I’m going to explain the point of stablecoins using my love language -memes.
The currency part of CryptoCURRENCY is really important. You need to be able to use them to pay for things. The price volatility of Bitcoin and other major cryptocurrencies makes it difficult to use them as a means of payment.
This is where stablecoins come into the picture.
These coins are designed to maintain a stable value relative to a fiat currency, like the US Dollar (USD), or another asset. This stability means that they can be used as a medium of exchange or to park cash as people transfer their wealth in and out of crypto. For example, if I'm invested in some obscure memecoin and am experiencing a lot of volatility, I might want to temporarily move some money out. If I convert my money back to USD (fiat currency), that might be quite a hassle, and it would be even more of a hassle if I wanted to convert it back to crypto. Instead, what I can do is put my money into a stablecoin like Tether (USDT), so it is still in the crypto ecosystem, but I don't have to worry about volatility.
Stablecoins have a few inherent advantages when compared to normal, fiat currency. They are programmable, permissionless, borderless, low-cost and fast settling.
Let’s say I want to send money to a relative in a developing country. I could go down the route of bank transfers, but this would involve paperwork, high fees and days of processing. If I use stablecoins, this money can be sent across the world immediately, at almost no cost. And there are many in developing countries who have internet connections but do not have access to bank accounts. For these people, there is more motivation to use stablecoins. At the moment though, if I were to send my relatives money in the form of stablecoins, they would have to convert this money back to fiat currency before they can spend it. This argument gets even stronger if and when merchants and businesses start accepting stablecoins as payment.
A fiat-backed stablecoin is the easiest to explain and will make the most sense to many readers. Fiat-backed stablecoins are collateralised 1:1 with a specific fiat currency. For those of you that don't speak banker, let me explain.
If my stablecoin is fiat-backed, it means that for every $1 coin that I issue, I will have 1 actual US Dollar sitting in my treasury. So if I issue 10,000 of my stablecoin, I will have $10,000 sitting in my treasury. If the price of my stablecoin goes below $1, I will sell some of the USD in my treasury and use it to buy my stablecoin, so that the demand for it increases and the price goes back to $1. If the price of my stablecoin goes above $1, I do the opposite. I sell my coin and use it to buy more dollars for my reserve until the price goes back down to $1 again.
The top 3 stablecoins by market capitalisation: Tether (USDT), Circle's USD coin (USDC) and Binance USD (BUSD) are all fiat-backed.
The Tether Controversy
These different types of stablecoins each have their drawbacks. But the controversy over stablecoins as a whole came to a head when people found out some worrying news about the most widely used one, Tether (also known as USDT).
Tether had initially claimed that they would have a dollar in their reserves for every USDT issued, meaning that USDT would be 100% backed. But many felt there was a lack of transparency, and some discrepancies in Tether's collateralised reserves were found. In layman's terms, they were being real shady.
Tether was charged $41 million by the US Commodity Futures Trading Commission (CFTC) because it made untrue and misleading statements. It claimed that between June 2016 and February 2019 they had the dollar reserves to back every dollar token when in fact, they didn't for most of that period.
This was an issue with Tether specifically. Many will point out that other fiat-backed stablecoins are properly collateralised.
But there is a more fundamental problem…