The Bitcoin Standard for Stable Currencies

The gold standard has served as a store of value to back assets for hundreds of years. Today, gold still backs some debts and guarantees the solvency of many institutions.

Bitcoin is an excellent option for backing stable currencies. Admittedly, it requires associated smart contracts or human intervention. Let’s look at the various options:

1. The smart contract uses WBTC or BTCB to guarantee that the issued stable coin is backed. Why is bitcoin locked? Not exactly, the backing is composed of an obligation to maintain reserves far in excess of the amount minted (say, 150% or 200%) and a settlement process to pay off the debt.

Human intervention. As in the first option, a higher percentage of collateral must be held. The difference is that the liquidator will sell the deposited bitcoin and will charge a commission against the difference between the amount owed and the amount settled. The main risk is counterparty risk, who sells these bitcoins and how? Are they exempt from corruption?

3. Mix of both. Obligation to use smart contracts to demonstrate that internal processes are lawful. This is a very important part of the process, because the institution should comply with the “solvency test” that comes to replace the gold audits that occur in financial institutions. 

Thus, currencies such as USDC, USDT and the possible EUROC would have a subordinate backing to a currency and would have to comply with real-time solvency ratios. With DAI it happens and they are in the spotlight now because MakerDAO may be forced to liquidate Celsius. If BTC falls below the settlement price. If they had not added additional collateral they would be liquidated now.

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The truth is that the market is able to discount the value of a coin very well. Better even than dozens of people trying to verify the solvency of a client. That is why, although there are guarantees with WBTC and BTCB, the market values DAI, USDX and USDT with variations according to their theoretical price. 

Suspicions of insolvency will obviously drive the price lower. This is how it is with fiat, whether there is gold or not. A synthetic price can always be created to replace the gold standard. Or the Bitcoin standard.