Is it possible to create a stable-coin without any fiat backing it?
Recently academics at the University of Texas, Austin published a paper suggesting that Tether USD (USDT) was used to manipulate the price of Bitcoin, leading to its massive boom in December.
Apparently, Tether USD is a cryptocurrency that is supposed to be backed 1-to-1 with fiat USD on the exchange Bitfinex. However, Bitfinex, under its terms and conditions doesn't allow anyone to audit its fiat reserves. This has led to the suspicion that Bitfinex doesn't actually have USD for every USDT in circulation. So if you had a bunch of USDT and want to see its value in your bank account, there's a chance Bitfinex won't buy it from you! This means there's a chance your USDT will remain stuck that way.
Yet, the price of USDT has remained stable. Here's why.
You cannot even set the price of USDT on the exchange!
This had me thinking. In order to create a stable-coin, all that an exchange has to do is create its own cryptocurrency and then somehow come to an agreement with as many other exchanges as possible to not let its users change its price. If enough exchanges agree, the price of that stable-coin will automatically normalize to the price these exchanges have set. There's no need to back anything, with anything at all.
Am I missing something here? This whole idea of creating a stable-coin seems so simplistic, yet scammy to me. Would this work? What do you think?
You really have a great idea over here.. Moreover there's no harm in trying..
My guess is, the only way it would really work is if all the exchanges agree. As soon as one decides to change the price and try to manipulate the market, then the game is off. How likely is that to happen?
100 in 100 chances, maybe?...lol
Peace.
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If you are looking for an absolute stability this can only happen in a situation at which an asset can only be traded with you but not between third parties; then the value you set would be definite.
However as long as third parties can trade with each other, the value becomes variable. This poses a challenge for currencies because a healthy economy needs a relatively stable currency. There are certain methods to succeed this. The primary method is holding large amount of any currency in a limited number of private or public funds which create stabilization by initiating buy/sell actions against the trend. These funds doesn't need to hold a large percentage of the currency as one might imagine. Something like 5-10% would be more than enough. No one actually holds 100% backup to stabilize the pair. That is just an empty promise by Bitfinex to assure people, the company is no way near that big to afford locking up that much money. If they would have to buy all the Tether, they would file bankruptcy and disappear long before they let out a penny. Financial institutions always do this and it always burns the small investors the most.
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