What are Stablecoins? What is Tether?

Summary

In this informative episode of Crypto Whiteboard Tuesday, Nate Martin from 99Bitcoins.com explains the concept of stablecoins, which are cryptocurrencies designed to minimize volatility by pegging their value to a stable asset, typically the US dollar. He discusses their primary use on cryptocurrency exchanges, where traders can mitigate risk by exchanging volatile coins for stablecoins. Martin also explores the methods used to maintain a stablecoin's value, such as collateral backing and algorithmic supply manipulation. He highlights the pros and cons of each method, including trust issues and the centralization concerns that arise from the need for a company to manage the peg. The video concludes with a look at popular stablecoins like Tether (USDT), TrueUSD (TUSD), Gemini Dollar (GUSD), USD Coin (USDC), and DAI, while acknowledging the ongoing debate about the long-term viability and regulatory challenges of stablecoins.

Takeaways

• 💡 Stablecoins are cryptocurrencies designed to minimize volatility by pegging their value to a real-world asset, typically a fiat currency like the US dollar.
• 🔄 They serve as a medium of exchange, providing the convenience of cryptocurrency with the stability of fiat currencies, and are particularly useful for traders on cryptocurrency exchanges.
• 📉 The main issue with cryptocurrencies like Bitcoin is their price volatility, which makes them unsuitable for everyday transactions and poses a challenge for their use as a store of value.
• 💰 Stablecoins allow for fast settlement and fewer regulatory hurdles compared to traditional fiat transactions, which is beneficial for traders looking to manage risk.
• 💵 The value of a stablecoin like Tether (USDT) is supposed to be backed by an equivalent amount of US dollars held in reserve, providing assurance of its value.
• 🤔 Trust in a stablecoin is crucial; if the market doubts the backing, the coin's value can plummet, leading to a loss of confidence.
• 💳 There are different methods to maintain a stablecoin's peg: collateralization with assets like fiat currency or gold, and algorithmic pegging which adjusts the coin supply to match demand.
• 📊 Algorithmic pegging uses smart contracts to act as a central bank, increasing or decreasing the money supply to maintain the peg, but this method lacks the asset backing of collateralized pegs.
• 🏦 Companies that issue stablecoins may face challenges such as the risk of asset embezzlement, regulatory scrutiny, and proving the sufficiency of their collateral.
• ⛓ The centralized nature of stablecoins, with a company maintaining the peg, raises questions about their place in the cryptocurrency ecosystem, which values decentralization.
• ⚖️ Regulatory concerns are significant for stablecoins, with some projects facing shutdown due to compliance issues, indicating potential future challenges for this asset class.
• ❓ The long-term viability of stablecoins is uncertain, as the cryptocurrency market matures and volatility may decrease, potentially reducing the need for stablecoins.

Q & A

What is a stablecoin?

A stablecoin is a type of cryptocurrency designed to minimize price volatility by pegging its value to a stable asset, typically a fiat currency like the US dollar.

Why were stablecoins created?

Stablecoins were created to combine the benefits of cryptocurrencies, such as fast transactions and decentralization, with the price stability of fiat currencies, making them more suitable for everyday transactions and less risky for investors.

How does a stablecoin maintain its value?

Stablecoins maintain their value through two primary methods: collateralization, where they are backed by an asset like fiat currency or gold, and algorithmic pegging, where the supply of the coin is adjusted based on market demand to maintain its value.

What are the main use cases for stablecoins today?

The main use cases for stablecoins are on cryptocurrency exchanges, where traders use them to reduce risk by trading volatile cryptocurrencies for stablecoins, and for fast and cheap fund transfers between exchanges.

How does stablecoin collateral work?

Collateral for a stablecoin serves as proof that the company backing the coin can fulfill its promise to maintain the coin's value. For example, Tether claims that each USDT is backed by an actual US dollar held as collateral.

What is an algorithmic peg and how does it work?

An algorithmic peg is a set of rules encoded in a smart contract that automatically increases or decreases the supply of a stablecoin based on its market price, aiming to maintain its peg to a specific value, like the US dollar.

What are the potential drawbacks of using stablecoins?

Potential drawbacks include the risk of not being able to maintain the peg due to market volatility, the centralization inherent in the management of the peg, regulatory uncertainty, and the trust that must be placed in the company issuing the stablecoin.

Why are some stablecoins considered centralized despite being cryptocurrencies?

Some stablecoins are considered centralized because there is a company behind them that actively manages the peg, whether through collateralization or an algorithmic approach, which goes against the decentralized nature of cryptocurrencies.

What are some popular examples of stablecoins?

Some popular stablecoins include USDT (Tether), TUSD (TrueUSD), GUSD (Gemini Dollar), USDC (USD Coin), and DAI (created by MakerDAO).

How do stablecoins address the issue of volatility in the cryptocurrency market?

Stablecoins address volatility by providing a stable value reference, usually to a fiat currency, allowing users and traders to conduct transactions or hold funds without being subject to the same price fluctuations as other cryptocurrencies.

What regulatory concerns are there with stablecoins?

Regulatory concerns with stablecoins include whether companies will be allowed to create assets that mimic legal tender without oversight, the potential for misuse or lack of transparency regarding collateral, and the overall impact on financial stability and monetary policy.

How do stablecoins facilitate arbitrage between cryptocurrency exchanges?

Stablecoins facilitate arbitrage by allowing traders to quickly move funds between exchanges, taking advantage of price differences for the same cryptocurrency across various platforms, without the delays and costs associated with fiat currency transactions.