Stablecoins are cryptocurrencies that maintain a stable value against a reference asset, such as fiat money, commodities, or other cryptocurrencies.
They are designed to reduce the volatility and risk associated with the crypto market and to enable more practical use cases such as cross-border payments and holding fiat in the form of crypto.
This article will explore the history of stablecoins, from the first attempts to create them in 2014 to the modern yield-bearing stablecoins like mUSD that offer money-making strategies to their holders.
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The First Stablecoins: BitUSD and NuBits
The concept of stablecoins is not new. In fact, the first stablecoin was launched in 2014, only five years after Satoshi Nakamoto created Bitcoin. The stablecoin was called BitUSD and was issued on the BitShares blockchain, a decentralized platform for financial services.
BitUSD was backed by another cryptocurrency, BitShares (BTS), which served as collateral for this stablecoin. BitUSD was pegged to the US dollar at a 1:1 ratio, and users could create or redeem BitUSD by locking or unlocking BTS on the BitShares platform.
Another early stablecoin was NuBits, which was also launched in 2014. NuBits was backed by another cryptocurrency, NuShares (NSR), which was used to regulate the supply and demand of NuBits. NuBits was also pegged to the US dollar at a 1:1 ratio, and users could buy or sell NuBits from the Nu network, which acted as a decentralized reserve bank.
Both BitUSD and NuBits were examples of crypto-backed stablecoins, which use other cryptocurrencies as collateral for the stablecoins. These stablecoins have the advantage of being decentralized and transparent, but they also face some challenges, such as maintaining sufficient collateralization, managing price fluctuations of the underlying assets, and ensuring the security and trust of the platforms.
Tether: The Rise of Fiat-Backed Stablecoins
The most popular and widely used stablecoin today is Tether (USDT), launched in 2015 by Tether Limited, a company affiliated with the crypto exchange Bitfinex. Tether is a fiat-backed stablecoin, which is backed by fiat currency reserves held by a third-party entity. Tether claims that each USDT token is backed by one US dollar in its bank accounts and can be redeemed at any time.
Fiat-backed stablecoins have the advantage of being more stable and less risky than crypto-backed stablecoins since they are not affected by the volatility of the crypto market. They also have lower transaction costs and faster settlement times than traditional fiat transfers.
Other fiat-based stablecoins that are pegged to the US Dollar include TrueUSD (TUSD), USD Coin (USDC), Paxos Standard (PAX), Binance USD (BUSD), DAI (DAI), Libra (LBR), and more. Each of these stablecoins has its own features and benefits, but they all share the goal of providing a reliable and convenient medium of exchange for crypto users.
However, they also have some drawbacks, such as requiring trust in the custodian of the reserves, complying with regulations and audits, and facing potential legal or technical issues that could disrupt the peg.
Cryptocurrency-collateralized stablecoins are another type of stablecoins that use other cryptocurrencies as collateral stablecoins. However, unlike BitUSD or NuBits, these stablecoins are not issued on separate platforms but on existing blockchains supporting smart contracts.
One of the most prominent examples of cryptocurrency-collateralized stablecoins is MakerDAO’s DAI (DAI), launched in 2017 on the Ethereum blockchain. DAI is pegged to the US dollar, but it is backed by various cryptocurrencies such as Ethereum (ETH), Basic Attention Token (BAT), USD Coin (USDC), and more. Users can create DAI by locking their collateral in smart contracts called Vaults, which automatically adjust the collateralization ratio according to the market conditions. Users can also redeem their DAI for their collateral by paying a stability fee.
Cryptocurrency-collateralized stablecoins have the advantage of being more decentralized and flexible than fiat-backed stablecoins since they do not rely on centralized custodians or intermediaries. They also allow users to leverage their crypto assets and access various DeFi services. However, they also have some challenges, such as requiring over-collateralization to maintain the peg, facing liquidation risks if the collateral value drops below a certain threshold, and depending on the security and scalability of the underlying blockchains.
Algorithmic stablecoins are stablecoins that do not use any collateral to back their value but rather rely on an algorithmic formula that controls the supply and demand of the stablecoins. The idea is to create a self-regulating system that can adjust the number of stablecoins in circulation according to the market forces and thus maintain the peg to the reference asset.
Algorithmic stablecoins have the advantage of being entirely decentralized and independent of any external factors or intermediaries. They also have the potential to create a more efficient and scalable monetary system that can respond to market changes in real-time. However, they also have risks, such as being vulnerable to price shocks, speculative attacks, or technical failures that could break the peg or cause instability.
Yield Bearing Stablecoins and mUSD—The Future of Stablecoins?
Yield-bearing stablecoins are cryptocurrencies pegged to a currency/asset and are issued in a decentralized and unbiased manner. Simply holding these stablecoins generates a yield income for the holder. Due to their low volatility and incoming interest, yield-bearing stablecoins can counteract harmful inflation and provide many DeFi opportunities for users all across the crypto-verse.
Yield-bearing stablecoins have the advantage of providing passive income and enhancing the utility of stablecoins. They also have the potential to create a positive feedback loop, where more demand for stablecoins leads to more supply of yield-bearing stablecoins, attracting more users and capital to the DeFi ecosystem.
We at MetaProtocol are working on a yield-bearing stablecoin called mUSD, a crypto token pegged to the US Dollar but supported by $GLP, the underpinning token of GMX, the largest DeFi protocol on Arbitrum.
By holding the mUSD tokens, you can earn interest in your wallet at an APY of 20% while also getting the opportunity to participate in Arbitrum’s DeFi and further boost your yields.
If you want to become a part of this futuristic stablecoin, you should participate in our quest to get whitelisted for our upcoming IDO.
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