Ever since the collapse of Terra's stablecoin, UST, and its native token, Luna (LUNC), the crypto world has been understandably skeptical of stablecoins. In particular, algorithmic stablecoins like UST are the subject of much debate.
Nonetheless, stablecoins play an important role in decentralized finance (DeFi) and can help facilitate smoother peer-to-peer crypto transactions. Because stablecoins are pegged to a known currency, commodity or asset, they can serve as a helpful store of value and give traders a way to stash their crypto aside where it won't be as impacted by the market's volatility.
So should we learn to trust stablecoins again? And how exactly do they work? BFF spoke to Coinbase senior business operations and strategy associate, Ella Cheng, to find out.
Edited excerpts:
I'll start with the very basics, which is what is a cryptocurrency or crypto? Y'all are probably super familiar with the two most popular ones, which are bitcoin and ethereum. Basically a cryptocurrency is just another form of money. So with money, you basically are trusting some sort of item to be worth some sort of value. A cryptocurrency is different from our current familiar form of money in that it's decentralized. So you're basically not relying on a central bank like a country's bank to issue and maintain a certain currency like U.S. dollars. Instead you have these protocols, basically code that's maintaining the value and like issuing that currency.
The stablecoin is just one version of cryptocurrency. It is meant to be more stable in price by being pegged to some underlying asset. One big example is stablecoins that are pegged to U.S. dollars (USD) for example. So a big example of that is Coinbase's own stablecoin which is called USD Coin (USDC). We have our own cryptocurrency that we have partnered with with another company called Circle, and we issue a U.S. dollar equivalence-pegged version of a cryptocurrency. In theory, one USDC should be worth one U.S. dollar.
Ella Cheng
That's a really good question. So one recent example of when a stablecoin price was not stable was the Terra collapse, which you may or may not have heard about. So there was one very complicated, very sophisticated "stable" coin that I know not being so stable because the underlying assets it was pegged to lost value very quickly in a short amount of time. In theory, basically think of a stablecoin as any other Investment that you make including in money itself. You have to trust in the value of that asset, and you also have to trust that it's being backed in a safe and secure way. We do our best effort at Coinbase of keeping USC as stable as can be and constantly pegged to $1.00. But you know, things can happen.
The very first stablecoin came in the year 2014. The very first one on record was something called bitUSD. It was basically issued as a token on the BitShares blockchain by some kind of crypto pioneers in this space. And it was backed actually by other cryptocurrencies. It wasn't actually backed by a fiat currency like the U.S. dollar. Now, it's not one of the top stablecoins.
Instead, you're seeing that the top three stablecoins at the moment are all backed by U.S. dollars. The number-one stablecoin at the moment is called Tether. Its ticker name is USDT. Number two is USDC, which is the coin that Coinbase issues with Circle. The third-top stablecoin is BUSD. This is Binance's stablecoin. So respectively those top three currencies have a market cap — this is basically the total value of all of the currency in the universe — of around 60 million for USDT, around 40 million for USDC and around 20 million for BUSD.
That's a really good question as well. Anyone in theory can build and issue a stablecoin. But obviously you have to know how to do it and have the bandwidth to do it. In the past, we've three types of players issue stablecoins. Number one is a private centralized company. Coinbase is a good example of this. Coinbase and Circle co-issue USDC. Tether (USDT) is actually issued by a company called Tether, but behind that is another centralized exchange called iFinex Inc. And then the second bucket of who can issue stablecoins is decentralized autonomous organizations, which in short are known as DAOs. These are basically decentralized protocols, groups of people honestly who are sort of dabbling in crypto. One example of a stablecoin issued by a DAO is Dai (issued by MakerDAO). Then the third category of someone who issues stablecoins is governments. I think no government has necessarily fully rolled out their own stablecoin, but a lot of governments are thinking about it. And if a government is thinking about issuing its own stablecoin, that stablecoin is what we call a central bank digital currency, or CBDC.
For more insights, listen to the full conversation with Ella here.
This is not financial advice. If you don't want to spend money investing in crypto or Web3 — you don’t have to. The intent of this article is to help others educate themselves and learn.
