Are Stable Coins Stable for Musicians?
The cryptocurrency market is an exhilarating avenue with unpredictable ups and downs. Known for their volatile nature, cryptocurrencies possess an inherent risk that intimidates yet excites many investors. Stablecoins aim to curb this volatility by being pegged to the value of fiat currencies such as USD or EUR. For example, a well-known stablecoin is “Tether (USDT)”, whose value is linked to the US Dollar such that 1 USDT should be equal to 1 US Dollar. USDT and USDC (USD Coin) have become exceedingly popular stablecoins due to their negligible volatility while reaping the benefits of blockchain technology.
Despite their popularity, stablecoins have come under scrutiny due to cryptocurrency Terra’s recent crash (LUNA). Terra plunged 96% to a near-zero value causing the crypto community to question its stability. Unlike collateralized stablecoins such as USDT, Terra is an algorithmic stablecoin. Using LUNA tokens as collateral, Terra used code to maintain the supply of the cryptocurrency. With Terra suffering due to mass selling, opinions are divided on the use of algorithmic and other forms of stablecoins.
It is important to factor in that, unlike Terra, Tether, and Binance USD is supported by actual money or cash equivalents such as bonds. To form a comprehensive understanding of stablecoins it’s worthwhile to compare their pros and cons.
Stablecoins are a relatively secure means to invest cash to facilitate crypto trade without directly interfacing with fiat currencies. By storing money in stablecoins, investors can utilize the power of blockchain while avoiding the volatility of traditional cryptocurrencies.
The most obvious use of stablecoins happens to be in faster and low-cost international transactions. However, since stablecoins are still a nascent form of transacting they are largely used for quickly trading cryptocurrencies. For example, one may easily convert existing bitcoin to USDT to avoid a potential crash.
Stablecoins are widely criticized for their transparency, misregulation, and centralization. In early February 2021, Tether and Bitfinex paid an $18.5 million fine to settle a lawsuit due to a lack of transparency regarding how their reserves were handled. Collateralized stablecoins are also criticized as they fundamentally oppose decentralization as “Ensuring that each coin in circulation is backed by an equal reserve value requires a team that leans the operation more toward a centralized structure.”(James,2022)
For artists and musicians, stablecoins offer a way to use real cash in the digital realm with less risk and unpredictability. However, it is important to note that most NFTs are transacted using Ethereum. Therefore, artists who incorporate NFTs into their business model should be aware of bitcoin trends that in turn affect other coins. The value of an NFT may increase or decrease over time as the price of Ethereum fluctuates. Moreover, an NFT’s worth is dependent on the type of content it hosts (e.g. exclusive tracks, signed art, etc.).
Music distributors Ditto recently introduced the “Opulous” platform including the “Defi” scheme (Decentralized Finance). As described by Opulous, “For those artists looking to borrow money, the loan” (provided by the Defi scheme) “is guaranteed against the artist’s past streaming revenues with the copyrights they own held as collateral”(Dredge,2021). Opulous is partnered with the Alogrand platform which incorporates stablecoins. Using smart contracts and blockchain technology, Opulous allows fans to own and trade Music Fungible Tokens, and Artwork NFTs thereby supporting their artists and simultaneously profiting by earning a share of their royalties.
With the fall of Terra, many believe that the success of stablecoins lies with collateralized stablecoins like USDT which remained relatively stable during Terra’s mishaps. Others have called for algorithmic stablecoins to have larger reserves as opposed to collateralized stablecoins.
All in all, as with anything new and exciting, cryptocurrencies come with inherent risks and dangers. It is important to understand that the information and advice regarding cryptocurrencies, NFTs, Web 3.0, and its trends are widespread and unfiltered. An inquiring mind that exercises caution may be the best bet to traverse this world successfully.
1)Dredge, S. (2021) Ditto launches Opulous decentralized finance scheme for artists, [Online], Available at: https://musically.com/2021/02/01/ditto-launches-opulous-decentralised-finance-scheme-for-artists/
2)James (2022) Pros And Cons Of Stablecoins, [Online], Available at: https://www.tap.global/blog/pros-and-cons-of-stablecoins