Decentralised synthetic assets

Tether is a crypto abomination

Tether is a crypto abomination

But it’s not for the reasons you might think. While there have been a lot of questions raised about whether Tether is fully backed, I personally believe there’s a strong chance Tether is fully collateralised. It is also a pragmatic solution to crypto volatility. Tether is the end result of the logic, “We need a stable cryptoasset, by any means necessary.”

So, if Tether is pragmatic and collateralised, then what, exactly, is the problem? To answer that, we need to go through a little crypto history.

Early history

The influx of newcomers to the crypto space over the past year has brought with it a myriad of issues. Chief among these challenges is a lack of quality resources which lay out the history of crypto — a series of events that often played out across obscure forums, instant messages, mailing lists and other hard to find platforms. This education deficit has led to widespread confusion among the many of crypto newcomers.

Before immersing ourselves in the history of Bitcoin, it’s worth doing a quick retrospective of the fads and investment narratives that have struck the crypto space over the past several years. When crypto winter broke in early 2016, many projects were founded by Bitcoin refugees and early Ethereum supporters so most of them were fairly sound, if somewhat audacious.

Things began to veer into dangerous territory in early 2017, when everyone and their brother began building marketplaces for every imaginable use case — everything from cannabis to dental care — with a proprietary token to match. By mid-to-late 2017, the emphasis had shifted to decentralized exchanges (DEX’s), because where else would we be able to trade this tsunami of new tokens!

In late 2017 and early 2018, next-gen smart contract platforms saw increased focus as the scaling issues of Ethereum become more well known (thanks cryptokitties!), unfortunately many of these projects chose to simply ignore years of work on consensus mechanisms, because, fast blockchain. Now, in mid-2018, it seems like every second project is a stablecoin.

Understanding decentralized systems

Throughout each crypto “flavor of the month” cycle, the same issue has presented itself. As more money and interest have entered the space, people were incentivized to start projects; but without a fundamental understanding of the history of decentralized systems, many set out trying to solve the wrong problems. “These blockchains are too slow; just reduce the number of nodes! These coins are too volatile; just dump a bunch of fiat in a bank!”

In principle, there is nothing wrong with this. Finding a viable decentralized solution to the stablecoin equation will require a lot of experimentation. Unfortunately, many of these projects are moving in the wrong direction by trying to “fix” the problem they believe they see in Tether, the largest stablecoin in the market.

The underlying reasoning looks something like, “Tether is bad because it is not transparent. If we can fix this by being transparent then we will have created the perfect stablecoin.” This logic is misguided and demonstrates an ignorance of relevant history. A notable exception is Circle’s recent announcement that they are also creating a new Tether clone. Seeing as the parties responsible for this project are undeniably well versed in the history of crypto, this move is more indicative of indifference than ignorance.

So if Tether is so good then why is the introduction of a bunch of Tether clones a bad thing? The answer is a philosophic one, in that Tether is ultimately antithetical to crypto and what Bitcoin was designed to create: a censorship resistant, decentralised and immutable way to transact on the internet. What people fail to see is that the surface problem they identify in Tether — a lack of transparency — is actually a feature, not a bug.

Why Tether has stayed opaque

Tether has managed to keep their virtual doors open by intentionally staying in a regulatory grey area. If they were to fully disclose where their collateral is held, it would give regulators the incentive to ask the questions that they will most definitely be asking at some point. By maintaining a level of opacity, Tether is delaying the inevitable. By assuming that Tether is simply choosing to be enigmatic to their own detriment, many projects are simultaneously showcasing their lack of insight while “solving a problem” that doesn’t exist.

To simplify, if transparency was the missing catalyst to dominating the stablecoin scene, why wouldn’t Tether implement it? The answer is equally simple: the US Government will not allow people to make their own currency. Bitcoin has only survived this long because it was designed to avoid the centralization that undermined previous attempts to create internet money, the most salient examples of which were E-Gold and Digicash.

In the case of the E-Gold, you had a guy in Florida with a pile of gold and a centralized system facilitating the transfer of millions of dollars anonymously on the internet. Needless to say, the US Government was having none of that, and by a combination of their intervention and other problems inherent to running a centralized private currency, E-Gold faded into memory.

With Digicash, it could be argued that it was the right thing at the wrong time. However, it’s fairly clear that had it managed to gain traction, the centralized nature of the service would have allowed for it to be regulated out of existence; or even more likely, forced to compromise on its goals like PayPal was in order to operate.

Why we need decentralisation

As to why Tether hasn’t been shut down yet, it could be that Bitcoin is providing a high-profile smokescreen to hide behind — one that will surely disperse soon enough. But if you are still uncertain of decentralisation’s importance, perhaps Satoshi can convince you:

A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.

The brilliance of Bitcoin was to solve the need for a central authority to administer such a system. This meant that it could not be shut down once it was launched. Much is said about the censorship resistance of Bitcoin, but often the focus is on a transaction level, when in reality the fact that the entire system is distributed and therefore censorship resistant is critical to its ability to survive.

Some people would argue we already have censorship resistant money in Bitcoin, but unfortunately one of the problems introduced by the Bitcoin consensus mechanism is a fixed monetary policy that creates volatility, which in turn prevents it from acting as a cash system.

This is the problem that Havven and other decentralised stablecoin projects are solving: creating a stable cryptoasset without compromising decentralisation. Rest assured that when a solution is found, the same arguments currently deployed against Bitcoin will be applied but in a much more aggressive fashion. The bottom line is that a stable decentralised currency will be a genuine threat to fiat, so Tether’s risk of being censored disqualifies it from being the answer to volatility, there is simply too much risk in a centralised system. This means Tether is not a long term solution, only a decentralised system can survive in the longer term.

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Kain Warwick

Kain Warwick

Kain is the founder of Synthetix and the CEO of blueshyft. Synthetix is a synthetic asset platform, and blueshyft is a crypto on-ramp in Australia.

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