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A Brief History Of Stablecoins
Stablecoins offer stability within the volatile crypto market, marrying blockchain's convenience with fiat currency consistency, but their history is marked by innovation and notable failures.
Stablecoins combine the flexibility and convenience of blockchain transactions with the price stability of fiat currencies. They play a crucial role in enabling DeFi users to store value, and trade and stake liquidity freely and frictionlessly, without being subject to the volatility for which cryptocurrencies like BTC and ETH are well known.
Stablecoins have a long and checkered history, characterized by experimentation and innovation, but also by a large number of failed concepts and abandoned projects.
Types Of Stablecoin
There are many different stablecoins, which have been launched by issuers in different jurisdictions and which take different approaches to maintaining price stability. Most are pegged to the US Dollar, but for various reasons traders and DeFi protocols may prefer or support one option above others on the market.
Given the notorious volatility of most cryptocurrencies, stablecoins have emerged as one of DeFi's killer use cases—ideal for payments, storing value, lending, yield farming, and more, with Ethereum co-founder Vitalik Buterin commenting they are one of the sector's most important developments.
In order to serve their vital roles, stablecoins have to maintain a reliable peg with the US Dollar (or another fiat currency). Some also seek to provide a high level of decentralization, with varying degrees of success.
The simplest way to peg a token's value to the US Dollar is to back it with a corresponding amount of reserves held in a bank account. Users deposit dollars with the issuing company and receive the same number of tokens in return. Conversely, users can redeem their tokens for dollars at any time. This convertibility helps ensure the stablecoin holds its value, since tokens that trade below $1 could be purchased and redeemed for a profit. The issuer is the "buyer of last resort", backstopping the token with the value it has collected. However, because it relies on the banking system and an issuing company, this model is highly centralized.
Algorithmic stablecoins seek to provide a decentralized approach that tracks the dollar using different on-chain and off-chain mechanisms. They are not backed by other assets, or may use a fractional reserve model. Algorithmic coins can be considered extremely risky, and there have been a number of high-profile failures (most recently including Terra). To date, none have proven robust and reliable enough to have gained widespread acceptance.
Decentralized Collateralized Stablecoins
Another approach is to collateralize stablecoins with crypto (e.g. ETH), and to use on-chain and off-chain mechanisms to ensure that each token is over-collateralized at all times to account for market volatility. This has the advantage that the stablecoins are backed, but can also be decentralized. MakerDAO pioneered this model with DAI.
Historically, fiat-backed stablecoins have proven the most reliable at maintaining their peg, and most popular, despite lacking decentralization. Algorithmic stablecoins remain experimental. Decentralized collateralized stablecoins have enjoyed some level of adoption but have not yet fully gained the trust of the community.
The total supply of different stablecoins over time reflects not only the popularity of one model over another, but also how stablecoins of the same type may be more or less trusted by DeFi users.
An Incomplete List Of Major Stablecoins
There have been too many stablecoins to list them all. Below is a summary of the most noteworthy examples, whether because they are the most-used stablecoins today, because they were early pioneers, or because they have gained notoriety in other ways.
BitUSD was the first ever stablecoin. It was a decentralized, collateralized token, launched in 2014 on the BitShares platform. Every BitUSD, nominally worth $1, was backed at the time of minting by at least $2 of BTS, the native token of BitShares. The idea was that BitUSD would be over-collateralized, even when the price of BTS fell. Unfortunately, BitUSD suffered from low liquidity and was still vulnerable to extreme volatility, ultimately losing its peg and falling from use altogether. However, the idea inspired former BitShares community members to create MakerDAO and the DAI stablecoin (see below).
NuBits was the first algorithmic stablecoin, launched on the Peercoin network in 2014. It used two tokens, the NuBits dollars stablecoin (USNBT) and a so-called "seigniorage" or governance token, NuShares (NSR). NSR holders could vote to increase USNBT supply to reduce the price when it rose above its peg, or to mint new stablecoins to incentivize "parking" of USNBT when the price dropped below $1. (There was no meaningful mechanism to reduce the supply of USNBT.) USNBT's peg catastrophically broke when BTC spiked in 2016, likely prompting holders to sell their NuBits en masse to chase the rise.
CoinoUSD was the first fiat-backed stablecoin, launched in 2014 on the Nxt blockchain platform. Users could deposit funds with Coinmat, the issuing company, and receive CoinoUSD in return to their Nxt address. It traded briefly on Poloniex as well as Nxt's decentralized Asset Exchange, but never gained widespread adoption and was ultimately discontinued.
Tether (USDT) was launched in 2014 and became the first stablecoin to gain significant traction in the crypto space. Every USDT is 1:1 backed by $1 of cash or cash equivalents (of varying convertibility), held by the issuing company, which is based in Hong Kong. Today, Tether is the most popular stablecoin and is widely supported by exchanges, with a supply of around 70 billion USDT and trading volumes of $50 billion per day at the time of writing.
DAI draws its inspiration from the failed BitUSD experiment, and traces its origins back to 2015, when the upcoming Ethereum platform offered the possibility of complex smart contracts for the first time. DAI is a decentralized stablecoin, generated by the Maker Protocol, which is managed by the MakerDAO community. Unlike fiat-backed stablecoins, every DAI is collateralized by at least $1 worth of on-chain cryptocurrency reserves, which are locked in Maker Vaults. This approach removes many of the single points of failure inherent in centralized stablecoins, but can mean slightly more price variation (a "soft peg" to the US Dollar) because DAI cannot be directly redeemed for USD. Single-Collateral DAI was launched in 2017, and then Multi-Collateral DAI in 2019. There are around 7.5 billion DAI in existence.
USD Coin (USDC) was launched in 2018 and takes a similar approach to Tether, but is issued by regulated financial institutions. Like USDT, every USDC is backed by $1 of cash or cash equivalents such as short-term US Treasuries. It's maintained by the Centre Consortium, which includes Circle and Coinbase. USDC has a circulating supply of over 50 billion.
Pax Dollar (USDP) is another fiat-backed stablecoin, launched in 2018, issued by blockchain infrastructure company Paxos and regulated by the New York State Department of Financial Services, meeting the highest standards of compliance and ensuring maximum convertibility to dollars. The reserves that back USDP are held in US bank accounts owned by Paxos, with the results of audits on these published every month. The current supply of USDP is around 1 billion. Binance USD (BUSD), which is the default stablecoin for Binance and the Binance Chain ecosystem, and has a supply of $18 billion, is a white-labeled version of USDP, effectively making this the third-largest stablecoin.
TrueUSD (TUSD), also launched in 2018, takes a similar approach to compliance, and is backed 1:1 by dollars held with independent financial institutions. Reserves are audited in real time for transparency.
Ampleforth (AMPL) can be considered an alternative asset rather than a normal stablecoin but deserves a mention as a pioneer of the "rebasing" model. The token seeks to target the purchasing power of the 2019 US Dollar. When AMPL's price is higher than this, the number of tokens owned by each user is automatically increased by a smart contract. When it is lower, they are decreased. The rebase occurs daily. While AMPL tracks its target less well than most other stablecoins, it has consistently returned to the $1 mark over time. Numerous stablecoins have adopted the rebasing approach, with limited success.
Libra, later known as Diem, also deserves a mention as Facebook's attempt to move into the stablecoin space. Libra was announced in 2019, and was originally intended to be backed by a basket of fiat currencies and US Treasuries, issued on a blockchain run by a consortium of payments companies and other major stakeholders including PayPal, eBay, Mastercard, Visa, Stripe, and others. The project faced stiff opposition from regulators, partly due to its scale and the fact that it would make Facebook a de facto central bank, and the systemic risk to the financial system that might follow, as well as concerns around user privacy and money laundering. Libra's scope was watered down and the project relaunched as Diem in December 2020, before finally being abandoned early in 2022.
Frax (2020) is a "fractional-algorithmic" stablecoin that is part-collateralized and part controlled algorithmically via Frax Shares (FXS), a governance token that also earns seigniorage revenues. Frax can be minted and redeemed from the protocol at $1. If the system ever become undercollateralized, users can redeem their FRAX for collateral assets and newly-minted FXS to make up the shortfall. Frax has traded within 1% of its target for most of its history, and has a current supply of around 1.5 billion.
Fei (2021) is a relatively new algorithmic stablecoin. Users deposit collateral, including ETH, in return for Fei. The collateral is then controlled by the protocol, and is used to generate yield and backstop the price of Fei when it trades below the peg. If Fei trades above $1, the protocol mints more and sells it. Fei's peg was seriously compromised at launch due to the unforeseen consequences of one of its stabilization mechanisms, which imposed penalties on holders seeking to sell below $1—thereby causing users to attempt to front-run further declines by selling even faster. Following updates, Fei has broadly maintained its peg ever since, trading at slightly less than $1 for most of the last year.
TerraUSD (UST) was launched in 2020. Like NuBits and other seigniorage algorithmic stablecoins, UST sought to peg one token by moving volatility to a separate token, in this case LUNA, which was also the native token of the Terra blockchain. Users could swap 1 UST for $1 of LUNA and vice versa. When the price of UST rose above $1, holders could profit by swapping $1 of LUNA for 1 UST (which would be worth more than $1), increasing supply and pushing down the price of UST. When UST was below $1, users could profit by swapping 1 UST for $1 of LUNA, reducing the supply of UST. This worked relatively well until a series of events led to confidence in the system collapsing, meaning there was no longer adequate demand for LUNA to stabilize UST. Its failure in May 2022 wiped out tens of billions of dollars of value from the Terra ecosystem, catalyzed the wider crypto bear market, and brought down several large organizations with exposure to it, including crypto hedge fund 3AC and lending company Celsius in the process.
Swap StableCoins Safely And Efficiently
This overview shows that relatively few stablecoins have stood the test of time, and even fewer reliably hold their peg. Far from being a store of value, some stablecoins can be more risky than cryptocurrencies like BTC or ETH.
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