November 20, 2017

The Future of Cryptocurrencies: Collateralization & Stabilization

A More Predictable Price Curve

2017 has been an incredible year for Bitcoin & Digital Currency. Cryptocurrencies are becoming more and more popular by the day. Bitcoin’s price continues to rise; now surpassing $7,000 USD. Bitcoin and lesser-known cryptocurrencies such as Ethereum are experiencing a coming out party of sorts. Everyone and their neighbor is looking to grab a piece of the profit, but where is this all heading? At some point, Cryptocurrency prices must stabilize in order to be considered viable forms of currency. The price of these tokens is in a constant state of flux, cryptocurrencies are still far too unpredictable for most financial institutions liking.[1]Clifford Geertz – The Interpretation of Cultures

The future of Bitcoin and other Cryptocurrencies

The future of Bitcoin and other Cryptocurrencies lays in collateralization for FIAT or in layman’s terms more traditional forms of currency such as USD or EUR. Cryptocurrencies are a finite commodity just like real estate; this means a more predictable price curve will develop over time. Once Bitcoin & it’s peers’ prices stabilize, banks and other financial institutions will begin to accept them as collateral for FIAT loans.[2]Clifford Geertz – The Interpretation of Cultures

Tokens as Collateral

We can already see the beginnings of this collateralization in the ICO space. Special brokerage firms and hedge funds have begun loaning out US dollars in return for ICO tokens like Bitcoin and Ethereum. This isn’t just limited to private entities & has already started to take shape in the consumer space as well. The startup company SALT Lending is revolutionizing the consumer's ability to leverage their blockchain assets for FIAT. SALT Lending members can hold onto their cryptocurrencies while leveraging them as collateral for cash.

Looking Ahead to Automation

This process of using digital tokens as collateral will most likely become automated in the future. It will become possible, maybe even on the chain, such as on the Ethereum main chain through smart contracts to collateralize Ethereum or Bitcoin. In return, a token would be issued with FIAT value but that token would not be FDIC insured since it did not come from a US bank. Future startups & companies may add insurance later on by requiring or requesting a risk premium.

Ownership of Cryptocurrencies as a Speculative Tool

We believe this collateralization and automation will solve the price stability issue of cryptocurrencies for everyday users. Eventually, cryptocurrencies won’t primarily be used by individual consumers anymore; they will be held by financial institutions, hedge funds, and large investors. These entities will use digital currency as a speculative tool, similar to how land ownership has slowly changed over the last few decades back to a lease or rent system in most developed economies. This means that Bitcoin, Ethereum, and other digital currencies will only be transacted when a settlement is reached between two parties or smart contracts. Similar to how XRP was thought to be used in their Ripple ecosystem.

Secondary Layers Will Lead to Tokens Being Used for Non-Forward Contracts

This leads us to the second point we want to make: Once secondary layers such as the Lightening Network or the Raiden Network are active they will allow cryptocurrencies to be used for non-forward contracts or cash-settled contracts. These secondary layers will make it easier and faster to perform transactions. These non-forward contracts will be settled via the Bitcoin or Ethereum Lightening network instead of the specific financial asset that is being settled. For example, a hedge for diamonds or oil would be settled via cryptocurrencies. This will be the first and one of the most important steps for the financialization of the Bitcoin ecosystem.