Great post! I'd be remiss if I didn't say, however, that twice now, I've seen you use the word "descentralized". Unless that's some outback Australian way of saying "get the stink off a pig," I assume you've got a scratch on your internal record player and it adds the superfluous "S" every time this word spins past the needle.
I think another issue with a currency board is what do you do with the reserve and the opportunity cost.
Consider, you deposit $100 in a bank, the bank keeps maybe $10 and lends out $90. If the bank charges 10% it gets $9 in income, if it pays 5% you get $5. Great. But if you want to withdraw $20 one day, the bank is in trouble. Well no it isn't because there are all sorts of rules and systems in place to make sure the bank can pull $20 out to cover your surprise withdrawal.
But say you put in $100 and you get 100 Stablecoins. The good guy running the stable coin puts 100% of that in reserve. Now while he could have been getting 10%, he gets 0%. The temptation is really there to say "can't we lend out just a little? how about half? what are the odds half of all coins will be redeemed at once?"
But even if they resist temptation, it's still a bit of a challenge. You don't literally store billions of dollar bills in a safe. If the stablecoin becomes huge, the reserve is going to become billions of dollars. Where can that go? Short term Treasuries, money market accounts? Those are pretty safe but you still have to think about what happens when there's a run on, say, $100B of stablecoin? Even money market accounts can't spin on a dime, try to liquidate a huge amount very fast and your reserve asset could crash.
If this is really going to work and if it is really going to go big time, you are probably going to need more than 100% reserves. You probably want several different assets (say Treasuries, money markets, gold) so you don't have to crash the market by trying to mass liquidate all at once. But how are you going to make profit doing this? The opportunity cost is going to be huge and you're essentially providing a public service for the crypto-ecosystem. Either you have to tax crypto to pay for this service or you need something like a central bank supporting you willing to come in and print dollars should the need arise.
All well and good, but Terra isn't the largest stablecoin, Tether is. Terra was the largest algorithmic-based stablecoin, since much more popular Tether is supposedly maintained by Tether Foundation having a lot of traditional non-crypto mostly US-based assets and willing to exchange this assets for Tether at a specified price (though they only allow some big crypto exchanges to do that trade). This eliminates the need for Luna equivalent. This also means that the peg is 100% the issue of your trust in Tether Foundation. Algorithm that tried to maintain Luna's peg is very important to the story as both USDT and USDC maintained their peg even as UST lost it
Great post! I'd be remiss if I didn't say, however, that twice now, I've seen you use the word "descentralized". Unless that's some outback Australian way of saying "get the stink off a pig," I assume you've got a scratch on your internal record player and it adds the superfluous "S" every time this word spins past the needle.
I think another issue with a currency board is what do you do with the reserve and the opportunity cost.
Consider, you deposit $100 in a bank, the bank keeps maybe $10 and lends out $90. If the bank charges 10% it gets $9 in income, if it pays 5% you get $5. Great. But if you want to withdraw $20 one day, the bank is in trouble. Well no it isn't because there are all sorts of rules and systems in place to make sure the bank can pull $20 out to cover your surprise withdrawal.
But say you put in $100 and you get 100 Stablecoins. The good guy running the stable coin puts 100% of that in reserve. Now while he could have been getting 10%, he gets 0%. The temptation is really there to say "can't we lend out just a little? how about half? what are the odds half of all coins will be redeemed at once?"
But even if they resist temptation, it's still a bit of a challenge. You don't literally store billions of dollar bills in a safe. If the stablecoin becomes huge, the reserve is going to become billions of dollars. Where can that go? Short term Treasuries, money market accounts? Those are pretty safe but you still have to think about what happens when there's a run on, say, $100B of stablecoin? Even money market accounts can't spin on a dime, try to liquidate a huge amount very fast and your reserve asset could crash.
If this is really going to work and if it is really going to go big time, you are probably going to need more than 100% reserves. You probably want several different assets (say Treasuries, money markets, gold) so you don't have to crash the market by trying to mass liquidate all at once. But how are you going to make profit doing this? The opportunity cost is going to be huge and you're essentially providing a public service for the crypto-ecosystem. Either you have to tax crypto to pay for this service or you need something like a central bank supporting you willing to come in and print dollars should the need arise.
All well and good, but Terra isn't the largest stablecoin, Tether is. Terra was the largest algorithmic-based stablecoin, since much more popular Tether is supposedly maintained by Tether Foundation having a lot of traditional non-crypto mostly US-based assets and willing to exchange this assets for Tether at a specified price (though they only allow some big crypto exchanges to do that trade). This eliminates the need for Luna equivalent. This also means that the peg is 100% the issue of your trust in Tether Foundation. Algorithm that tried to maintain Luna's peg is very important to the story as both USDT and USDC maintained their peg even as UST lost it