What Is A Stablecoin?

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Bitcoin was introduced to the world in 2009, and within a couple years, markets emerged where you could trade Bitcoin against fiat cash. The system for getting into trading was clunky; someone wanting to simply buy BTC on an exchange might wait up to a week for a bank transfer to clear.

From Humble Beginnings

Then there were the constant issues with account closures as a result of trafficking in cryptocurrency, on both the exchange and the user side.

In 2012, Coinbase came along and changed the game a little. Users could now purchase BTC with credit card. Coinbase probably wasn’t the first to do it, but they’re certainly the most notable, especially in hindsight.

Buying with credit card has become the speciality of other exchanges, as well, and every now and then a card processor will drop a company like Coinbase because of the risk for fraud. After all, you’re buying money, and the temptation to scam is higher than typical goods.

Now a user could conceivably get into the crypto economy within a matter of hours, but what about going from exchange to exchange? A user wouldn’t want to have to buy cryptocurrency with his credit card at every exchange. He also wouldn’t want to have to wait days to transfer funds between exchanges. Suppose a user saw an arbitrage opportunity; one exchange was selling Bitcoin for $70 cheaper than the next. How could he take advantage of that, in the moment?


This is where Tether (USDT) came in.

Introduced in 2014, Tether asked a major concession from the cryptocurrency community: trust a centralized entity. As it turned out, years later, people were right to have their misgivings.

The premise of Tether is simple enough. A trusted entity, namely Tether Limited, holds a bunch of cash for people and issues them tokens. Each whole token is worth 1 whole dollar. Unlike regular dollars, you can split Tethers up into eight decimals.

At the time, these tokens were issued only on the Bitcoin blockchain, via the Omni protocol. Today, you can use Tether tokens additionally on Tron and Ethereum. To date, it’s the only stablecoin to transcend three blockchains.

Tether is the first stablecoin, and probably the essence of the idea. However, the term stablecoin wasn’t used until 2018, when a range of them were created by competing companies.

The notable stablecoins today are Tether, USD Coin, TrueUSD, and Paxos Standard. Of these, Tether is the most successful, with over 4.5 billion units issued. Nothing else compares, but USDC is in second place.

All stablecoins operate on essentially the same premise: the easiest way to put a fiat asset on the blockchain is to issue it as a token. Everyone has to trust the backing, and the value of that token. It’s important, because when you need to liquidate your stablecoins, you don’t want the money in the vault to be missing.

Is The Future “Stable”?

USDC is issued by Coinbase and Circle. As such, you can easily convert USDC at Coinbase. This probably lends to its popularity.

Unlike Tether, which was found to have funds missing, USDC undergoes a regular audit process.

But it may all be a matter of the past, if reports of central bank digital currencies (CBDCs) are to be believed. Stablecoins may quickly find themselves irrelevant in a world where people can move their dollars around like they can Bitcoin now, but in a cash sense.

Imagine being able to tap phones with someone and swap actual cash, with no owner associated. Phones will become more valuable, obviously, but so will security on phones. Currently, biometrics are pretty good, and pretty common, but better methods may evolve.

That’s a world where stablecoins may have no chance at all, but it could also be decades off.

In the meantime, stablecoins serve a purpose for traders, and the staggering volumes on their markets tell the tale.

For example, Tether itself had done $40 billion in volume over the course of the 24 hour period.