallet and can send DJED to the other side of the planet at any time for a low fee?

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