Stablecoins

Basics

• Unlike bitcoin and similar cryptocurrencies, they are digital assets built to lessen price volatility and are often paired against the U.S. dollar or established commodities like gold. Volatility is one of the main reasons why several institutional investors and individuals have thought twice about stepping into the cryptocurrency arena, and stablecoins seek to make things a little less frightening.
• Cryptocurrency firm Blockchain has released a report examining the growth of the stablecoin trend, the differences between the growing number of stablecoins in circulation, and whether they truly work to lower volatility in the market.
• Tether currently (4-2-2020) accounts for about 85% of the total stablecoin market cap. Comparatively, Tether made up about 77% of the market cap on January 1st, 2019.
• Some of the biggest investors in stablecoins include Pantera Capital, Coinbase & Circle (US Dollar Coin), and the Digital Currency Group.
• Total stablecoin supply passes $100bn (14-6-2021).

History

• From Bankless (3-6-2022):

"In July of 2014, Dan Larimer and Charles Hoskinson issued the first ever stablecoin called BitUSD on the Bitshares Blockchain, which was backed by the Bitshares’ native token BTS and other crypto assets. Both founders are well known in the crypto space. Charles Hoskinson is one of the co-founders of Ethereum, while Dan Larimer was the CTO and core developer at Block One, which founded EOS in 2017. After inception, BTS was used as collateral for other stablecoins, which were backed by native, local currencies such as the Philippine Peso. For BitUSD to stay stable, the amount of BTS used as collateral had to be at least two times the value of one dollar. BitUSD’s  peg broke in 2017, caused by high overall crypto market volatility and instant liquidations, and the token is no longer actively traded.

NuBits was introduced in September 2014 as a “Seigniorage Style” system stablecoin. NuBits were not pegged to any asset, but instead relied on arbitrage and game theory to maintain its dollar peg. NuBits worked similarly to algorithmic stablecoins, which create and burn new tokens depending on complex algorithmic processes to keep the price stable. NuBits’s peg first broke in May of 2016, after traders and NuBits holders were FOMOing into the spike in BTC price. They traded large quantities of NuBits for Bitcoin. This large sell-off in NuBits increased its supply, lowered the market cap, and the price for one NuBit fell below one dollar. The price only collapses if the entity that issued the stablecoin (in this case NuShares that issued NuBits) does not have the necessary capital to buy back the new supply of NuBits on the market. This was the case when the peg broke the second time in 2018. Since then, NuBits has never fully recovered and is trading close to zero, which is ultimately caused by people's lack of faith in NuBits. This results in fewer buyers of NuBits and higher sell pressure, due to the lack of buy pressure.

The third and final stablecoin of the Class of 2014 is Tether. Tether was founded in November of 2014 by the Bitfinex exchange as “RealCoin” and was rebranded in the same month of its launch to avoid association with altcoins. Tether is a centralized, fiat backed cryptocurrency, which should mean that each new Tether token (USDT) released on the blockchain is backed by a real world asset in the company's treasury. This has allegedly not always been the case, and Tether and Bitfinex have witnessed several attacks and bad media over the past few years. In 2016, Bitfinex was hacked for $72M, which is still one of the largest hacks in crypto history, followed by a Tether hack in 2017 worth $31M. Investigations took place in 2018 and 2019, after Tether got accused of market manipulation. Fast forward to 2022 and there is still controversy around the treasury management of Tether."

Types

• From The Defiant (28-9-2020):

"There are two main types of stablecoins: custodial backed tokens and algorithmic coins. The first, true to their name, use a centrally stored reserve of fiat assets to guarantee the peg. The tokens are (in theory) backed 1:1 and as such should not deviate from it. The most popular of these are USDT, USDC, and now BUSD.

The algorithmic approach often also uses collateral (in the form of digital assets and not fiat), but unlike custodial backed tokens, it is operated and stabilized through smart contracts and algorithms. It uses economic incentives to motivate arbitrageurs to maintain the peg of the stablecoin. Dai is the most famous stablecoin in the market, but there are others like RSR, USDX and sUSD. These coins exhibit more volatility and at times struggle to maintain the peg. 

A third, but the more abstract type as the concept is still in an experimentation phase, is the CBDC or central bank digital currencies. Worried by the fact that DeFi constructs may displace central banks, governments are looking into issuing their own cryptocurrency assets. While some experiments like the Petro have proved largely unsuccessful, the expected arrival of the digital yuan and other major digital currencies has promise." 

Ethereum and Stablecoins anno 1-2020

• From Bitcoin.com (31-1-2020):

"The ETH chain has a great number of stablecoins such as TUSD, USDT, DAI, PAX, and GUSD. All five of these stablecoins leverage the ETH chain for stable value transfers. “Stablecoin transfer value has now flipped ETH on Ethereum,” Watkins tweeted. While sharing another chart, Watkins indicated that most of the story is consumed by tether (USDT) transitioning to Ethereum last year. Watkins believes the flippening took place in mid-2019 and emphasized that since then “Ethereum’s economy is now dominated by stable value transfer.”

Additionally, researchers have noted that 70% of the circulating tether supply is controlled by roughly 104 addresses."

Well known stablecoins include:

• DAI
• UST
• USDC

• USDT
• RAI
• Liquity
• PAX
• GUSD
• TUSD
• rDai

Lessons from an old stablecoin, NuBits

• NuBits has suffered two big crashes (13-7-2018), with extended peg breaking:

"In 2016, NuBits’ peg infamously broke, and it remained broken for 3 months. The initial price drop happened between May 26th and June 20th, 2016. This was about the same time that Bitcoin’s price suddenly spiked, after 6 months of relative stability. It’s plausible that the drop happened because of the following: People who had capital in NuBits saw how Bitcoin was spiking. They wanted to get in on the spike, so they sold their NuBits in large quantities to buy Bitcoin. The NuBits peg was unable to handle the large sell-offs and broke. The price tanked and the peg stayed broken for an extended period.

After NuBits crashed in 2016, its market cap grew 1,500% on Coinmarketcap between the end of 2017 and the beginning of 2018, going from $950k to $14 million. This is strange, considering the NuBits peg had been broken for such a long period in 2016. Their market cap had been stagnant for years, and suddenly it takes off. Was this spike just an accounting error, or had people suddenly decided NuBits was actually amazing? People were buying millions of NuBits in late December. The price of the NuBits stablecoin was notably above its $1 peg between December 20 and December 28, when it peaked close to $1.50(!).

What caused the increase? It’s clear when one looks at the Bitcoin price history. The NuBits high price period starts when Bitcoin had its “Christmas crash.” By December 22 there was a strong news narrative about Bitcoin crashing.

This shows how when Bitcoin and cryptomarkets crash, capital rapidly flows into stablecoins. NuBits faced a lot of downward pressure as people sold it off to try to get in on a Bitcoin spike. But the crash ensued because the NuBits protocol wasn’t designed to be able to deal with it. The way to deal with these cycles of downward pressure — caused in part by lack of diversification — is to have large reserves, potentially many times over circulating supply, which can be quickly used. NuBits had only a small, fractional reserve that was not algorithmically controlled. It could not be used to automatically, with arbitrageurs, cover the drop in demand and keep the price unaffected.

Nubits repegged in September 2016 and saw its peg break again on March 21 of this year. This second crash was also caused by insufficient reserves. A lack of reserves prevented the NuBits team from being able to protect the NuBit price from a small demand dip. Holders selling off dropped the price further, causing a rapid cascade. A contributing factor was that NuBit reserves were stored as Bitcoin. Most of the reserves were created a few months ago when Bitcoin was high and people bought a lot of NuBits. The value of the NuBits reserve fell as Bitcoin’s price fell.

Overall it seems that Nubits was a victim of its own design: improperly diversified collateral and, on top of that, not nearly large enough reserves to maintain the peg."