What are stablecoins?

Stablecoins are cryptocurrencies that are programmed to maintain a value approximately equal to another asset. While the most popular stablecoins are pegged to a traditional fiat currency (like the US Dollar, the Euro, or the Japanese Yen), they can also represent other commodities, such as gold or silver. Stablecoins offer transparency and ease of transfer, similar to other cryptocurrencies, with mechanisms in place to reduce volatility.

There are a few different ways that stablecoins maintain their peg to the designed asset. Some are backed by assets held in reserves while some rely on smart contracts to expand and contract the supply of the cryptocurrency based on the demand for that token.

The idea for electronic cash is not a new one. Long before Bitcoin, there were several projects that attempted to create digital money through cryptography.

The first one, B-money, was proposed by computer scientist Wei Dai in 1998 and was intended to work as an anonymous and distributed digital cash. This was followed by Bit Gold, an attempt to create a decentralized online currency created in 1998 by Nick Szabo. While both projects never saw the light of day, eCash was the first major attempt at creating an anonymous online payment using cryptography and was used by one bank in the US for three years but was dismantled in 1998 due to poor adoption.

Bitcoin, created in 2009 by the pseudonymous Satoshi Nakamoto, was the first cryptocurrency to achieve full decentralization as a peer-to-peer cryptocurrency. However, as soon as Bitcoin started trading on the open market, its price became highly volatile and detracted certain users from using it as a form of cash.

The need to reduce the risk of volatility is an important reason why stablecoins came into existence. The very first one created was called BitUSD and issued on the BitShare blockchain by blockchain industry pioneers Charles Hoskinson and Dan Larimer in 2014.

The most widely used stablecoin by trading volume is USDT, a cash-collateralized stablecoin issued by Tether Limited. Created in 2014, USDT was the first stablecoin to be backed by real assets held in Tether Limited reserves.

Many stablecoins have since been created using different methods to maintain their peg.

There are several types of stablecoins, each utilizing a different mechanism to maintain its peg.

Stablecoins have proven useful in many different contexts.

First, they offer all the benefits of other cryptocurrencies, such as transparency, ease of transfer, instant finality and being borderless, while reducing the risk of high volatility for users . This can help when trying to purchase goods and services locally, or on a bigger scale as an alternative to the traditional SWIFT or Western Union for global payments and remittances.

Stablecoins are also useful for traders who wish to get in and out of trades 24/7 and to transfer their wealth between various exchanges to find different cryptocurrencies or arbitrage opportunities.

Additionally, stablecoins are increasingly utilized by financial institutions and corporations for cross-border settlements and B2B (business-to-business) payments. By leveraging stablecoins, institutions can transfer large volumes of capital globally outside of traditional banking hours, achieving near-instant settlement times and lower transaction costs while reducing the risk of severe price volatility associated with unpegged cryptocurrencies.

Disclosures:

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