Our Vision For Cryptocurrency

Cryptocurrency started as a technical discussion on a mailing list, grew into a small movement, attracted hordes of speculators, and then splintered into a zillion useless imitations of itself. We believe it’s destined to consolidate and eventually give way to a battle for power on the global stage. We foresee uncomfortable disruption, a real threat of catastrophe, and a real promise of increased prosperity. Let us try to explain why.

  • Money is broken in some parts of the world – corrupt governments have a hard time maintaining stable value in their currencies.
  • Cryptocurrency is attempting to solve this problem, with many projects working on centralized coins that are pegged to the US dollar.
  • The future dominant cryptocurrency will be a decentralized, dollar-independent stablecoin, and it will change the economic situation in many countries around the world.

The core problem with existing money

Many existing currencies are extremely well operated. It’s an amazing feat that the purchasing power of mainstream fiat money is so reliable – inhabitants of most of the developed world hardly ever need to think about inflation, and the concern of deflation is completely out of mind.

But some existing currencies are not so well managed. In countries that have historically suffered from more disorganization and corruption, currencies often lose their value alarmingly quickly over time [1]:

Current Annual Inflation Rate (%)
South Sudan
Dem. Republic of
the Congo

Directly measured inflation rates are often multiples higher than the official estimates [2]. In the case of Venezuela, the directly measured rate is actually lower, but still out of control.

Why does this happen?

The basic driver is the desire for free money. Who doesn’t want free money? Free money means you can get people to do things at no cost to you – you just hand them the money, they give you something or do something for you, and that’s it.

The reason why coins have ridges on the edge is that people used to clip off the sides, melt them down, and make more free coins for themselves – known as “coin clipping.”[3]

Coins with ridges and worn edges, potent evidence of the intentional shaving off of a small portion of metal coin for profit.

The reason why modern bills all have a special pattern of dots in common with one another – the “EURion pattern” – is so that photocopiers can detect them and disallow people from making copies.[4]

Close up of a twenty-dollar US bill, with a mapped constellation of circles shown.
A five-hundred dollar Euro note, with a close-up showing a specific constellation of circles.

Modern technology has allowed us to cut down on citizens counterfeiting money. But what about the people who control the money supply in the first place? Can’t they just print however much they want?

Indeed they can. High inflation usually comes from this ability being abused. We often hate the word bureaucracy, but strong bureaucracy in developed countries helps us avoid the corruption that leads to this overprinting and currency devaluation. Weaker institutions in some parts of the world have no way of avoiding this outcome.

And so this is the core problem. We can stop citizens from counterfeiting money, but we can’t stop corrupt governments of sovereign nations from doing essentially the same thing. This leads to devaluation of those currencies, and everyone living in those countries is worse off for it – money they earned a few years ago is worthless today, so they are always starting from scratch.

There are of course many other problems with money, some large and some small. But we believe this particular problem is extremely fundamental.

The story with crypto

What’s ironic is that most cryptocurrencies to date have been produced from the same motivation as coin clippers, bill copiers, and irresponsible central banks – to earn free money. Convince people that it’s money, and it is. Despite Bitcoin’s promise to only ever have 21 million coins, forks and competitors have led to zillions of coins [5] . And the more coins we spread our value across, the less each is worth, just like in the case of a failing fiat currency.

The promise of course is that most of the coins are fake and will be discarded at some point. No, we’re not going to be passing on family wealth in Bitcoin Diamond. The idea is that there will eventually be a consolidation into a few consensus crypto stores of value, and the dilution in quantity won’t really matter at that point, just as all of the Monopoly money in the world poses no threat to the US dollar.

However, even if this reckoning someday comes and the consensus coins are left with minimal competition, we believe the one true BTC stands little chance of replacing the failing fiat currencies we described above. Why? Because the monetary policy of Bitcoin is a blunt instrument – a fixed supply will lead to a volatile short-term value like we see with gold. The same types of groups that sometimes abuse the power to mint and burn money are the ones who very often manage it quite skillfully. Without a central bank or currency board in control, a cryptocurrency has no chance of maintaining stable purchasing power.

This volatility has made cryptocurrencies fun, but dangerous. Essentially a new form of gambling, cryptocurrencies have drawn in people who are most focused on getting rich quick.

Is this really a bad thing? Well... yes. The Pyramid and Ponzi schemes have officially been joined by a third, more decentralized scheme, aptly dubbed the Nakamoto scheme [6] , where lots of investment money changes hands, little or no value is created, and at the end of the scheme there are some big winners and big losers, but there is no central party to hold responsible. It would seem that the main activity we’ve decentralized so far is a weird hybrid of fraud and gambling. Heck, the whole thing appears to have been started off by an enormous bot-driven pump and dump on Mt. Gox, operated by the exchange itself [7].

Oddly, aside from all of the collateral damage, the insane repeated crypto bubbles may have been an ideal way for cryptocurrencies to enter the world stage. Why? Because they were decidedly non-threatening. Any economist or banker could see from miles away that Bitcoin had no chance of being a real currency, so we never really worried about it. While cryptocurrencies have made it harder for us to protect investors and prevent money laundering, they haven’t really threatened monetary policy, so we’ve allowed them. If you’d asked the Reserve founders seven years ago how popular Bitcoin would be today, we’d have explained that deflationary currencies don’t make sense and that it was a doomed monetary experiment built on a neat technological idea.

What this means is that we’ve reached a situation where the amount of effort pouring into the technological development of crypto is insanely high – each layer in the stack to support crypto-as-money is being built dozens, hundreds, or even thousands of times over – and we are still in a narrative as a society where creating cryptocurrencies is pretty much an acceptable thing to do. Had Satoshi gone with a different monetary policy, we may have nixed all of this way before reaching billions in market cap.

For the past four years or so, a few renegades in the cryptocurrency world discussed and began working on bringing a simple form of monetary policy – pegging to some existing currency – to the crypto world. BitShares, Tether, NuBitz, and MakerDAO all spun up to work on this challenge with varying degrees of success, and Robert Sams and Vitalik Buterin published influential articles that led to much additional thought [8], [9].

Over the past year, we’ve seen an enormous boom in the number of pegged cryptocurrencies – conveniently named “stablecoins.” Where has this boom come from? Why now? We count a number of factors as important:

  • The general crypto boom of 2017, which led hundreds of entrepreneurs to think through what kind of token they may offer to the ecosystem. Only a few recognized that Bitcoin would never stabilize, and they set to work building something that would.
  • The realization that it’s possible to profit from a coin that doesn’t go up, by allocating revenue the network generates to investors. This sentiment is still spreading – people often sheepishly ask us why Reserve’s fancy investors would buy a coin that doesn't go up. Just like PayPal investors didn’t just put their money in PayPal but rather bought shares in PayPal, investments in stablecoins are usually in some secondary token that captures some form of revenue.
  • The accidental adoption of Tether, which was originally intended to be a consumer means of exchange before it was sold to Bitfinex, was repurposed as the go-to trading pair within crypto. Once there was a billion dollar stablecoin, it was easy to see at least one proven use case, and it felt more plausible that the other hypothetical use cases would materialize at some point.
  • The “solving” of the oracle problem – the challenge of getting information from the real world onto the blockchain in a trustworthy way. We put “solving” in quotes because this problem remains challenging, and what was important was that there were some proposed solutions that the industry began treating as sufficient, whether or not they actually were.
  • The initial flow of investor dollars into stablecoin projects. Once headlines hit about Andreessen Horowitz et. al. investing in the category, heads started to turn.

Despite the 100+ stablecoin projects proposing different routes to stability, the year of the stablecoin was dominated by cryptocurrencies that weren’t all that different from Tether – “fiatcoins,” as they’ve been labeled. These fiatcoins are backed by a central issuer holding dollars in a bank account, willing to redeem them for the token for a small fee. For the time being, it almost feels as though we’ve solved the problem of stability. Tether is under some fire, but the new fiatcoins have been welcomed and are competing to take its place.

This raises an interesting question: which problem did they solve that Tether didn’t solve, and why can’t Tether just copy their solution and keep its place as king? For all of the downsides of centralization, one benefit is that you can iterate on the product. So why doesn’t Tether just set up whatever banking relationships and legal structure that allows its new competitors to perform audits on their funds, so that it can satisfy customers that the money is all there?

What's coming next

At the end of the day, the centralized fiatcoins that exist today are like a version of PayPal that only requires KYC for cashing in and out but allows customers to receive and send money within the system pseudonymously. While we continue to permit this kind of business legally, these are currently the best stablecoins in existence – but we don’t foresee this model withstanding the test of time. Governments tend to reach for more and more surveillance, regardless of whether that’s a net benefit to society. And once they decide to, they may be able to force these centralized coins to add full surveillance, or shut them down entirely.

So which kind of stablecoin will win out? Some think that fully decentralized, algorithmic coins are the right way forward. But without some kind of independent collateral in the system, we’re skeptical that any design can be economically sound. We worry a lot about these designs catastrophically failing. That’s why we think an asset-backed coin, where the backing is properly diversified across asset classes and distributed around the globe, operated by well-designed on-chain governance, will eventually become the dominant global cryptocurrency. We believe that the most responsible path to this decentralized digital currency is to launch as a centralized fiatcoin, gather the necessary usage data, and use that data to evolve to a fully decentralized model. The full set of reasons for this is nuanced – you can read more in our whitepaper.

One way or another, stablecoins are here to stay, and we are about to see the grand experiment of digital cash play out across the globe for the first time. Because cryptocurrencies are unstoppable (you can send them to anyone, anywhere, any time, and nobody can stop you as long as you have an internet connection) and unseizable (as long as you protect the keys, you can have digital money that no bank or government can take away from you), this is a VERY big deal.

Property rights are constructs that establish ownership – basically whether you can keep what belongs to you. Countries with stronger property rights tend to experience greater economic success [10] . In most developed nations, if you legally accumulate wealth, you can be relatively confident that the government won’t seize that wealth from you - beyond what they receive in taxes. The same is not true globally.

A digital store of value provides an alternative path to providing strong property rights to people in all nations. If someone lives in a country with weak property rights and they store their wealth in a stablecoin, it becomes much harder, though not impossible, for their wealth to be improperly seized.

Nations with mismanaged currencies tend to impose barriers on their citizens to prevent them from adopting alternative currencies, so that they can maintain the ability to print free money. These artificially maintained monopolies harm the financial situation of their citizens. An unstoppable cryptocurrency is much harder to restrict access to, so we expect to see real competition, for the first time, over currency choice in the nations listed at the top of this page.

This will essentially amount to exporting the monetary stability of developed nations to the most disorganized monetary zones. Failing fiat currencies will be seriously challenged by virtual extensions of the best fiat currencies, and will either be wiped out or will up their game to compete.

So what does this future look like for individuals and businesses?

Citizens will be able to have a stable savings “account” on their phones. Millions of people will happily become unbanked, and millions more will leapfrog normal banking entirely.

Businesses will be able to pay their international suppliers nearly instantly and for free any hour of the day. They will also be able to store their treasuries in currencies with much less risk of devaluation, likely making them more attractive to international investors.

Will the local governments allow this?

This new world presents opportunities for governments. The promotion of foreign investment, the movement of money from cash to pseudonymous digital transactions, and the taxable gains from citizens holding foreign currencies that strengthen relative to the local money – which will be easier to collect in a digital ecosystem – are all upsides for these governments to benefit from.

The Reserve team is actively working with an international coalition of nations, several of which have currency problems, to determine the best way forward. If you are part of a government agency working on these issues, please reach out to us.

In summary, this is going to be a huge change to the economic situation for the least stable parts of the world. We don’t see cryptocurrencies having anywhere near the same impact on the developed world. Financial life is already so developed that it will be much harder for digital cash with no speculative appeal to compete, so long as mainstream fiat currencies continue to hold their value.

The even bigger picture

Ray Dalio recently started speculating that the US dollar is not destined to remain the world’s reserve currency. Bloomberg recently reported [11] :

His concern — shared by BlackRock Inc.’s Larry Fink, among others — is that swelling U.S. budget deficits will eventually irk big buyers overseas. Dalio told Bloomberg [in September 2018] that “You easily could have a 30 percent depreciation in the dollar” as the Fed has little choice but to monetize the national debt.

Dalio repeated these issues and implications during [a] live podcast. “The role of the U.S. dollar will diminish, and the returns on U.S. dollar-denominated debt will suffer,” he said. “Then I think you will see the emergence of other currencies,” though he declined to identify which ones, saying it was “too big a topic to get into.”

Bridgewater, the world’s largest hedge fund with about $160 billion in assets, has been a steady holder of gold through the two largest bullion-backed exchanged-traded funds, Bloomberg News reported last week. Dalio has said that investors should consider placing 5 percent to 10 percent of their assets in gold as a hedge against political risks.

This is the reason why Reserve is designed to go off of the peg from the US dollar. In the very long run, the best outcome for cryptocurrency isn’t just to extend an existing currently-stable asset class, but to create something new that is equally stable in the short run, and much more stable in the long run.

The journey ahead

A version of Reserve has been running on the Ropsten testnet for a while now, but the process of responsibly launching a piece of software this important involves iterative stages of testing in a production environment before control is handed to the token holders.

Ultimately a network isn’t about the technology, it’s about the people. Reserve started with one idea and one person, and has snowballed into an epic team supported by investors and a growing community. It’s still just the beginning, but the journey is about to get very exciting. We hope you’ll join us.


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