By late 2013, it was clear crypto assets would be the future of finance. It was the first time bitcoin crossed $1,000. To the cypherpunks’ chagrin, central banks around the world began publishing warnings to curb the “decentralized genie” threatening the stability of the familiar system. First they ignore you, then they fight.
Bitcoin’s rally stopped short due to a lack of trust and high volatility, rather than any state intervention. That was when people realized crypto assets needed a bridge to financial world, based on our own terms. This was the impetus to create “stable cryptocurrencies,” or stablecoins.
This post is part of CoinDesk’s 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. Sasha Ivanov is the founder of Waves, a blockchain platform.
From that moment, two different approaches to stabilize crypto asset prices began to develop simultaneously: fiat-backed stable assets and algorithmic stablecoins. While central banks perceived cryptocurrencies as a potential threat to the stability of the financial system and their monopoly in money issuance, it wasn’t until recently that they began to research, develop and experiment their own digital currency (CBDC) alternatives.
While the tension between stablecoins and CBDCs has not come to a head, it is still present to the perceptive. Just look at how China, the European Union and the U.S. responded to the libra (now diem) stablecoin project, for instance. These asset groups, fiat-pegged and algorithmic stablecoins, will eventually compete directly with CBDCs to try to squeeze each other out of the market.
Stablecoins backed by fiat
The first and most common type of stablecoins are fiat-backed tokens on public blockchains, typically denominated in U.S. dollars. The most popular collateralized stablecoins are issued by cryptocurrency exchanges – Bitfinex’s USDT, Coinbase and Circle’s USDC, Binance’s BUSD and Gemini’s GUSD. Tether first appeared in 2014 and is the most popular “crypto dollar” today, with a market cap exceeding $18 billion.
Issuers of fiat-pegged stablecoins typically claim these crypto assets are backed with real dollars, other cryptocurrencies and government bonds, with reserves held in a bank account. This is what preserves a token’s “dollar parity.” Tether’s price, for instance, rarely deviates by more than a tenth of a percent.
See also: Stanford Prof Darrell Duffie on Our Big Stablecoin Future
But it is not easy to verify the real backing of such stablecoins. One has to trust reports of the issuer, that is a crypto company often registered in an offshore jurisdiction, or the occasional attestation by a third party. (The New York State Attorney General’s office is investigating the company Tether’s claims about its reserves.)
Users of fiat-backed stablecoins hardly think about their real backing, as the ease of use exceeds all doubts and risks. The stability of their price is…
Read more:Sasha Ivanov: Crypto Dollars and CBDCs Do Battle – CoinDesk