The first stablecoin that became available in the market was Tether (USDT) back in 2014, after it was renamed from Realcoin. The idea, though, was first proposed in 2012 by J. R. Willett after noting that cryptocurrencies had a lot of volatility.
History of stablecoins
When Tether was launched, the founders claimed that each token was backed by actual currency. This was meant to ensure stability in prices since tokens were backed by US dollars, euros and Japanese yen. Therefore, the coin’s value would not change regardless of the withdrawals/deposits made. To this date, the value of USDT tokens has remained around $1 as promised.
Following the success of Tether, it was only natural to expect more players to enter the game… which they did. By the end of 2017, there were only a few stablecoins around despite the boom in coin prices, but today the number has risen significantly.
Blockchain, a crypto research firm reported that there are 54 stablecoins active today and these comprise 2.7% of the total crypto market cap. Of these, 83% are backed by real world assets while the rest (17%) are algorithmic.
Why are stablecoins so attractive?
In October 2019, the Bank for International Settlements (BIS) published a report that stated Bitcoin had failed as an “attractive means of payment or store of value”.
This was supposedly due to the high volatility users experience on a day to day basis that makes it difficult to depend on the coin as legal tender. Imagine you ran a business and agreed to accept, say, Bitcoin, as payment. One day, one coin could be worth $10,000 and the next it could be worth $7,500. To keep up with these fluctuations, you would either have to change your prices continuously or swallow any losses. This is what makes coins so unsuitable as a means of payment and why stablecoins may be the solution.
Because stablecoins are pegged to a stable asset, their value does not change. A good example is Tether, which has always been valued at about $1 after being pegged to the US dollar. As a result, businesses can rely on such coins for payment because both the business owners and customers know what to expect. Apart from being favourable for payments, stablecoins are also great for global remittances because transfer of tokens is much faster.
Finally, stability in value makes stablecoins attractive to investors without the risk of flash crashes or crypto exchange runs.
Flash crashes are very common and they often occur when a major investor making a huge withdrawal or deposit.
This problem cannot happen with stablecoins. Crypto exchanges are also prone to runs that cause services to become low or shut down completely, which happened severally back in 2017. This too cannot happen because stablecoins cannot lead to the same issue.
Stablecoins have had some very popular proponents including Vitalik Buterin and the Winklevoss Twins.
Both of them see stablecoins as a solution to many coins’ problems and the future of the crypto market. Indeed, stablecoins can be used as a go-between by traders, investors and users to convert between different coins, which would create an extensive crypto arena.