# Stablecoins

**Published by:** [0xhubman.eth](https://paragraph.com/@0xhubman.eth/)
**Published on:** 2024-11-19
**URL:** https://paragraph.com/@0xhubman.eth/stablecoins

## Content

For this post, we'll be diving into one of the crypto industry's most popular use cases - stablecoins. As of November 2023, USDT and USDC, the two biggest stablecoins by market cap, have a combined market cap of ~$110 billion within the crypto industry's entire $1.48 trillion market cap. However, this rise in popularity of stablecoins has not come without its controversies. If you've spent any amount of time following or participating in the crypto industry, you've no doubt seen the barrage of news headlines concerning stablecoins, whether they be about dollar stablecoins losing their peg, stablecoins becoming undercollateralized, or lack of transparency around the issuer's reserves. Despite the controversies surrounding them, stablecoins have cemented themselves as a cornerstone of the crypto industry and have ruffled more than a few feathers within the legacy financial system and government regulators. But to understand why stablecoins have gained such widespread adoption within the crypto ecosystem, let's first cover the basics of what a stablecoin is and some important history on their meteoric rise. To define what a stablecoin is, let's first describe what they are not. Most other crypto assets have a reputation for being quite volatile with tremendous price swings in either direction from day to day. As the name would suggest, stablecoins are not volatile. A stablecoin is simply a crypto asset that is pegged 1:1 to another asset, so its price remains stable relative to the pegged asset's price. The most popular and easy to understand stablecoins are ones pegged to the US dollar, such as USDT, issued by Tether, and USDC, issued by Circle. 1 USDT or USDC should always (in theory) be equal to $1 and can be redeemed for $1 with that stablecoin's issuer. These dollar stablecoins maintain their peg to the US dollar due to each stablecoin issuer holding reserves in cash and cash equivalents that equal the total circulating supply of their stablecoin at any given time. Now you might be thinking "I thought the entire point of Bitcoin and the wider crypto ecosystem was to create a new, digital financial system that isn't reliant on the dollar or any other fiat currency". And you would be right, but Rome wasn't built in a day and turns out securing banking relationships for crypto companies looking to replace said banks isn't an easy sell. Due to this major friction existing between traditional banks and crypto exchanges, on-ramping users from fiat into the crypto ecosystem was fairly difficult in the early 2010s. Aside from in-person meet ups and P2P exchanges, the average person or entity was fairly limited in their available options. Thus in 2014, Tether was born to help solve two major issues:Crypto volatilityBefore the advent of USDT, users onboarded into Bitcoin were subject to intense price volatility with no real feasible way to hedge this volatility. Now with USDT, users can swap in and out of BTC whenever desired.Convertibility between crypto assets and fiat currenciesAs mentioned above, fully fledged banking rails were still a pipe dream for many crypto exchanges in the early 2010s. USDT offered a solution crypto exchanges could utilize to gain the utility of US dollars without having to support actual fiat currencies or the regulations that necessitate this.One item to note is Tether has extremely close ties with the well-known off-shore crypto exchange Bitfinex as both Tether and Bitfinex share many of the same executives. This relationship has drawn much criticism over the years due to the seemingly nebulous flow of funds between the two entities.From its inception in 2014 to the peak of the crypto industry during the 2016-2017 bull run, USDT quickly gained traction throughout the crypto ecosystem and introduced many crypto users to the concept of stablecoins. At the peak of this bull run in January 2018, USDT had amassed a market cap of over $1.5 billion and was ranked among the top 20 crypto assets by market cap. After the mania of the 2016-2017 bull run, USDT's market cap continued to rise as a brutal bear market gripped the crypto industry from 2018-2019. Many crypto users fled the downward price volatility of crypto assets and flocked to USDT to preserve their capital. However, during this bear market a dollar stablecoin arms race developed with the emergence of several new issuers who saw the success of Tether and USDT and wanted a piece of the pie. New dollar stablecoins to debut during this period included DAI, GUSD, BUSD, TUSD, USDP, and chief among them USDC. At the time, there was a fair amount of criticism levied at these various new stablecoins because really how many different dollar stablecoins did we as an industry need? But as many realized shortly after, all of these dollar stablecoins helped increase liquidity in crypto markets and created the plumbing for many of DeFi's emerging primitives. Before the advent of dollar stablecoins and up until the beginnings of the 2020-2021 bull run, much of crypto trading was denominated in BTC due to Bitcoin having the most liquidity. Historically, if you wanted to buy any other crypto asset, you would first need to buy BTC and then swap your BTC for your shiny new altcoin. With the introduction of these numerous new dollar stablecoins, crypto exchanges began listing altcoin trading pairs in USD as sufficient liquidity had finally arrived. Additionally, many budding new DeFi dapps began to utilize all the new dollar stablecoin options available to them via liquidity pools and borrowing & lending protocols. With all these new dollar stablecoin options available, it opened the floodgates for institutional players to finally enter the crypto ecosystem with size. In April 2020 (this marked the start of the 2020-2021 bull run), the dollar stablecoin market cap sat at roughly $5 billion. At peak craziness and mania of this bull run in November 2021, dollar stablecoins had amassed a roughly $130 billion market cap, a nearly 2,500% increase! Suffice to say, any industry that sees an enormous increase like that (especially one that directly involves the US dollar) will draw the attention and potential ire of the US government. Additionally, certain stablecoin issuers have no doubt given the US government plenty of reasons to closely examine dollar stablecoins, such as:The collapse of Terra's $18 billion market cap stablecoin, USTSEC alleges Binance stablecoin, BUSD, to be a security$3.3 billion in Circle's reserves for USDC stuck in Silicon Valley BankThese reserves were later bailed out as part of the US government's depositor bailoutComplaints re: the audit status of Tether's reservesAs such, there have been many attempts by US legislators over the past few years to pass some form of legislation regarding stablecoins. The latest bill making the rounds is the Clarity for Payment Stablecoins Act of 2023, which was introduced by Rep. Patrick McHenry (Chairman of the House Financial Services Committee). This bill has seen the most movement and industry backing behind it and is actually the first bill of its kind to be voted through committee and advance to a general vote on the House of Representatives floor. However, it remains to be seen how this bill will fare within the general House and eventually the Senate as it has many vocal critics, such as Rep. Maxine Waters, who also serves on the House Financial Services Committee, and Senator Elizabeth Warren, member of the Senate's Committee on Finance. However, regardless of what legislation may or may not pass in the United States, the Pandora's box of dollar stablecoins has been opened and they continue to act as the main avenue for liquidity to enter crypto markets. Although 2022 was an abysmal year for the crypto industry as a whole, the total market cap of dollar stablecoins only declined ~30% to $100 billion (compared to 70-80% declines in most other crypto assets), which makes the case that stablecoin liquidity is quite sticky and once its onboarded into the crypto ecosystem it's here to stay. Lastly, as has been alluded to, dollar stablecoins are just one type of stablecoin. Below are a few other examples of various stablecoins that have gained popularity within the crypto industry.Bitcoin stablecoinWBTC - tokenized version of Bitcoin on EVM chains (i.e., an ERC-20 token) issued by BitGocbBTC - tokenized version of Bitcoin on EVM chains issued by Coinbase1 WBTC or 1 cbBTC is pegged to the price of 1 BTCEther stablecoinstETH, rETH, frxETH - various different liquid staking tokens for staked ETH1 of the above tokens is pegged to the price of 1 ETH plus any APY from staking rewardsGold stablecoinPAXG - tokenized version of physical gold issued by Paxos1 PAXG is pegged to the price of 1 oz of goldOther fiat stablecoinEURC - Euro stablecoin1 EURC is pegged to €1Until next time!

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