Stablecoin: what is it?

We call “stablecoin”, crypto-currencies such as USDT or DAI, backed by a classic currency such as the dollar, the euro or the yen. The idea of stable corners is to limit the uncertainty that may weigh on certain cryptocurrencies. Thus, in 2017, the Bitcoin rode close $20,000 before losing more than half of its value. In March 2021, its price exceeded 63,000 dollars to fall back to around 30,000 in July. The same is true for a large number of cryptocurrencies : they may seem a bit too volatile. Who would like to be paid in a currency which one does not know whether the next day it will have gained or lost 10% of its value?

Tether’s USDT

In 2014, a Hong Kong-based company, Tether, came up with a new form of cryptocurrency: USDT. The principle is simple 1 USDT = 1 dollar. Whatever happens, Tether guarantees that this equation will always be respected. And so, as the price of a USDT does not vary, it is called a “stablecoin”.

How does Tether manage to maintain this parity at all times? From the outset, this company claimed that regardless of the number of USDT put into circulation, the same amount of dollars was put in reserve. In fact, controversies have arisen in relation to this reservation. As an example, in September 2020, there was just over 14.4 billion USDT in circulation, and Tether then claimed to have $14.6 billion in reserve. Yet, according to a New York State prosecutor, Tether’s claims that its virtual currency was permanently backed by US dollars was a lie “. As a result, on February 21, 2021, Tether paid an $18.5 million fine to the State of New York to end the lawsuit. These various tribulations have not prevented the USDT from thriving: this currency is usually the 3^and cryptocurrency in the world matter of capitalization.

It is true that, overall, the appearance of this stablecoin was perceived more than positively. When the market is a little shaken up, investors can find USDT a safe haven. What’s more, it has become possible thanks to USDT to exchange dollars without having to go through a bank or other financial institution. Finally, an investor knows that he can convert his USDT into real dollars at any time.

Appearance of other “stablecoins”

In the wake of USDT, other stablecoins have seen the day :

• USDC (Coinbase)
• TUSD (True USD – TrustToken)
• PAX (Paxos Standard)
• GUSD (Gemini Dollar)
• BUSD (Binance)
• DAI (a “decentralized” stablecoin)

Some of these stablecoins are backed by things like gold, platinumof the’moneylanded property or a commodity such as oil. And in the case of MakerDAO’s DAI, the guarantee (called “collateral”) exists in the form of ETHs (the currency of Ethereum) invested by the users of this currency. Besides, the smart contracts, which is the basis of the DAI, specifies that these ETHs are blocked in a so-called “over-collateralized” way. In other words, for every DAI put into circulation, the Ether equivalent of $1.50 is locked in by MakerDAO. Thus, even if the price of Ether varies, there is always a counterparty able to cover the reimbursement of DAIs.

In the long term, a threat could arise on these various stablecoins : the central banks of many nations (and in particular the ECB) are working on official equivalents traditional currencies. We could thus soon have an MDBC (digital central bank currency) equivalent to one euro and guaranteed by the ECB. These MDBCs could sound the death knell for stablecoins existing.