There is great debate about the future of money. This is not surprising since there is a lot of confusion about money's past.

Nevertheless, cryptocurrency will consume fiat currency, yet not how most opine. In this article we will discuss some vital characteristics along with a potential path of how this transition will occur.

Be forewarned, there might be some discussion about the Hive Backed Dollar (HBD). Also, coins such as Bitcoin or Ethereum will not be the ones disrupting things although they do have a role to play.

Source

Stability

The number one goal of monetary policy should be price stability. This is why central banks spend so much time trying to keep the inflation rate stable. We see the results over the last couple years when things get out of hand.

It is also why Bitcoin and Ethereum will not take over as basis for money.

The CPI in the US reached almost 10%. That means the purchasing power of the currency over that time declined by that amount. In other words, things cost, on average, 10% more than before. This was a fact that was magnified due to the fact things rose quickly.

Now compare that to Bitcoin. It is a currency where a 10% drop can be seen in a day. We know there are big swings in value. Some will say that one BTC is worth 1 BTC. Do not be misled, a fixed supply always means volatility whether it is being prices in USD, houses, an hour of labor, or food. Price instability exists regardless of the form of money used.

Therefore, when the price of Bitcoin went from $60K to $15K, that was a 300% increase in price relative to the value of BTC.

Of course, there are some who feel that moves the other way are beneficial. If the price goes from $15K to $60K, then I can purchased 4 times more. Or so goes the thinking.

Here is where misunderstanding enters. Do you think companies will allow their products to be sold for 75% less? Is that how they are going to stay in business? Are people going to want to see their wages reduced, in BTC terms, as it increases.? We can see how companies would have to keep adjusting all prices and costs across their entire enterprise.

Circling back, this is why the Federal Reserve focuses so much attention on price stability. Naturally, we can make the case they do a bad job of it but, to be somewhat fair, it is a thankless task When things are stable for most of a decade, few pay compliments.

Stablecoins

People need to understand two things:

• stablecoins are the future
• USD pegged stabledcoins will be the norm for the next decade

Some are still going to argue about the first one but the above shows why it will be the case. The second is a matter of great debate. Nevertheless, we can forget about all other pegged stablecoins. Volatility is the enemy which makes it useless for a medium of exchange.

We can actually add a third component to this:

• algorithmic stablecoins will be the norm

Again, we are embarking upon some debate. However, if we look at the mechanics, we see how this is where things change.

A coin like USDC is backed by cash and cash equivalents (mostly T-bills). This does not to affect the money supply. It also is completely under the policy of the Federal Reserve. The reason is because the money never leaves the banking system.

When you take a dollar and buy a USDC, the money is then used to buy US Treasuries. Eventually, it ends up on the domestic banking system. There is really no change.

Algorithmic stablecoins take us to another level. This is akin to the Eurodollar system. When we see something like HBD, there are no US dollars involved. Instead, we are using that solely as a unit of account. Whatever price stability the Federal Reserve is able to create is piggybacked. However, there is no direct influence on monetary policy.

Here is where we see control of the money supply move past the central bank. We also can extrapolate how this is introduced into the real economy.

In short, money creation is taking place outside the traditional financial (banking) system.

Collateral On Steroids

If you are following along, we still haven't answered how cryptocurrency is going to eat fiat. To reach that point, we have to factor in collateral.

Our money supply, either at the dollar or Eurodollar level, is based upon collateral. In the commercial banking realm, one takes an asset such as a piece of real estate and uses that as collateral for a loan. Here is how we see the money supply expanded under fractional reserve banking. When banks are lending, the money supply expands as long as it net positive of the default/repayment rate.

Here is where things are put on steroids.

With decentralized finance (DeFi), there is no house, car, or business posted as collateral. Instead, we only have tokens. This could be Bitcoin, Ethereum, or Hive. It also could be non-fungible tokens (NFTs).

What is ironic is that, under this scenario, the Fed is being used to maintain price stability of the USD while the stablecoins operate freely. They have this burden removed, allowing it to operate throughout both the digital and physical economies.

There is one final point that is vital: the stablecoin issuance is driven by the business cycle. Fed policy does not allow it to control the expansion or contraction based upon economic condition. With stablecoins, the issuance is based upon market needs. When the community (another term for market) requires more, it will be created.

In Conclusion

By now you should see what we discussed over the last couple years regarding the Hive Backed Dollar. This is why there is reason to be extremely optimistic about what is taking place.

This utilizes the USD as a unit of account but is not dependent upon the money supply at all. We are already seeing real world adoption outside the United States banking system, meaning that it is operating at the Eurodollar level. It is completely driven by the market, with no overlords to dictate what needs to be created.

It is a system that operates outside the reach of the banks and government.

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