When it comes to bitcoin, there’s no shortage of hullabaloo around the price volatility. I can’t tell you how many times I’ve been told I will lose all my money, and in fiat terms, I have, but that would be under the assumption I would know how and when to sell at the top. A skill I do not have; I am no trader, no analysis, just a humble pleb selling his time into the open market.
Yes, bitcoin has volatile it can move up or down in a matter of minutes, and if you’re emotionally tied to that purchasing power, you’re going to get tossed around and probably make some bad decisions. Despite the bumpy ride in the short term, bitcoin trends higher over a longer-term time frame, and for those who stomached the short-term repricings, they’re now in a better position for it.
This is not an excuse for bitcoin volatility, nor does it make the experience any better, but neither does the one-way volatility of emerging market fiat currencies.
Aside: I am not a fan of the term emerging market. What did we emerge from? The arsehole that is the US dollar?
As someone from the third world, I am used to one-way volatility; I get to enjoy the downtrend of consistent devaluations against currencies like the US dollar and the Euro. So if I am destined to be cleaned out, I might as well try something different, right?
The analogy of the boiling frog comes to mind; while the story centres around the frog or frogs sitting in the boiling pot, getting closer and closer to their demise with time, we never think, what if the person raising the heat doesn’t do it steadily enough and triggers the survival instant of a cohort of the frogs, who jump out sensing the danger and tries to warn the rest.
Monetary and fiscal policies are blunt tools at the best of times and at the worst of times; it’s like like trying to hammer a nail with a rock. You might get the job done, but boy, will it be an inefficient mess of note and a waste of a lot of energy when compared to a hammer.
As countries in emerging markets react to the global financial landscape, their governments and central banks must try to stem outflows as best they can. It’s a tough task paying debt in dollars, trying to balance your trade budget so you have dollars to manage your FX market and then deploying some of that capital in a way that makes it attractive for both local and foreign investment to stick with your banana republic fiat currency.
It won’t take you more than five minutes of looking at a developing nation’s USD pairing over any period of time to realise that emerging market governments and central banks have not been successful in maintaining any sort of rough pegged range in exchange, and it’s a constant downward trajectory.
As the local currency devalues, the citizens are left to try and shelter themselves from this devaluation. The average African, in my case, doesn’t have much exposure to offshore assets like real estate or the foreign stock market, so what are you left with?
You could choose bitcoin, or you could choose the Dollar. The fiat currency sucking up liquidity and purchasing power from your home nation.
The fiat federated mint.
If you’re based in the US or another G7 nation, you probably don’t think much of your local currency; it works just fine, yes it loses purchasing power year after year, but it’s not like you’re walking around with wheelbarrows of cash to exchange for a loaf of bread, not yet anyway.
Your bank account allows you to hold dollars; if you’re not in the US, you may be able to have a US dollar-based account; you have formal forex markets to trade in and out of digital or physical dollars at any time.
That’s not really the case in the global south.
You could ask any African, if they had to choose between our local currency and dollars, what would they say?
Bitcoin!
No, I’m kidding or rather hoping it will be someday, but for now, Dollars are the “flight to safety”. But dollars are scarce in these parts of the world, and the on-ramps and off-ramps are akin to the roads in Africa, either grey roads or tared ones full of potholes.
I want to save in dollars; how do I do it?
For a select few of us privileged folk here, we can open up forex accounts tied to our ID, these accounts are limited in how much we can hold, and they don’t net you an interest rate. You’re also locked into a walled garden; you can’t exactly go and pay with these accounts; you’re only holding a dollar promise with a bank, that will let you convert it later for your local currency and then spend it on their rails.
Forex income is also taxed, so if you’ve held US dollars and your local currency hits a speed bump, and you happened to save yourself, and you’re sitting with a healthy profit, if you convert it back depending on the range, this will add to your annual income, and you’ll be taxed on it.
If you have physical dollars, you can try approaching a bank or money service to swap them into local currency when you need cash to pay for goods and services, but you will need an ID or some sort of KYC and pay your “white market premium.”
If you don’t have an ID or you can’t get someone with a local ID to exchange dollars for you, you would need to go to a “black market” trader and pay their ridiculous premiums, but if you have no choice, you’ll have to accept that deal.
The final option would be to try and secure stablecoins, which have become popular in the global South because you can interact with a wider ecosystem, and you have your selection of wallets you can use without KYC.
The problem is the constant need to purchase a shitcoin to use your stablecoins to pay for that chain’s transaction fees. Coupled with the pain of stablecoins not being interoperable if hosted on other chains, it becomes a nightmare.
You simply can’t expect someone holding $30 – $100 on a mobile wallet to go out and figure out how to bridge across chains and pay double blockchain fees; it’s just a waste of time and becomes expensive.
While the appetite for US dollars remains, the number of headaches it brings to get some turn people off, and they simply stick with their local currency, allowing local governments to continue to debase your savings at faster rates.
So how do we get all these global citizens looking for dollars into a product with fewer restrictions, and once that can still benefit bitcoin? Well, the guys over at Fedimint have a new proposal in the works aimed at tackling this exact issue through the issuance of synthetic fiat backed by bitcoin.
This is not a new concept; in fact, several projects of its kind exist today, such as:
Stability pools are yet another implementation of the synthetic dollar concept.
What is a stability pool?
A “stability pool” is an additional module that can attach new functionality to any Fedimint that holds bitcoin on either via the base chain or Lightning as eCash tokens. The stability pool allows users to “lock” in the US dollar value of their eCash for a fee.
This feature is targeted towards users who aren’t ready for full custody of bitcoin or would like to use bitcoin to secure fiat in a faster, cheaper and easier way with less friction. While the primary selling point of stability pools is for those who are not willing to tolerate bitcoin’s price volatility, the secondary benefits are equally attractive.
The users can still use any Fedimint that hosts this module; they can interact with several mints, they can use any compatible wallet and have control over how much they hold in bitcoin or fiat ecash tokens. They also have access to the wider Bitcoin financial system, so users can still transact on bitcoin rails.
Users who want a constant dollar value are referred to as stability Seekers, who will be matched with stability Providers. Under normal working conditions, seekers can expect to maintain the US dollar value of their eCash minus some fee which is paid periodically to providers as a charge for this service.
How does a stability pool work?
Stability seekers will approach the stability pool with bitcoin placed in their custody and then create a request for a “stability asset”; this could be USD or a local currency. The stability pool locks with some amount of eCash needed to collateralise the asset.
Stability providers place Provider Bids to take the other side of these locks, containing a maximum amount and some minimum fee rate (parts per million) they are willing to provide at.
The stability works through hedging, where stability seekers are going 1x short bitcoin, and the stability providers are going long to take the other side.
In both cases, bitcoin is the collateral they offer to take on these positions. The collateral seekers put up is always equal to their position, but the collateral providers put up is a configurable parameter.
By hedging their bitcoin position, stability seekers will maintain the US dollar value of their locked amount.
These positions expire at the end of each period, called an Epoch. At the end of each epoch, stability seekers have their positions rolled over into the next epoch, so their balance continues to maintain US dollar value (unless they request to Unlock their locked balance).
Similarly, providers’ bids are also re-entered for the subsequent stability epoch’s matchmaking unless they are withdrawn from the pool.
Why would you want to use a stability pool?
Examples could include a shop owner who has fixed costs purchasing stock that is denominated in USD or KES (Kenyan Shillings) as an example. You can accept bitcoin payments, set aside some funds so you know you have USD or KES to buy stock and the rest you can leave as a bitcoin floating rate.
Bitcoin remittance without the headache.
If you’re an unbanked individual living within a developing nation who earns bitcoin from their freelance work, because it’s easier to get across borders and far cheaper. You can swap some of your earnings into USD or local currency so you have a buffer to cover your bills, while you can hold some bitcoin if you wish.
Miners needing short-term hedges.
Bitcoin miners are always looking to co-locate with energy production that is either unutilised or underutilised. Now it’s all well and good to be mining bitcoin in the middle of nowhere, but now that you have the bitcoin, going “bundu bashing” to try and find dollars or your local ATM isn’t a practical or efficient use of your time.
Instead, miners could commit some of their rewards into a stability pool to secure some dollar or local currency-denominated value and build some runway they can set aside to pay bills and wages. This can help miners become far more efficient in the way they operate without needing another financier counterparty to help them diversify their holdings.
What are the advantages of stability pools?
One advantage of using stability pools is you reduce the layer of custodial risk involved. If you’re holding a stablecoin, you need to trust the following:
- The chain miners/stakers.
- The chain nodes.
- The issuer of the stablecoin.
- The banking partner of the stablecoin
In a stability pool, you can pick your provider or mix of providers and move between them based on reputation or rates.
Diversification of purchasing power.
This diversification is crucial in any investment portfolio as it ensures that investors are not too heavily invested in any one asset, reducing the potential negative impact of sudden market fluctuations.
Diversification can also provide a cushion against inevitable market downturns, providing a more stable and secure overall investment approach. While you might believe in bitcoin, you have no control over an exchange blowing up and dragging the market down with it, nor do you have the foresight on when it will recover.
Low transaction fees.
Low transaction fees are another significant advantage when it comes to trading bitcoin and fiat currencies via the eCash system of federated mints. Traditional trading methods often charge high transaction fees, which can quickly erode what savings or profits you try to retain.
However, eCash mints offer significantly lower fees, allowing individuals to retain more of their funds, and as users who previously used other methods like physical dollars or stablecoins on other chains see the convenience and savings, that demand flows into stability pools and thus into the demand for bitcoin.
Potential issues and risks with stability pools.
One issue with stability pools is how banks, governments and regulatory agencies will approach and enforce rules on them or how hard they will come down on stability pool federation members. Remember that issuing currency is a special privilege. While you can play with your bitcoin all you want, once you venture into fiat currency territory, you’re stepping on a bankster’s toes.
Trusting price oracles.
A classic vulnerability that comes from the world of on-chain price oracles is trusting the spot price of a centralised exchange. If the exchange feeds go down, or are manipulated, they can cause chaos with the funds being balanced based on these prices.
Insufficient stability providers.
If the mint cannot collect enough long positions from the providers to cover the short positions of the seekers, the mint will not fulfil new seeker lock requests and possibly also evict (by not rolling over) existing stability seekers to balance both sides of the pool.
Risk of liquidation.
It is possible for the bitcoin price to drop so drastically during an epoch, and the collateral posted by the providers is insufficient to cover the stability seekers’ expected payout entirely. The payout from the epoch will be worth less than the expected locked USD value.
Low time preference privilege.
In bitcoin circles, you will often hear the talk about low-time preference and high-time preference, but to me, this is a privileged argument. For now, I remain one of those privileged enough to have enough of a fiat buffer to live, that I do not need to touch my bitcoin now but save it for the future.
While I don’t have certainty over that, I’ll be getting while the getting’s good. I can stomach 20, 50, or 80% drawdowns because I don’t need that bitcoin right now.
As for others, where bitcoin might be the only way to get paid, the cheapest way to get paid or is the only asset they can get a hold of, this isn’t a practical stance. A 20 – 50% drawdown can be the difference between someone going hungry or having to walk to work instead of using their car or taking public transport.
It’s a serious life-impacting drawdown, and these people would benefit from having short-term shelter from price volatility. While bitcoiners can argue on Twitter about what low time preference is, the reality is there is nothing more high time preference than going hungry.
Stability is what you make of it.
In conclusion, trading bitcoin and fiat currency offer numerous benefits to individuals seeking high monetary freedom. Freedom to do with your purchasing power as you please, is empowering. It allows the individual to play around with how they save, how they spend and how they manage risk.
As people take control of their monetary destiny, they can decide the fate of their funds. If bitcoin is the superior asset, as many bitcoiners like myself believe, then those who opt to use stability pools will eventually see more of their wealth migrate to native bitcoin with time.
Do your own research.
If you want to learn more about federated pools on bitcoin, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research other sources, and you can start by checking out the resources below.
Are you investing in the bitcoin ecosystem?
Do you invest in bitcoin? Do you maintain stablecoin balances? How do you deal with having one foot in each ecosystem?
Let us know in the comments down below.
