Chapter 5: BitUSD for the consumer
Now that we know how bitUSD works under the hood, let's take a look at what it means to the consumer. At the beginning of this book, I forecast some incredible use-cases for Bitshares. BitUSD is one of those incredible use-cases. But the average consumer has neither the time nor inclination to understand the underlying markets supporting this financial tool. Similarly, the average user of the USD does not understand the monetary policy supporting his or her fiat currency. But it "works." In this chapter, we will explore how bitUSD will "work" for the average user. In other words, what are the use cases of bitUSD other than as a derivative contract?
Here is where Bitassets like bitUSD get really exciting.
Three big advantages bitUSD has over non-crypto tools are:
- The ability to maintain your purchasing privacy.
- Confiscation by authoritarian governments is impossible. This is a huge win for those poor unfortunate souls living under tyranny around the world.
- It operates in a trustless environment called the Blockchain. There are no third parties and no trust is required.
In fact all of the benefits of Bitcoin are available for bitUSD users plus the ones discussed below.
I have created 10 of them to get us going, but I think the uses of bitUSD are nearly unlimited.
Example #1
Let's look at bitUSD as a competitor to CD deposit accounts. If you are not from the US, a CD account is a normal bank account in which you can get a slightly higher interest rate by locking away your money for a fixed period of time.
Lets compare locking your money in a CD account for one year as compared to leaving your money for one year in bitUSD.
According to www.Chase.com (One of the largest banks in America) the highest interest rate you can get with them right now for a one year CD is 0.05%p.a. For this great rate you need to deposit a minimum of $100,000. There are account fees you need to consider and penalties if you need to spend your money early. It is only available to US citizens.
With bitUSD, the current variable rate is 5% p.a. That is a 10,000% increase over Chase's published interest rate. There are no minimums and your money is never locked away. Every month you hold bitUSD you are earning that variable interest rate. There are no account fees and no penalties for spending your own money. It is available to everyone on Earth.
But, I hear you ask... "How secure is your money?" A fair question.
There is no apples-to-apples comparison, because crypto-currency is just completely different.
But let's look as best we can. There are three levels of security for American banks like Chase.
- Chase Corporation backs your money.
- Your deposit is insured with the FDIC.
- Because they fall into the "too big to fail" category, Chase may be bailed out by the United States taxpayer.
I could spend days dissecting the value of each of these mechanisms, but I want to keep this chapter moving along, so I will be brief.
I would invite you to look at the objective data and notice that most banks in the West have incredibly thin levels of capital and liquidity —the exact opposite of what a safe bank is supposed to have.
They're backed by poorly capitalized deposit insurance funds, which are guaranteed by insolvent governments.
Also bear in mind that even if your bank is reasonably well capitalized, you are still guaranteed to lose money on an inflation-adjusted basis if you're holding your savings there. Inflation is higher than your interest rate. So you are guaranteed to make a loss on your money if you store it in a bank.
In the last real estate market crash of 2008, those thin levels of capital and liquidity were simply not enough. Many major banks in the west like Chase became insolvent and customers were about to lose some of their deposits. They were only saved by a bail out from the Federal government.
The Federal government was at the time $8 trillion in debt and now they are $18 trillion in debt. Remember, those business cycles they put us through are usually around 7 years on average, +/- 2 years. 2008 plus 7 years is 2015. It might not happen in 2015, but a correction is coming soon. During the next real estate bust, will the US government bail out the banks again?
It seems unlikely. Let me tell you why. After a banking failure in Cyprus in April of 2013, the European Central Bank tried a different model. Rather than taking money from taxpayers and giving it to the insolvent banks, they took it from the depositors. This process is known as a bail in instead of a bail out.
In the aftermath of Cyprus, Ben Bernanke, then head of the Federal Reserve, said that if a 2008 style crisis occurred in America again, the bail in model would likely be used because of the success of the Cyprus bail-ins. That is of course if you think that depositors losing half of their savings count as a success.
The European Central Bank, the IMF, the Australian Central Bank and the Canadian Central Bank, echoed his sentiments as well.
The International Monetary Fund went so far as to publish a report saying that the key to its success is that depositors did not see it coming. That means that governments and banks will give you no warning at all if it is about to happen.
The reality is that leaving your money in a bank is putting your money at risk for a negative real interest rate. It means risking your money for a guaranteed loss.
Although I do believe that the Western banks are not as safe as most people think imagine how much more vulnerable banks in countries like Argentina and Venezuela are. Some of these are in absolute shambles. Recently German retail banks started charging their customers interest to store their money with them because of the European Central Bank's negative interest rate policy.
The worlds banking system is very, very sick.
All over the world, the disasters of fractional reserve banking practices have left depositors very vulnerable. People are waking up and starting to look for alternatives to store their wealth.
So, how safe is your money in bitUSD? To begin with your funds are secured by 300% collateralization in Bitshares.
Granted, Bitshares is a new concept and it will likely be subject to large swings in price. But the swings in price would have to be very large for the customer to lose any portion or all of their money. Larger swings than even Bitcoin saw in its infancy. I certainly do acknowledge the possibility and it is up to everyone to assess that risk him or herself. One thing is likely though; if Bitshares gets more users and the liquidity pools get larger, then volatility will become smaller and smaller.
For the right type of person storing some portion of their wealth in a Bitasset for a positive real interest rate could be the right move. Especially for the billions of people locked out of the banking system.
Example #2
Currency and payments. We all know of Bitcoin's amazing potential for streamlining payments, especially online payments. But there are some areas in which bitUSD, has superior functionality than Bitcoin when used as a payment mechanism.
The first is that a merchant does not receive a highly volatile currency. That means they are not incentivized to sell it immediately to lock in their profits. They can hold bitUSD for days, months, or years without losing or gaining any purchasing power when compared to the US dollar. This will allow people to hold some or all of the currency for longer periods. This is especially true when you factor in that merchants can earn a much higher interest while holding bitUSD than they can when they convert it to fiat and put it in their bank. This will result in more people being able to keep their wealth out of the banking system and it will hasten network effects. There are many businesses that accept Bitcoin but never hold Bitcoin. With bitUSD businesses are incentivized to hold onto bitUSD because of the interest rate.
The second advantage bitUSD has over Bitcoin is because it is stable in price you can set up recurring payments. It is easy to pay 9.99 bitUSD each month, but if you tried that with Bitcoin, say half a Bitcoin per month, the value of your payment might change dramatically. You could of course do it with third party involvement, but not at the client level. So bitUSD, as compared to other crypto-currencies, opens up opportunities for a whole new range of merchants that rely on continuity payments.
The third advantage that is there is no need for conversions. The customer is already used to thinking in terms of bitUSD and understands what that means. This fact alone should help user adoption dramatically.
The fourth advantage is that even though merchant processors like Bitpay can help most merchants eliminate price exposure; no such service exists for dark market activity like Silk Road or even legal activity by the unbanked. This would allow those people to trade in a more stable crypto-currency in a way they never have had before.
If Bitpay or Coinbase or others were to integrate bitUSD as an option, they would be able to tap into billions of new unbanked customers. If they don't, someone else will.
Example #3
Decentralized locks. We spoke in a previous chapter about an excellent product from a Panamanian company called Coinapult.
That product was called Locks, and it helped users preserve the value of their Bitcoin irrespective of the Bitcoin price. The challenge is that it is a centralized solution and as such has many points of vulnerability. BitUSD would allow users to achieve the same result while still keeping the private keys to their wealth, even when they are "locked" to the value of a given asset.
Example #4
A crypto that allows continuity payments. We touched on this earlier, but I think it deserves a little more attention. One of the niches that are in desperate need of a crypto-currency is the home shopping or the infomercial market. Their merchant fees are incredibly high, charge backs expensive, and it is not uncommon for those merchants to lose 10-20% of their revenue to credit card processors. So why have we not seen Bitcoin making huge in-roads into that community? The answer is that the industry is built on continuity payments. Most infomercial products rely on a re-billing of a cream or refill for about $5 to $30 per month. BitUSD is the only crypto-currency that can solve the needs of this community. Think of your phone subscription, cable subscription, Internet subscription, or Netflix subscription. All of these industries rely on subscription payments and coins like Bitcoin simply cannot meet their needs— at least not without a third party.
There is also another feature of Bitshares that will help the home shopping network that I have not even mentioned yet. Home shopping is run with phone sales. Getting a Bitcoin address over the phone is quite the challenge without third party tools.
Bitshares has user-friendly names built right into the protocol. Their pioneering strategy called TITAN (Transfer Invisibly To Any Name) allows people to register a user-friendly name on the Blockchain while preserving privacy of all transactions. These user-friendly names are perfect for phone sales. The phone sales person can ask the purchaser to simply pay "HomeShopping." This is a lot easier than asking someone to pay 3J98tlWpEZ73CNmQviecrnyiWrnqRhWNLy.
Example #5
Decentralized smart wallet. A smart wallet is a wallet that will change currencies for you instantly and seamlessly. So let's say an American tourist has bitUSD in his wallet, but he is holidaying in Europe and the merchant only accepts bitEuro. Prior to Bitshares, a third party was needed to convert one currency into another. This, of course, has all the problems of a centralized solution and is expensive for a third party to manage and profit from. With Bitshares, this process can be seamless and will cost almost nothing.
Another use case is that of a "prepper" who wants to accept gold or silver as payment. The user can pay in bitUSD and the merchant can receive bitGLD or bitSLV. All parties used the currency they wanted, and the smart wallet took care of the conversion seamlessly, without any third parties.
Example #6
Bank accounts in foreign currencies. Right now it is very difficult for your average retail bank customer to have a bank account in a currency other than that of the country he or she in. For example, let's say you live in America and you are concerned that because the Fed is printing so much money we might see a lot of inflation. It is not that easy to go to your local bank and say set up an account in Singaporean dollars or Australian dollars or any other foreign currency. With Bitshares, you can switch to any currency you wish. You don't have to ask permission from anyone; no one can stop you, there are no minimums, and you can do it yourself in seconds.
There are lots of online communities preparing for the collapse of the dollar, and I personally know many people who have flown all the way to another country just to open a bank account and store some of their wealth in a non US dollar denominated account.
Example #7
Bank accounts in commodities. What if you don't think any national currency is a good place for your savings. What if you want your savings tied to the value of gold or silver or oil or wheat? In your Bitshares wallet, you can change what your savings are exposed to in a second for near zero cost. And you earn interest on your holdings. For all those people in ETF's for gold, silver, or anything else, are you earning interest on your holdings, or are you paying middlemen for the privilege of exposure to those prices? With Bitshares, you can have exposure to the price of any commodity and earn interest on your holdings. BitGLD earns interest just like bitUSD does. All Bitassets do.
Example #8
Streamlining crypto currency trading platforms. In the last year or so, Bitcoin has attracted a lot of traders. Many are people who are not necessarily interested in Bitcoin itself, but think they can trade it for profit. Right now, there are hundreds of millions of dollars per year buying in and out of Bitcoin on exchanges. Those traders are not receiving an interest on their holdings and are exposed to disaster scenarios like that of Mt. Gox. All the problems associated with centralized solutions for those exchanges can be eliminated. For pennies, traders can trade in and out of bitBTC and bitUSD on the Bitshares platform. This exposes them to the price of Bitcoin, dollars, or any other currency, without ever losing control of their money or trusting any third parties. "Goxing" can never happen on the Bitshares Blockchain.
Example #9
Earning interest on your Bitcoin. Why hold Bitcoin when you can hold a Bitcoin derivative that tracks the price of Bitcoin and pays you interest? bitBTC is ready and waiting for you.
Example #10
Loans in crypto have been nearly impossible. This is something seldom spoken of, but I think it is holding Bitcoin back as much as anything else. Businesses and individuals do not really borrow Bitcoin because it is too volatile. Imagine if I wanted to borrow 1000 Bitcoin today to grow my business. Let's say I do, and in 12 months time my business is worth double. When I go to pay off my loan I discover that the value of the 1000 Bitcoins has gone up 10 fold. Bitcoin's volatility makes it terrible to use for loans. With a stable currency, borrowing and lending of crypto-coins becomes a real possibility.
All the use cases I have just mentioned for bitUSD and Bitshares are real world problems that the Bitshares platform solves right now. It is just a matter of letting the world know about them and streamlining the technology.
Many of the above use cases can replace whole industries that are worth billions of dollars. If any one of them were to take off, it would be the start of something truly transformative.
These are just a few of the possibilities that are the result of having a price stable crypto-currency available on the Bitshares platform.
I am sure that as time goes on, many creative entrepreneurs who begin playing with Bitshares will invent other possibilities.
In the next chapter I will let you know the current state of Bitshares and what it has planned in the near future.
But before we head there, I should tell you that Bitshares has a whole other aspect we have not even spoken about yet. So far we have learned about collateralized assets. By locking away 300% collateral users can create Bitassets. However there is also a whole other world that the Bitshares platform supports: user-created assets.
These are tokens that users create without any on-Blockchain securitization. There are lots of applications for this. Frequent Flyer miles are one example. Airlines could issue, manage, and track their miles on the Bitshares platform for near zero cost. They could save themselves a fortune and improve security considerably.
This is a fun rabbit hole to explore and the use cases will surprise you. This book does not delve into the world of user-created asset. However, I did record an interview with Dan Larimer about this very topic that I think you will find very interesting. You can view it here: