Can Cryptocurrencies Be Stable Without Inflation?

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by Cointelegraph

With the rise of cryptocurrencies over the recent years, speculators have come alive with spirit, yet the mainstream audience continues to remain relatively shy.

While there are numerous reasons for this lack of mainstream adoption, the main reason revolves around price volatility. To even begin tackling this problem, one must have a clear understanding of why it occurs in the first place.

Simply put, price volatility stems from an uncertain demand for an asset that has a fixed supply. Now while it is a simple problem to state, it is quite the opposite to solve.

Why is stability essential?

A currency needs to be stable in order to be a trusted medium of exchange. With such extreme rising and falling of prices, most average people are scared away from using cryptocurrencies for everyday use.

The unpredictability also wreaks havoc on businesses such as remittance, currency conversions and ATMs, as they must charge higher than normal fees in order to hedge their risk against a drop in price. It drastically reduces the reasons one has to own a cryptocurrency over traditional currencies.

This is evident in the case of Bitcoin, where ATMs charge exorbitant fees that can be as high as 15 percent to simply withdraw to fiat.

Patience is a virtue

There are strong reasons for why cryptocurrencies haven’t tried tackling the problem of stability, mainly because it is not only difficult, it takes a really long time. This gets in the way of speculators who seek immediate gratification by selling their currency for as high of a price as possible as quickly as they can. Without laying the proper groundwork, one runs the risk of putting the cart before the horse, from which there’s no clear path to recovery.

Phase one would be building a stable ecosystem. During the formidable years of a cryptocurrency, it is important to establish a stable footing, from which the currency can grow and course correct.

Gauging demand

Since uncertainty around demand is the primary cause for volatility, being able to gauge it would help with trying to match price with demand. Almost all of the cryptocurrencies are online exchange dominant because it is far simpler and they have access to the largest pool of cryptocurrency investors, the speculators. This is clearly the source of the problem, not only do the speculators wreak havoc on the stability, but that speculation now dictates the price of the currency.

Traditionally the task of keeping a currency stable fell on the shoulders of the central bank, that could, of course, inflate at will. But without a central bank, the cryptocurrency needs a decentralized way of achieving the same level of coordination and structure, and it has to do this while maintaining democracy and not resorting to inflation.

Cooperation over competition

In a nutshell, a decentralized cooperative community is the heart and soul of the currency, a network of cooperative businesses and services that cooperate and coordinate with each other to act as one unit. This network continues to grow and provides strong incentives for everyone in the network to cooperate and coordinate for the global well-being of the entire network. And the use of the Blockchain in such a structure, for example, voting on decisions, preserves democracy.

This gives rise to the concept of having official local exchanges where a member can buy and sell the currency. It also gives the community the ability to vote on when it is safe to increase the official price of the asset, effectively moving the price up with demand.

Official local exchanges

Having a list of official locations where users can buy and sell the specific cryptocurrency, addresses a few problems.

First, users now have a face to face, trusted location to purchase the currency. Second, usually as a byproduct of risk and regulations, at local exchanges, there will generally be a limit to how much you can buy and sell at any given moment. This acts as a throttle to be able to gauge demand, which allows the local exchanges to vote on increasing the price. Thirdly, this creates a sense of consistency, as the member now doesn’t have to guess where they can buy and sell the currency.

There are several non-financially related advantages as well. Unethical businesses such as those found in the dark markets (illegal weapons, drugs, child pornography etc.) would probably not make the cut to be within such a cooperative network. That doesn’t mean they cannot exist, it simply means that they will not be able to reap the benefits of being in the network.

Local exchange dominance

In order for such a strategy to work, the local exchanges would need to drastically outnumber the online exchanges. This is to ensure that the price of the asset is largely dictated by local exchanges.

Marketing early can be disastrous

Marketing early can be a double-edged sword. On one hand, the currency needs to attract investors to take the value of the currency up, so that currency can be sold off to pay for growth, ATMs, further development etc.

On the other, the investors that it will attract are the worst kind, the speculators. Now, the currency would have to heavily rely on artificial ways to create stability within the currency, which means an infusion of capital to provide a stable floor.

In the case of Bitcoin, with a market cap of approximately $18 bln, would require a sizeable amount of capital to keep it stable.

Slow and steady wins the race

The currency race has only just begun and we have quite a few out in front, however; where the finish line is, isn’t clear. Without a clear path toward the finish line, one runs the risk of running long distances in the wrong direction. There are a few currencies, however, that have been taking interesting approaches within this race.

The central app coin method

In this particular strategy, the objective is to create value via unique products and services offered and make the currency be the central focal point of those services. A good example of this is the MaidSafe network. The nice aspect of this method is that they get to build a community with a core use case for the currency. In addition, everyone cooperates within the network to create more value and channel that value toward one currency.

The setup and switch method

This method is an extension to the central app method, but with one difference, here the central currency doesn’t make itself be the focus until the user base is established. A good example of this is with the Bitshares ecosystem.

They’ve got a number of startups all cooperating amongst each other to form an ecosystem hovered around social media services and games all of which utilizes the graphene blockchain and DPOS (Delegated proof of stake) consensus.

There’s Steemit which provides a decentralized reddit alternative, with the base currency being STEEM. There’s Peerplays, which provides a wagering platform for MMO gaming, which has Peerplays tokens. Their plan (a bit unclear) seems to be to cooperate privately among themselves to build enough social infrastructure and users, to then drop in a central currency, Bitshares.

The nice aspect of this strategy is it can be done by marketing the side platforms, raising funds and unifying everything once all of the chess pieces are aligned.

The grassroots movement

Ultimately, if a currency can pull all of the above off, the best way would be through bootstrapping the entire process. Bootstrapping, however, requires everyone within the system to believe in the currency far beyond the value that it can be traded for at the moment. A good example of this is FairCoin, which is part of a global grassroots movement led by the team at FairCoop. Here, their strategy is to build a large cooperative ecosystem, where every business cooperates to provide users within the ecosystem, maximum value, not simply because of the greater good, but because it helps create strong value propositions for using the currency.

They’ve got strategic partnerships in place all over the world that lets them have thousands of ATMs, official local exchanges in 25 countries, debit cards and other infrastructure benefits that make it easy for mass adoption. The nice aspect of this strategy is that they get to grow out a strong stable base without being in the limelight. The difficulty they will encounter is that they have to execute this plan mostly in the shadows, without marketing. This means that they will have to rely heavily on strategic partnerships rather than being able to sell the coin to raise funds. They will have to basically bootstrap this until they can attract investors that believe in the currency without looking at Coinmarketcap (which is only a representation of marketing efforts and influx of capital).

Coinmarketcap.com doesn’t represent the true value of a coin, in fact, it highlights potential problems that are in some cases irreversible.

Hard forks

Take the recent hard fork looming around the corner for Bitcoin. This is the kind of complexity that makes it even harder for the masses to get into cryptocurrency. Imagine not only having to deal with volatility, knowledge of the Blockchain, but to have to deal with divergent consensus such that the user’s coins end up on to two competing chains. This adds quite a bit of uncertainty to the price of the currency. When you have a large community based upon cooperation, on top of an immutable Blockchain, hard forks become extremely difficult.

MaidSafe, Bitshares and FairCoin are all examples of core communities that cooperate with each other to strengthen bonds. They’re all incentivized financially to cooperate, far beyond than just the value of the coin. Hard forks (based upon divergent consensus splitting into two coins) are highly disincentivized since defecting from the system doesn’t just mean a simple fork, it also means giving up on all of the other financial benefits that their network brought them. Simply put, it is really difficult to hard fork a cooperative community that cooperates on deeper levels such as contractual obligations.

Conclusion

Stability in price requires having a stable ecosystem in place. Marketing early can be tempting, but one needs to realize the consequences of opening up Pandora’s box early. Without having a stable footing, the currency will mostly be used by speculators rather than the 99 percent. It needs to grow with the people, not past them.

With stability, the currency is now able to have services such as remittance, currency conversions and ATM withdrawals at fees lower than conventional fiat systems. Which will ultimately give a strong value proposition for the mainstream audience to consider making the switch.

The value proposition: a cryptocurrency that only goes up in value (when it is ready, slow and steady), that is cryptographically secure, has really low fees and has no governing authority.

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