Thomas Lee Talks About Stablecoins on Ripple Insights
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Thomas Lee Talks About Stablecoins on Ripple Insights

In a recent Ripple Insights article, Thomas Lee explained stablecoins as well as the pegging problems and the misbehaving market.

As the article goes:

“Stablecoins are a welcome attempt to bring stability to the digital assets market. Much like a country pegging its volatile currency to a more stable country’s currency in an effort to make its economy more predictable and attractive to investors, digital assets issued by companies like Tether and Haaven are anchoring to the U.S. dollar, gold reserves or even the algorithm behind the digital asset itself.”

Adding to it:

“When every day seems to bring a new swing in the price of Bitcoin and other volatile digital assets, any effort to bring more calm to the market is appreciated. Yet, history demonstrates that the stability promised by the name ‘stablecoins’ is impossible to guarantee.”

Talking about the pegging problems:

“By definition, pegging creates an artificial economic environment that cannot be sustained in the wider unconstrained market over a long period. Past examples of fiat currency pegging prove that while it may act as a short-term solution, the inevitable unpegging creates serious instability.”

Adding to it:

“As a major oil producer, Nigeria decided to peg its currency, the naira, to the U.S. dollar in order to maintain a consistent export value. When oil prices began to decline in the mid-2010s, the naira also should have dropped except that the Nigerian government spent nearly 20 percent of the country’s foreign reserves to maintain the peg. With the currency trading at half its value on the black market, Nigeria soon was forced to unpeg from the dollar. The result was a 30 percent collapse in the naira’s value and skyrocketing inflation.”

Talking about it further:

“An even more significant example happened in Thailand in the 1990s. With the Thai baht pegged to the U.S. dollar, the country was one of the much-lauded “tiger cub” economies of Southeast Asia. But when economic growth began to slow, investors started betting that the baht would lose value. As in Nigeria, the Thai government spent billions of dollars defending the peg before eventually abandoning it in 1997. The resulting depreciation of the baht had a domino effect in the entire region and sparked the infamous Asian financial crisis of the late ‘90s.”

Talking about the misbehaving market:

“The problem with pegging is that the theory relies on the market behaving in specific ways. But you can’t tell the market what to do. Either people find loopholes to exploit, create a black market that better reflects real value or simply don’t behave as the efficient-market hypothesis suggests they should.”

Adding to it:

“Just look at the currency used in most pegging situations, the U.S. dollar. As currencies backed by more stable governments and central banks, than the governing bodies and institutions in the U.S., the Swiss franc and Singapore dollar perhaps represent a more stable pegging option. Yet the dollar is the default choice because people trust it. This is not logical, but rather, because of its legacy and emotional appeal. People outside the US are used to dealing with the dollar and are, therefore, more comfortable with it than any other currency in the world.”

Talking about it further:

“The lesson here is that it’s often more valuable to look at what people are actually doing and not what they should be doing. To bring it back to stablecoins, Tether is the runaway leader in the market despite the questions over whether it has enough reserves to support its U.S. dollar peg. But that doesn’t seem to matter because enough people believe in it. If the tether (USDT) loses value and some holders panic sell, there are enough potential buyers who trust that the company is committed to returning the stablecoin to its pegged price.”

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Syed Ali Mudassar
It was when he was pursuing his graduation in Computer Science that he found his flair for writing about new and existing technologies. He likes researching about technologies and how they could help people. Currently, he works as the Content Manager at CoinFrenzy, a leading blockchain news, and media publication website.