[Stablecoin Editorial] The History of Stablecoins
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- The History of Stablecoins - senad
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History of Stablecoins - Class of 2014
1 Introduction
Stablecoins are cryptocurrencies such as Bitcoin and Ethereum and fall under a specific category of crypto asset classes. As cryptocurrencies, stablecoins use blockchain technology to run their smart contracts and back their treasuries to external asset classes. They became relevant for investors who try to avoid sleepless nights caused by price fluctuations of cryptocurrencies such as bitcoin, which sometimes faces volatility up to ±10% on a regular day. The inception of stablecoins go all the way back to 2014 and the introduction of BitUSD, NuBits and RealCoin (Tether), the first ever stablecoins that have entered the crypto market. What stood out was the different pegging mechanism for each of them three. RealCoin (Tether) for example used FIAT-Money to collateralize the stablecoin, BitUSD used the Bitshares native token and other cryptocurrencies and NuBits was the first ever algorithmic stablecoin. Fast forward to 2022, there are a bunch of cryptocurrency projects issuing stablecoins and many wonder what happened to the OGs such as BitUSD and NuBits?
In the following article, I’ll take a look at three stablecoins that were issued in 2014 - the “Class of 2014”. Spoiler: only one of them is still around, trading on markets, has seen tremendous growth in market cap and is currently the third largest cryptocurrency by market cap.
2 BitUSD
In July of 2014, Dan Larimer and Charles Hoskinson issued the first ever stablecoin called BitUSD on the Bitshares Blockchain, which was backed by the Bitshares’s native token BTS and other crypto assets. Both founders are well known in the crypto space, Charles Hoskinson for being one of the Co-Founders of Ethereum in 2015, working aside Vitalik Buterin, Dr. Gavin Wood and Jeffrey Wilcke. Dan Larimer for being the CTO and core developer at the company block one, which founded EOS in 2017. In the following years of its inception BTS has been used as collateral for other stablecoins, which were backed by native, local currencies such as the Philippine Peso. BitUSD was tied to BitShares native token and thereby crypto backed. For BitUSD to stay stable, the amount of BTS used as collateral had to be at least two times the value of $1. The next chapter is going to take a deeper dive into different types of stablecoin and how they maintain their peg and further price stability. However, BitUSD is no longer being traded on markets since its peg broke in 2017, caused by high overall crypto market volatility and instant liquidations.
3 NuBits
NuBits was introduced in september of 2014 and as a“Seigniorage Style” system stablecoin. NuBits were not pegged to any asset but used arbitrage and game theory to maintain its stable price at $1. They worked similarly to algorithmic stablecoins, which create and burn new tokens depending on complex algorithmic processes to keep the price stable. I was able to find a price chart on CoinMarketCap that shows the suffering of NuBits during high volatility in overall crypto markets.
Resource: CoinMarketCap. 2022. NuBits Pricechart. URL: https://coinmarketcap.com/currencies/nubits/
NuBits’s peg first broke in May of 2016, after traders and NuBits holders were fomoing into the spike in bitcoin price. They traded large quantities of NuBits for Bitcoin. This large sell-off in NuBits increased its supply, lowered the market cap and the price for one NuBit fell below one. The price only collapses if the equity that issued the stablecoin (in this case NuShares that issued NuBits) does not have the necessary funds to buy back the new supply of NuBits on the market. This was particularly the case when the peg broke the second time in 2018. Since then NuBits has never fully recovered and is trading close to zero. This is ultimately caused by people's lack of faith in NuBits. This results in fewer buyers of NuBits and higher sell pressure, due to the lack of buy pressure.
3 Tether (RealCoin)
The third and final stablecoin of the “class of 2014” and probably most controversial of all stablecoins currently trading on the market is Tether. Tether was founded in november of 2014 by the Bitfinex exchange as “RealCoin” and has undergone its rebranding in the same month of its launch, accordingly to avoid association with altcoins. Tether is a centralized, FIAT-Backed cryptocurrency which means that in the likes of USDT each new Tether (Token) released on the blockchain is backed by a real world dollar in the companies treasury. This has allegedly not always been the case. However, Tether and Bitfinex have witnessed several attacks and bad media over the past few years. In 2016, Bitfinex was hacked for $72M, which is still one of the largest hacks in crypto history, followed by a Tether hack in 2017 worth $31M. Investigations took place in 2018 and 2019, after Tether got accused of market manipulation. Fast forward to 2022 and there is still controversy around the treasury management of Tether.
4 Conclusion
Stablecoins are here to stay and they have come a long way since they got first introduced to the crypto markets in 2014. Investors and traders use them to park their money into less volatile assets and to trade on exchanges. Being aware of the risks that come with an investment in stablecoins is indispensable. In times of high volatility the chances of the peg to break increases especially for those stablecoins, that are not sufficiently backed by assets in their treasury. This is especially concerning when we realize that we are still early in cryptocurrency adoption and the fact that high volatility in crypto markets is very common. However, as the overall crypto market grows in market cap and treasuries diversify their holding to back up their cryptocurrencies the problem of stablecoins losing their peg should eventually decrease over time.
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