What are Stablecoins? What is Tether?

99Bitcoins

8 Jan 201911:23

Summary

TLDRIn 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.

Outlines

00:00

💡 Introduction to Stablecoins

The first paragraph introduces the concept of stablecoins, their purpose, and the basics of how they are created. It sets the stage for the video by posing questions about what stablecoins are, their uses, and their legitimacy. Nate Martin from 99Bitcoins.com welcomes viewers to 'Crypto Whiteboard Tuesday,' a series that simplifies complex cryptocurrency topics. The paragraph explains the volatility issue with cryptocurrencies and how stablecoins aim to provide the benefits of cryptocurrencies without their price volatility. It also touches on the current limited use of stablecoins in day-to-day transactions and their main utility on cryptocurrency exchanges for risk mitigation.

05:01

🔑 How Stablecoins Maintain Their Value

This paragraph delves into the mechanisms that allow stablecoins to maintain their value and avoid volatility. It discusses the two primary methods for achieving stability: collateralization and algorithmic pegging. Collateralization involves backing each stablecoin with an asset, such as the US dollar or gold, to ensure its value. Algorithmic pegging, on the other hand, uses smart contracts to adjust the supply of the stablecoin based on market demand, aiming to keep its price stable. The paragraph also explores the pros and cons of each method, including trust issues, the risk of embezzlement, and the challenges of proving sufficient collateral. It concludes by questioning the incentive for creating stablecoins and the various business models behind them.

10:02

🌐 Examples and Criticisms of Stablecoins

The final paragraph provides examples of popular stablecoins, including USDT (Tether), TUSD (TrueUSD), GUSD (Gemini USD), USDC (USD Coin), and DAI (MakerDAO). It addresses the criticisms surrounding stablecoin creation, focusing on the difficulty of maintaining their pegged value and historical examples of failed currency pegs. The paragraph also raises concerns about the centralized nature of stablecoins and the potential regulatory challenges they may face. It concludes with a reflection on the uncertain future of stablecoins within the cryptocurrency ecosystem and an invitation for viewers to ask questions and engage with the content.

Mindmap

Keywords

💡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. In the video, stablecoins are presented as a solution to the volatility often associated with cryptocurrencies, allowing for more predictable and stable transactions. An example given is Tether (USDT), which is supposed to maintain a 1:1 value ratio with the US dollar.

💡Volatility

Volatility refers to the degree of variation in the price of an asset over time. In the context of the video, it is a key issue with cryptocurrencies that stablecoins aim to address. The script illustrates this with the analogy of throwing a rock into a small pond versus the ocean, highlighting how smaller markets, like the cryptocurrency market, are more susceptible to price fluctuations.

💡Market Cap

Market cap, short for market capitalization, is the total value of a company or an asset that is available for trading in the market. The video explains that the smaller the market cap of an asset, the more volatile its price will be. This is relevant to the discussion of stablecoins as they are created to offer stability in a market with a relatively small market cap.

💡Fiat Currency

Fiat currency is a government-issued currency that is not backed by a physical commodity, such as gold, but rather by the government that issued it. The video discusses how stablecoins are pegged to fiat currencies to maintain their value, with the US dollar being a common reference point.

💡Collateral

In the context of the video, collateral refers to the assets or resources that back the value of a stablecoin. For instance, Tether claims that each USDT is backed by an actual US dollar held as collateral. This is a way for stablecoin issuers to maintain trust and ensure that their coins hold their pegged value.

💡Algorithmic Peg

An algorithmic peg is a method used by some stablecoins to maintain their value by adjusting the supply of the coin in circulation based on market demand. The video explains that if the price of a stablecoin starts to rise due to increased demand, new coins are issued to increase supply and bring the price back down to the pegged value. Conversely, if the price falls, coins are removed from circulation to support the value.

💡Cryptocurrency Exchanges

Cryptocurrency exchanges are platforms where users can trade cryptocurrencies. The video discusses that one of the main uses of stablecoins today is on these exchanges, where traders can use stablecoins to reduce risk by exchanging volatile cryptocurrencies for stablecoins during times of uncertainty.

💡Arbitrage

Arbitrage is the practice of taking advantage of price differences for the same asset in different markets. The video mentions that stablecoins facilitate faster and cheaper transfers between exchanges, which makes arbitraging more convenient and can help close price gaps between different Bitcoin exchanges.

💡Decentralization

Decentralization refers to the distribution of power or control away from a central authority. In the context of the video, it is one of the benefits of cryptocurrencies that stablecoins attempt to combine with stability. However, the video also points out that because stablecoins are often issued and managed by a central entity, they are criticized for not being truly decentralized.

💡Regulation

Regulation in the context of the video pertains to the oversight and governance by authorities that can impact the operation and legitimacy of stablecoins. The script raises concerns about whether regulators will allow stablecoins to exist without oversight, given that they mimic legal tender.

💡MakerDAO

MakerDAO is a decentralized organization that has created the DAI stablecoin, which is mentioned in the video as an example of a crypto-collateralized stablecoin. Unlike fiat-collateralized stablecoins, DAI is backed by other cryptocurrencies, which are held as collateral on the Maker platform.

💡Governance

Governance refers to the process of decision-making and the framework within which such decisions are made. The video discusses the issue of governance in relation to stablecoins, questioning whether a centralized entity maintaining the peg of a stablecoin is truly in line with the decentralized ethos of cryptocurrencies.

Highlights

Stablecoins are cryptocurrencies designed to minimize volatility by pegging their value to a real-world currency, such as the US dollar.

The value of a stablecoin, like Tether (USDT), is intended to remain stable at 1 US dollar regardless of market fluctuations.

Stablecoins offer the advantages of cryptocurrency, including fast settlements and fewer regulatory hurdles, combined with the stability of fiat currencies.

Currently, stablecoins are predominantly used on cryptocurrency exchanges for risk mitigation and as a means to trade volatile cryptocurrencies for stability.

Traders can use stablecoins to retain dollar value during periods of high market risk without cashing out into fiat currencies.

Stablecoins facilitate quick and cost-effective fund transfers between exchanges, which is particularly useful for arbitrage opportunities.

The creation and maintenance of a stablecoin's peg can be achieved through collateralization, where each coin is backed by an asset like USD or gold.

An alternative method to maintain a peg is through an algorithmic peg, which adjusts the coin supply based on market demand to keep the value stable.

Fiat collateralized stablecoins provide certainty but come with risks such as asset freezing and potential embezzlement.

Crypto collateralized stablecoins require over-collateralization to account for the volatility of the underlying cryptocurrency.

Algorithmic pegging does not require asset holding but relies on complex smart contracts to manage supply and demand.

The business model for creating stablecoins varies; some companies charge trading fees, while others use them as a marketing tool.

Examples of popular stablecoins include USDT, TUSD, GUSD, USDC, and DAI, each with different backing mechanisms and issuers.

Critics argue that the long-term viability of stablecoins is uncertain due to historical precedents of pegged currencies failing.

Stablecoins are often centralized, which contradicts the decentralized nature of cryptocurrencies, leading to questions about governance.

As the cryptocurrency market matures and volatility decreases, the need for stablecoins may diminish.

Regulatory concerns pose a significant challenge to the creation and operation of stablecoins, with some projects facing shutdown due to compliance issues.

Stablecoins currently serve as a temporary utility for traders on exchanges, providing a hedge against volatility without a regulated fiat option.