For all of the praise given to cryptocurrencies and their power to change the world, one often cited criticism is that of volatility. One only has to look at Bitcoin’s erratic movement since the start of the year, ranging from highs of around $17,000 in early January to lows of around $6,500 at the start of February, to appreciate the severity of the issue. And with such severe volatility comes a lack of stability, an undesirable feature in any currency.
But it appears that a potential solution may not be too far in sight, and this one has come from the economists. Saga has been referred to as the ‘thinking person’s cryptocurrency.’ A bold project in creating a stable coin, the cryptocurrency will work by being tied to reserves – a basket of fiat currencies – held at commercial banks. Saga’s ultimate aim is not to replace fiat currencies, but instead to act as a “complementary global currency”, as put by the founder, Ido Sadeh Man. So how does it work?
A Stable Coin
The Saga Foundation is a non-profit organisation headquartered in Switzerland that aims to ensure that the potential of digital currencies is fulfilled and that they can be integrated effectively within the current financial system. Saga’s Advisory Council includes big names like Myron Scholes, co-creator of the Black-Scholes model for pricing options, and Jacob Frenkel, the Chairman of JPMorgan Chase International and former Governor of the Bank of Israel. With such well-qualified backing, confidence in the token should be high – this is clear to see, with $30m already having been raised by investors.
The currency, SGA, which is intended to be launched in the final quarter of 2018, will work on a variable fractional reserve system. This reserve will include the funds that are used to buy SGA tokens and will also ensure that individuals are able to sell their tokens. Although the price will be allowed to fluctuate to a degree, the reserve will give a level of control through manipulation of the money supply. The SGA supply will be adjusted according to the smart contract – as the economy begins to expand and prices rise, more SGA tokens can be released, and vice versa, therefore controlling price movements.
Having said this, part of the price will still be determined by speculation. All currencies are based on an intrinsic value decided by a level of market trust. The reserve will mainly be employed as a stabiliser in the early stages of the development of the currency. As stated on Saga’s website, “When the economy is small – and the inherent value is especially volatile – Saga applies a high reserve ratio, supporting stability.”
Saga is not the first coin to be based on a reserve. Tether is a cryptocurrency which claims to back each token with one dollar in reserve. However, there are question marks over the legitimacy of Tether, as there have been suggestions that the level of reserves is not large enough to account for the level of coins that have been issued. Therefore, Saga may act as a more legitimate ‘stable coin’ in comparison, allowing it to generate greater trust from investors.
The minds behind Saga also intend to remove the anonymity away from their cryptocurrency. Bitcoin has been criticised for the anonymity of users, with private addresses raising the potential for financial crimes, therefore creating a concern for regulators. Other cryptocurrencies like the altcoin Monero offer even more privacy, with almost completely anonymous transactions.
Saga, therefore, has declared that it will require all owners to pass anti-money laundering checks and also allow any national authorities to check a holder’s identity if required. This will increase the accountability of users, therefore reducing the possibility of crime.
However, perhaps this level of regulation may also put off many users of digital currencies. Cryptocurrencies were originally created as a decentralised system away from the control of the government, therefore excessive regulation may reduce the popularity and scope of Saga as a cryptocurrency.
Saga certainly provides an answer to the issue of cryptocurrency volatility, adding value in the form of stability. It also ensures a level of regulation, this being an issue that has been brought to attention by such individuals as the Governor of the Bank of England, Mark Carney. Therefore, in these two senses, Saga has the potential to be a very successful coin.
Yet this isn’t a coin for those investors seeking a large return, but rather those that may actually want to do business with a virtual currency. This creates a different selling point for Saga, assuming individuals are willing to accept the level of regulation that comes with.
Saga has potential, but it is still a project – and economists aren’t known for always getting things right.
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