The cryptocurrency community has always understood that bitcoin volatility is a feature, not a disadvantage. But others see bitcoin volatility as a serious obstacle to the spread of cryptocurrencies.
One solution to this problem is stablecoins. They claim the role of “cryptocurrency for the masses,” which will finally fulfill the promise to create an independent digital monetary system.
The idea behind stablecoins is not novel. It is known as a fixed exchange rate system in the traditional economy. The exchange rate of one currency is tied to the value of another currency, basket of currencies, or other liquid assets – for example, oil or gold. A similar model formed the basis of stablecoins.
In January 2012, the American developer J.R. Willet published a work entitled “The Second Bitcoin Whitepaper”. In it, he described a way to create new tokens based on Bitcoin blockchain.
The add-in protocol is called Mastercoin. According to the author, he was supposed to allow end-users to create their own cryptocurrency with a fixed rate due to binding to another currency or product. A year later, Willett held the first token sale and raised $ 500 thousand to launch his project. In November 2014, based on this protocol, the Realcoin cryptocurrency, now known as Tether, was launched. It was the first stablecoin whose value was tied to fiat.
The model by which such stablecoins work is simple. Each token corresponds to a unit of fiat currency (or asset). The funds are held by a third party – for example, by bank. For every US dollar deposited to a bank account, the user receives a token as proof of eligibility for that US dollar. At any time, the user can redeem their US dollars back.
The weak point of stablecoins linked to fiat currencies is the need for an intermediary who must accept funds, store them, and maintain the rate. For this, most of these stablecoins are criticized. Tether has proven that these doubts are valid.
In July 2014, before the advent of Tether, developers Dan Larimer and Charles Hoskinson introduced the BitUSD stablecoin released on the BitShares blockchain. Unlike Tether, the backup asset in their model was not a fiat currency, but BitShares tokens directly.
Today, the most successful stablecoin is Tether. With a market cap of $ 9.2 billion and high liquidity. It accelerated the development of the cryptocurrency ecosystem, having managed not to lose its link with the US dollar.
A simple fiat security model combined with a good relationship with Bitfinex and other large crypto exchanges has contributed to the growth of Tether among crypto traders.
Stablecoins attracted the attention of major crypto market players. Coinbase, Gemini, and Binance cryptocurrency exchanges launched their own “stable” tokens. Representatives of the traditional market did not stand aside. For example, investment bank J.P. Morgan creates JPM Coin and Facebook Technology Corporation – Libra. Today, Tether’s closest competitor is the stablecoin USDC, a joint project of Coinbase and Circle.
In just six years, we have gone from blockchain experiments to a full-scale battle for the future of digital money. Today most stablecoins are tied to fiat currencies. It turns out that even a decentralized foundation cannot eliminate their dependence on national governments. Therefore, they are forced to build relationships with regulators and traditional market participants.
However, this is not just about digital money, but about digital sovereignty in general. Billions of US dollars have already been invested in stablecoins. And for the traditional financial industry, they may not be a compromise, but a Grecian horse.