Asset Backed Cryptos
A huge issue with cryptocurrency is that it is very volatile. One moment a currency can be worth thousands and the next it could be virtually worthless. This has led to developers scratching their heads and trying to come up with a way that makes cryptocurrency more reliably priced and more stable. The more stable a currency is the more suited it is to being an actual currency rather than a novelty.
The answer some development teams have come up with is to back their currencies with assets to ensure that whatever happens, the crypto will have a minimum value.
How Asset Backing Should Work
In an ideal world a cryptocurrency would be backed by a commodity such as gold or oil that has plenty of value in the real world. This means that if the currency has any difficulty it always has the reserve to back up the cryptocurrency’s value.
A simple example of this is a currency being backed by gold on a gram for token basis. The crypto will always be the value of 1 gram of gold in this circumstance.
In this example, cryptocurrency is using what is known as a gold standard and it is also the same system that the US dollar used until recent times. In theory, asset backing is great, in practice it isn’t scalable and it doesn’t really counteract inflation which is partly why asset backed real world currencies don’t exist today.
How Cryptos Are Asset Backed
Notice how I said in an ideal world… well, cryptos are too much of a mixed bunch to say that they are functioning ideally. Some asset backed cryptos are doing just fine and have assets that the developers are readily making available for investors to check and verify. The problem is, these currencies have assets that aren’t worth very much and the tokens aren’t worth very much as a result.
This is because to asset back anything, a crypto needs a large amount of capital upfront.
Two examples of asset backed cryptos that I am dubious of are;
Petro is a national cryptocurrency that was created by the government of Venezuela to enhance the value of its stock currency (Bolivar) and counter inflation. The idea is that the Petro is backed by oil reserves and other natural resources owned by the Venezuelan government.
The issue is that there is absolutely no evidence of any such reserve that is backing the currency and all that we have to rely on is that the Venezuelan government says it is backed. All current understanding points to the Petro being a state orchestrated scam to try and prop up the Bolivar.
USD Coin (USDC)
USD Coin is backed by the US Dollar. Or so its developers say. They claim that for every USDC there is a physical US Dollar held in reserve. This means that the USDC should never trade below the value of a US Dollar.
My scepticism arises from three things;
- No one has independently verified the existence of the reserve and its contents.
- The USDC frequently trades at under the value of a Dollar which shouldn’t happen if users are guaranteed to be able to sell it for a Dollar as the developers claim.
- In a world where developers are looking to show that cryptos are the future, it is beyond me why a crypto would back itself on “the past” i.e. real-world currencies.
I am keeping a very close eye on both cryptos mentioned and will update you as things unfold. Asset based currencies do have potential if they are done well and with an exit plan when long-term scalability becomes an issue. Currently, it is too early to say if any cryptos are doing it right.