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Few assets are as volatile as cryptocurrencies. Bitcoin’s more than 50% drop in value in just a few months. For example, on May 12, the price of Bitcoin dropped about 13%. Almost all cryptocurrencies fluctuate wildly, making them attractive for investors but risky assets for people who want to own and pay for goods and services. "stablecoins" are cryptocurrencies to serve this need.
The first stablecoin is USDT. It is cryptocurrency but it is not decentralized cryptocurrency. USDT is produced by Tether Holdings. Tether Holdings, the centralized authority of USDT, has the ability to print USDT. Tether initially told its investors it was 100% backed by dollar reserves and that it would be subjected to constant audits.
When an investor buys a USDT from Tether, Tether will send a US dollar to a bank. At any time, when the investor wants to return a USDT to Tether, he will get one US dollar. Therefore, to an investor, a USDT always means a US dollar.
It looks good, but it is reported that the audits never happened, and they eventually conceded only ~70% was backed by "short term cash reserves". In addition, Bloomberg reported, "this year, Tether Holdings started putting out a huge amount of digital coins. There are now 69 billion Tethers in circulation, 48 billion of them issued this year. That means the company supposedly holds a corresponding $69 billion in real money to back the coins—an amount that would make it one of the 50 largest banks in the US if it were a US bank and not an unregulated offshore company."
Bloomberg's report said "As far as the regulators are concerned, the size of Tether’s supposed dollar holdings is so big that it would be dangerous even assuming the dollars are real. If enough traders asked for their dollars back at once, the company could have to liquidate its assets at a loss, setting off a run on the not-bank. The losses could cascade into the regulated financial system by crashing credit markets."
The latest centralized stablecoins, US Dollar Coin, or USDC, is Launched in September 2018. It is a fully collateralized fiat-backed stablecoin developed by Centre and issued and managed in collaboration between Circle and Coinbase. A Coinbase Blog has a report titled "USD Coin is the largest regulated stablecoin in the world". It wrote that "USDC is regulated as a stored value instrument. Stored value products are regulated under state money transmission laws. As the issuer of USDC, Circle is subject to oversight by 46 state regulators, which conduct frequent exams of Circle’s activities."
USDC looks better, but it is still a centralized stablecoin. Dai is a decentralized stablecoin cryptocurrency. It is maintained and regulated by MakerDAO, a decentralized autonomous organization composed of the owners of its governance token, MKR, who may vote on changes to certain parameters in its smart contracts in order to ensure the stability of Dai. The aim is to keep its value as close to one United States dollar as possible through an automated system of smart contracts on the Ethereum blockchain.
Dai also has potential risks since it is maintained by a program and is backed by other cryptocurrencies. In March of 2020, Ethereum lost over a third of its value in a single night. MakerDAO even considered an emergency shutdown of Dai. If that had happened, Dai holders would have needed to redeem their coins for Ethereum.
Here, I want to emphasize that stablecoins are not stable. The price can fluctuate. For example, Dai's price has both exceeded $1.10 and gone under $0.90.
Lastly, because of the relative stability of stablecoins and the trackless of the blockchain character, stablecoins became an illegal target. For example, a prominent Tether trader in China is serving three years in prison there for using the currency to launder $480 million for illegal casinos.
In the end, Let me cite Bloomberg's report again, "The strange thing is that, at least for now, most participants in the crypto market, including some very large and sophisticated operators, don’t seem to care about any of the risks."
References:
https://www.bloomberg.com/news/features/2021-10-07/crypto-mystery-where-s-the-69-billion-backing-the-stablecoin-tether
https://blog.coinbase.com/fact-check-usd-coin-is-the-largest-regulated-stablecoin-in-the-world-6e7f3c06cbf0
https://www.fool.com/the-ascent/cryptocurrency/articles/5-things-to-know-before-you-buy-dai/
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