4 ms·

It's entirely possible to have a stablecoin and indeed others exist. The key to a stablecoin however, is trust. Users have to trust that their holdings are ac

It's entirely possible to have a stablecoin and indeed others exist. The key to a stablecoin however, is trust. Users have to trust that their holdings are actually backed by real fiat currency as that's the promise of the stablecoin. That trust can typically be bolstered by things like 3rd party audits, which is something Tether promised for many years and did not deliver. With Tether the problems are that they have avoided scrutiny and audit, made statements on their website that subsequently turned out to be false and have a somewhat murky corporate structure. None of these, should , engender trust.

noxer 7y ago
Stablecoin do not need to be backed by fiat. They can be backed by crypto as well an be stable against fiat or anything of value. This way trust can mostly be removed. No 3rd party audit needed because you can lock up crypto in a way it's public verifiable for everyone. There are some trust issues that are still problematic like for example someone needs to provide a price feed against which the value will be stabilized. Whoever is in control of that price feed could of course damage the system to the point where people loose all their money. But in the real world such a price feed could come from a DEX so its not controlled by someone but instead by what people buy and sell. In a closed system this could however cause a "runaway" of the price due to price feedback loops. Here is an interesting talk about a crypt collateralized stablecoin proposal https://www.youtube.com/watch?v=Se2CDsmMqvE https://www.youtube.com/watch?v=Se2CDsmMqvE again this does NOT yet exist!
- ht85 7y ago
  I have a hard time understanding how a stablecoin could be backed by crypto. Traditional currencies are mostly backed by things that are very unlikely to crash like real estate, profit share in companies and other ressources with value besides speculation. What would happen if BTC crashed to 1/10 of its price, and all other coins followed?
  - jki275 7y ago
    You've hit upon the problem. All the stable coins, unless they're actually based on and backed by something other than other cryptocurrencies, are essentially fraudulent.
  - seibelj 7y ago
    MakerDAO has overcollaterized deposits of Ethereum backing their stablecoin Dai
  - noxer 7y ago
    You should totally watch the video above ;) In short you can earn money if you re-collateralize with crypto so if the price goes down it produces demand for that crypto to re-collateralize. Some people get liquidated of course because they are unable to throw more money in. This is the risk you take if you participate. It only makes sense to participate if you are long or if you just buy up the ones who get liquidated. For the users of the stablecoin however this is totally irrelevant they want to avoid the volatility by using stablecoins. Therefore they wont profit on price gains but also wont lose on price drops. They kinda gave away that risk/opportunity. "Gave away" as in someone else has it now. And that's why it works. Someone actually will lose if the price drops. Someone has to. Unless everyone would hold enough reserves to actually cover the drop. But people are greedy and will risk more than they can cover. To good part is that they should lose before they can harm the system. Its basically like with trading where the exchange will liquidate your position before you actually go below zero.
  - dragonwriter 7y ago
    > I have a hard time understanding how a stablecoin could be backed by crypto. If you had a coin backed by a basket of other cryptocurrencies, it would likely be relatively stable in that the distinct individual volatility of each of the backing coins would be mitigated. OTOH, the overall volatility of the cryptocurrency market (which often moves rapidly and in the same direction) would not, so it wouldn't be very stable.
- rtempaccount1 7y ago
  In the current centralized markets, stablecoins are used as fiat on-ramps, there's no real need there for a crypto backed stablecoin for that kind of role. I'm sure you could have one, but in the case of Tether, that's not what the product is or claimed to be.
- xibalba 7y ago
  Tether claimed to be backed by fiat at 1:1 USD.

noxer 7y ago

Stablecoin do not need to be backed by fiat. They can be backed by crypto as well an be stable against fiat or anything of value. This way trust can mostly be removed. No 3rd party audit needed because you can lock up crypto in a way it's public verifiable for everyone. There are some trust issues that are still problematic like for example someone needs to provide a price feed against which the value will be stabilized. Whoever is in control of that price feed could of course damage the system to the point where people loose all their money. But in the real world such a price feed could come from a DEX so its not controlled by someone but instead by what people buy and sell. In a closed system this could however cause a "runaway" of the price due to price feedback loops. Here is an interesting talk about a crypt collateralized stablecoin proposal https://www.youtube.com/watch?v=Se2CDsmMqvE https://www.youtube.com/watch?v=Se2CDsmMqvE again this does NOT yet exist!

ht85 7y ago
I have a hard time understanding how a stablecoin could be backed by crypto. Traditional currencies are mostly backed by things that are very unlikely to crash like real estate, profit share in companies and other ressources with value besides speculation. What would happen if BTC crashed to 1/10 of its price, and all other coins followed?
- jki275 7y ago
  You've hit upon the problem. All the stable coins, unless they're actually based on and backed by something other than other cryptocurrencies, are essentially fraudulent.
- seibelj 7y ago
  MakerDAO has overcollaterized deposits of Ethereum backing their stablecoin Dai
- noxer 7y ago
  You should totally watch the video above ;) In short you can earn money if you re-collateralize with crypto so if the price goes down it produces demand for that crypto to re-collateralize. Some people get liquidated of course because they are unable to throw more money in. This is the risk you take if you participate. It only makes sense to participate if you are long or if you just buy up the ones who get liquidated. For the users of the stablecoin however this is totally irrelevant they want to avoid the volatility by using stablecoins. Therefore they wont profit on price gains but also wont lose on price drops. They kinda gave away that risk/opportunity. "Gave away" as in someone else has it now. And that's why it works. Someone actually will lose if the price drops. Someone has to. Unless everyone would hold enough reserves to actually cover the drop. But people are greedy and will risk more than they can cover. To good part is that they should lose before they can harm the system. Its basically like with trading where the exchange will liquidate your position before you actually go below zero.
- dragonwriter 7y ago
  > I have a hard time understanding how a stablecoin could be backed by crypto. If you had a coin backed by a basket of other cryptocurrencies, it would likely be relatively stable in that the distinct individual volatility of each of the backing coins would be mitigated. OTOH, the overall volatility of the cryptocurrency market (which often moves rapidly and in the same direction) would not, so it wouldn't be very stable.
rtempaccount1 7y ago
In the current centralized markets, stablecoins are used as fiat on-ramps, there's no real need there for a crypto backed stablecoin for that kind of role. I'm sure you could have one, but in the case of Tether, that's not what the product is or claimed to be.
xibalba 7y ago
Tether claimed to be backed by fiat at 1:1 USD.