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The Origins of Stablecoins

Categories: GeneralPublished On: November 24th, 20202.9 min read

With Tether’s (USDT) market cap well over $15 billion these days, stablecoins are becoming an even hotter commodity than they already were in 2019. The sustainability of this astronomical growth is debatable, but with daily trading volumes over $30 billion, it is hard to imagine the train stopping anytime soon.

Therefore, we thought it would be a good time to take a look at the history of stablecoins and specifically, Tether (USDT), to analyze the past in order to see if it can give us any clues for the future. For most in the industry, the eruption of stablecoins over the last 24 months has been a much-needed injection of capital and attention to the blockchain industry — but stablecoins have been around much longer than their recent hot streak.

In fact, Tether’s history dates back all the way to 2014, when other players like NuBits and BitUSD were still in play. Fortunately for Tether, both of their competitors had massive challenges in keeping their prices pegged to 1 USD, with NuBits dropping as low as $0.058 or roughly 6 cents on the dollar. Turns out that maintaining a stable peg to 1 USD is much harder than originally thought! Controlling either supply and demand is a lot more difficult with decentralized and secondary markets.

While its early competitors struggled, Tether was not without controversy itself as it consistently tried to convince the market it really did have the collateral to back the trading volume it displayed on a 24-hour basis. Tether asked the market to have the definition of faith, the experience of knowing something is there but not being able to see nor hold physically. 6 years later, they have been rewarded — albeit not without hiccups.

Much speculation was put on Bitfinex, the company behind Tether, regarding it manipulating its price and causing market crashes in the Bitcoin space due to its large trading volume. This was the first sign of a stablecoin power, and how the market uses it as a gateway into the crypto world. A significant portion of the roaring crowd was quieted on March 1st, 2019 when Tether clarified that collateral included assets and interest on loans, giving them more of a buffer in terms of convincing the market and significantly increasing trading volume.

Once it seemed like Tether was in the clear, it paved the way for dozens and dozens of other projects who wanted to get in on the stablecoin game. These include current industry giants like MakerDao and TrustToken.

As the market continues to swell, recent events such as an increase in DeFi related projects seem to continue on the ramp that stablecoins have built. Since DeFi is focused on finance, many projects are seeking ways to collaborate or incorporate stablecoins into their infrastructure to provide more stability to investors and community members. As a result, we are witnessing stablecoins being further entrenched in the blockchain ecosystem. Hopefully as we move forward, diversification in assets and collateral will become a forefront in the stablecoin space as Tether proved the importance of being able to give a community of investors and stakeholders faith in its ability to back up the claim of being pegged to 1 USD.

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