Redundancy is good: a lesson from Tether

ChronoBank will enable payments in any ERC20-compliant Ethereum token. The situation at Bitfinex shows why that’s so important.

It’s a continual irony of the bitcoin and cryptocurrency ecosystem that we trade decentralised currencies on centralised platforms. This is partly a quirk that arises from the very different natures of the fiat and blockchain systems. Whilst fiat is centralised, backed by governments and central banks, cryptocurrency is decentralised and its value is set by the market. The two approaches are chalk and cheese, and when they butt up against each other there are no easy solutions.

We have seen the results of this innumerable times, not least in the hacking and collapse of MtGox. Centralisation always introduces a point of failure, and exchanges are the weakest link in the bitcoin world. However, the pooling of customer cryptocurrency funds is not the only point of centralisation that traditional exchanges entail.

Untethered

In the last week, the price of bitcoin on Bitfinex has been anything up to $100 higher than on other major exchanges. The reason for this is a problem with their fiat withdrawal arrangements. With most options unavailable on at least a temporary basis, traders are opting to buy BTC and withdraw that rather than to park funds in Tether (USDT), Bitfinex’s fiat-backed blockchain currency. The additional buy pressure is enough to send the price of BTC well above the broader spot price, and is an indication of the impatience and anxiety around the problem. Without fiat withdrawal arrangements, there is no scope for arbitrage with other exchanges and the price remains artificially high.

The bottom line is that Bitfinex — perhaps the foremost bitcoin exchange — has been hamstrung by its legal/regulatory problems. The fact that MtGox exhibited precisely this price dynamic before it went offline is doing nothing to return confidence to traders, despite statements from Bitfinex that the exchange is fully solvent.

Decentralise everything

One solution to the problem of centralised exchanges is the DEX, or decentralised exchange. These operate on the blockchain and are fully peer-to- peer. Whilst early DEXs were slow and clunky, newer versions such as the Waves DEX are fast and secure, and offer trading experiences similar to regular exchanges. LaborX will be another such decentralised exchange, and we’re working to make it as fast and convenient to use as possible.

Even this, though, does not remove the problem entirely. Fiat currencies always entail a degree of centralisation, as Tether shows.

This is one of the reasons we want to make payments available in any currency the worker and client agree upon — or, at least, any ERC20-compliant token. Unlike Bitfinex, we cannot have our system reliant on a single currency such as USDT. We have to give users choice. If they want to use LH tokens, they can; these are relatively well decentralised, since they will ultimately be backed by a group of labour-hire organisations. But, in the event of any regulatory issues or unforeseen circumstances, we cannot run the risk of LaborX being abandoned for other options.

The more payment options we offer, the less this will ever be a problem. Over time, new solutions will be developed and there will be ever-more ways to pay a worker. We will have LH tokens in various national currencies. There will be BTC-linked tokens. It will be possible to pay in the tokens of major cryptocurrency projects, such as Iconomi and Golem. It will also include commodity-backed tokens, such as the gold-backed blockchain token developed by DigixDAO.

New fiat-backed tokens may become established, and perhaps coins that pioneer a successful decentralised pegging system. The more options available, the better.

For more information, visit www.ChronoBank.io.