stablecoin

Money in the Metaverse: Digital Assets, Online Identities, Spatial Computing and Why Virtual Worlds Mean Real Business

by David G. W. Birch and Victoria Richardson  · 28 Apr 2024  · 249pp  · 74,201 words

money, there is a correspondent guilder in gold or silver to be found in the treasure of the bank.’ The Bank of Amsterdam’s paper ­stablecoin was a great success, contributing significantly to the Dutch Golden Age, because it meant that Amsterdam had a very efficient system for inter-merchant transfers

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et al. 2023). Trading of digital assets needs digital cash, and there is already some $120 billion in circulation in the form of fully reserved stablecoins (e.g. USD Coin). Banks are experimenting with the tokenization of their reserves. Higher interest rates have changed the economics around short-term liquidity transactions

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the fungible side of things, we find ourselves looking at money from central banks (central bank digital currencies) and, more generally, at the world of ‘stablecoins’. Stablecoins The wild and unpredictable historic oscillations in the prices of cryptocurrencies made them unsuitable for use as a medium of exchange, so people began to

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look at the idea of stablecoins that would have more predictable values. We think these have an important role to play in future commerce of all kinds, so we need to

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look into them in a little more detail. To start with, we must first be clear on what a stablecoin actually is, because the word as used colloquially in fact refers to a number of different financial instruments, each with different characteristics. The basic split

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is between stablecoins based on algorithms and stablecoins based on assets, which may be money or some other suitable commodity. For the purposes of informed discussion, that means there are three

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different kinds of stablecoin, each of which might need to be approached in a different way. Figure 12 extends our earlier taxonomy for the purposes of this discussion. Figure

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taxonomy gives us, essentially, three different kinds of fungible money to use in our metaverses: algorithmic stablecoins and stablecoins based on private assets or public assets. Algorithmic stablecoins First there are algorithmic stablecoins, such as the infamous Terra. These attempt to maintain their value against an external unit of account (e.g. the US

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or selling assets. Terra isn’t the only one of these to have found it difficult to maintain their pegs when under pressure. An algorithmic stablecoin called Iron collapsed before Terra did, costing investors a cool $2 billion when, according to the anonymous team behind Iron, it suffered a ‘large-scale

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crypto bank run’ (Osipovich 2022). In fact, the idea of a cryptocurrency that has its value stabilized by algorithms is where the term ‘stablecoin’ originated. In practice, however, it has proved difficult for such algorithms to maintain stability in the face of external shocks. Attention has therefore shifted away

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from this mechanism, and the concept of stablecoins has been extended to digital currencies that have their value pegged to something external to their ledgers (as distinct from cryptocurrencies that have no value

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beyond their ledgers). Asset stablecoins Such ‘asset-backed’ stablecoins emerged early in the evolution of the space because market participants found it difficult to manage and minimize transaction costs with volatile means of

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exchange. It is important to note, however, that not all such assets were actually stable. The death spiral of the Terra ­stablecoin was a consequence of the economic model used that was widely anticipated by a great many well-informed industry observers, including the respected commentator Frances

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Kwon for being ‘poor’ when she suggested that the Terra model might not be sustainable in the long run) (see Birch 2022). Then there are stablecoins that are receipts for some fungible commodity such as gold or for some other asset with independent value that can be traded: a square foot

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always has the same value in gold but not in dollars, since the value of gold varies against dollars. Private. Then there are asset-backed stablecoins that have a reserve in fiat currency or high-quality liquid assets. These are what used to be called ‘currency boards’ before the term

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stablecoin was extended. When most people talk colloquially about stablecoins it is these fiat-backed tokens that they are thinking about. These are where we are going. As Coppola has noted

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, research shows that the only type of stablecoin that can guarantee to hold its fiat currency peg under all conditions (and therefore be actually stable) is one that is fully backed by hard

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dollars in the manner of a currency board (Coppola 2022).5 The dominant actually stable stablecoins are backed by US dollars – at the time of writing, the top three (with a combined ‘market cap’ of some $140 billion) were Tether, USD

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global reserve currency, while few people have a desire to hold yuan (and no one wants to hold, for example, rubles). Public. Finally, there are stablecoins issued by central banks: the central bank digital currencies about which there is much discussion at present, not only in terms of national strategies for

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in the Metaverse. Stable demand Whether we are talking about US dollars or Canadian dollars or Singapore dollars, there is an evident market demand for stablecoins – if there was not, they would not exist. Professor Eswar Prasad, writing on the future of money, said that ‘bitcoin, the cryptocurrency that started it

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all, may not have much of a role to play in this monetary future’, because stablecoins of one form or another might well be more desirable to the average person than volatile tokens for speculators (Prasad 2022). He also suggested that

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appropriate. As Morgan Ricks, a Vanderbilt Law School professor and former Treasury official, rather notably said (see Greeley 2022): ‘There’s nothing inherently dodgy about stablecoins, but there is something inherently dodgy about banking, which is why countries build elaborate regulatory regimes to protect deposits.’ This is why banking regulations have

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central bank reserves. The fourth report in the IESE Business School’s The Future of Banking series explored and reinforced the need for regulation around stablecoins, and it highlighted the key issue of whether non-banks should have access to central bank accounts (Duffie et al. 2022). This is an issue

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that a Federal Reserve CBDC ‘would solve any major problem confronting the US payment system’. He went on to note that appropriately regulated private sector stablecoins could be used to satisfy the demands of the DeFi sector for money that can be algorithmically traded for cryptographic assets. At the 2021 Financial

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Stability Conference, co-hosted by the Federal Reserve Bank of Cleveland, he also said: ‘I disagree with the notion that stablecoin issuance can or should only be conducted by banks, simply because of the nature of the liability.’ He then went on to talk about private

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field’. Interesting.7 Light touch For what it’s worth, we agree with both Professor Ricks and Governor Waller. There is no need to regulate stablecoin issuers as if they were banks (because they will not provide credit); instead they should be regulated in something like the way that the existing

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European electronic money regime works. This seems adequate for fiat stablecoins and, indeed, this is what the UK intends to do. The definition of ‘electronic money’ under the Electronic Money Regulations 2011 will be extended to

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include fiat-linked stablecoins, with the additional recognition that the holder of a stablecoin may not always have a relationship with the issuer. The holder’s relationship may instead be with a third party (such

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or wallet provider). Federal Reserve Vice Chair Lael Brainard told the House Financial Services Committee that a ‘CBDC could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money

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we are not so sure, because the need for value that can move between a panoply of metaverses will drive more (and more kinds of) stablecoins. Non-fungible metaverse property As already noted, the difference between fungible and non-­fungible tokens is central to understanding the digital assets that are at

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is dominated by Nike, which generated far more than all other top performers added together! * * * 5 By contrast, the stablecoins backed by algorithms cannot be guaranteed under all conditions and even those stablecoins that are over-collateralized in risky assets such as cryptocurrency cannot be guaranteed to hold their pegs under all

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detail in his 2020 book, The Currency Cold War. 7 It appears that recent proposals from legislators and regulators have shifted attention away from turning stablecoin issuers into insured depository institutions (which was one recommendation made by the President’s Working Group on Financial Markets back in November 2021) and towards

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we should be wary of using the very general term ‘crypto’ given the wide spectrum of instruments it has come to encapsulate (e.g. bitcoin, stablecoins, NFTs, DeFi, L2s and so on). If we’re not precise here, the word ‘crypto’ will become less meaningful to the point at which it

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kind) and digital assets (bearer instruments, exchanged without clearing and settlement). These digital assets can be divided into two basic categories that we can label stablecoins when they are backed by reserves of fiat currency and something else yet to be determined (we’ll come back to this shortly) when it

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to the problem of what to call these tokens: tokens that are some sort of digital asset that is kind of new and of which stablecoins are a specific subset. How should we begin thinking about them? Perhaps the place to start is by observing that a useful Metaverse is one

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trading of digital objects of all kinds. Alice can’t store her gold bars in her local bank branch but she could store gold-backed stablecoins in her bank’s digital object vaults. In their June 2020 market overview prepared for the Dubai Financial Services Commission, the accountants Deloitte said that

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currently hold cryptocurrencies – or even want to ever hold ­cryptocurrencies following the cryptowinter – but who might be interested in holding digital objects such as NFTs, stablecoins, carbon tokens and such like if the custody service was offered by their bank. Michael Gofman, assistant professor of finance at the University of Rochester

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larger merchants – indicates that growing the loans business is firmly in its sights. As these merchants become able to accept various digital forms of payment (stablecoins and cryptocurrency included), the longer-term role for banks isn’t necessarily certain. Clarisse Hagège, a former banker and the founder of Dfns, tells a

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create an unbiased global financial system that could improve both (decentralized) finance and monetary policy (Brennecks et al. 2022). For this purpose, they implemented the stablecoin Dai, the governance token MKR and a governance system for gaining access to and managing the entire ecosystem without relying on intermediaries. These were built

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, then what will those ‘things in wallets’ – those digital objects – be? It is not hard to see that in the short term they will be stablecoins. If Alice is paying for her car insurance in the Metaverse, it will in the first instance be with digital sterling. But how about in

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funding. Securities: investible financial assets offering returns. Investing: the act of committing money into tokenizable securities. Payments: specifically programmable payments, where assets can interact with Stablecoins or CBDCs. Validation: verifying investment data and digital assets’ existence. Wade’s passionately held view is that these key concepts, once combined, deliver up a

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the form of fungible tokens that, under the circumstances in question, exhibit the characteristics of money. The obvious candidate is what people refer to as stablecoins.11 * * * 11 In this context, it is interesting to note that both Visa and MasterCard have been working with the circle US dollar

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stablecoin (USDC) in the absence of some kind of ‘fedcoin’. Table 7. Digital wallet lines of business. Category Examples Estimates Payments Apple Pay charges issuers 15

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, it would seem that banks are ideally positioned to be the trusted gateways between mundane transactions and Metaverse ones. One obvious use case is converting stablecoins to sterling (other fiat currencies are available) so that customers can shift their spending between the universe and the Metaverse, online or in physical stores

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October (https://tinyurl.com/ytgp8zj8). Birch, D. (2021). Art for money’s sake. Forbes, 13 October (https://tinyurl.com/yq4gctjh). Birch, D. (2022). Locking the stablecoin door after the horse has spent all of the crypto on carrots and then vanished over the fence. Forbes, 30 May (http://tinyurl.com/2y98wyvu

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the metaverse: can travel go virtual? Report, 31 October, McKinsey (https://tinyurl.com/25kd4let). Coppola, F. (2022). There’s no such thing as a safe stablecoin. Coppola Comments, 13 October (https://tinyurl.com/yssu3ppg). Court Record (2022). Plaintiffs – v – META PLATFORMS, INC., formerly known as FACEBOOK, INC.; SNAP, INC.; ROBLOX CORPORATION

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance

by Eswar S. Prasad  · 27 Sep 2021  · 661pp  · 185,701 words

dollar is deposited into the Diem reserve. The full backing Diem enjoys suggests that it will provide a stable store of value—hence the moniker stablecoin—and will have no monetary policy implications because it will not involve the creation of any new money. Central bankers remain concerned, however, that

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co-opt new technologies to their own benefit, deterring new entrants. Even currency dominance could become entrenched, with the currencies of some major economies or stablecoins issued by prominent corporations rivaling national currencies of smaller economies, as well as those with less credible central banks and profligate governments. Meanwhile, the introduction

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creating a reliable medium of exchange—the instability of the cryptocurrency’s value relative to the unit of account, which is typically a fiat currency. Stablecoins With many players in the cryptocurrency game recognizing that a viable medium of exchange needs stable value more than absolute anonymity or a fully decentralized

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gap. In a less-than-creative twist, these cryptocurrencies, which ostensibly maintain a stable value relative to fiat currencies, have come to be known as stablecoins. Stablecoins use cryptographic technology to provide some degree of user anonymity, but the validation and settlement of transactions are handled by the issuer of the currency

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by reserves of prominent cryptocurrencies such as Bitcoin and Ether, although this would seem like a contradiction in terms. Such cryptocurrency-backed stablecoins aim to maintain a stable value by holding a basket of cryptocurrencies, rather than any particular cryptocurrency, in reserve and by holding a larger

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to use cryptocurrencies without forsaking stability has spawned many mongrels that represent a wide range of approaches to ensuring stable values. One of the earliest stablecoins, Realcoin, was launched in early 2014. In November 2014, Realcoin rebranded itself as Tether to avoid being associated negatively with Altcoins, which were being

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“operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.” Despite the taint from Tether, the concept of stablecoins persevered but morphed into other forms, as we will see later in this chapter. Restoring Anonymity Heavyweight cryptocurrencies such as Bitcoin and Ethereum provide pseudonymity

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value; and was to be governed by the independent Libra Association. In its initial conception, Libra was designed to be a new type of stablecoin, with a constant value relative to a basket of major currencies rather than to any specific currency such as the US dollar. It was to

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find the multicurrency digital coin more attractive for cross-border payments. The multicurrency coin would be implemented as a smart contract that aggregates single-currency stablecoins using fixed nominal weights, with those weights to be determined by Libra Association members, who would incorporate input from third parties. Second, the association

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only very restricted access to the network. The other main features of Libra were left largely unchanged in the revised version. The reserves backing the stablecoins are to consist of a collection of liquid, low-volatility assets, including short-term government securities (at least 80 percent of the reserves) as

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deposits are.” Moreover, the reserve would feature a “loss-absorbing capital buffer,” meaning that, to offset any doubts about the extent of the backing, the stablecoins would be matched more than one-to-one by the stock of fiat currencies held in reserve. The Libra project also includes some technical innovations

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function properly even if nearly one-third of the validator nodes fail or are compromised. To sum up, Libra is envisioned as a set of stablecoins that will be limited in function to serving as mediums of exchange. The coins will be fully backed by fiat currency reserves, and the

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Libra Association changed its name to Diem in an attempt to symbolically sever its close association with Facebook and make the point that the proposed stablecoin’s design was much different from the original proposal. The company stated that the name change denoted “a new day for the project,” and

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as coordinated international regulatory responses. Rampant Manipulation A major concern is that the cryptocurrency market is ripe for manipulation. We have already seen how the stablecoin Tether might have been used to manipulate the price of Bitcoin. That is not the only problem. The research firm Glassnode has compiled data on

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can boast the blend of stability, efficiency, privacy, and safety that would allow it to dominate central bank money. The prospect of Facebook issuing a stablecoin has, however, shaken the complacency of central bankers. Diem is unlikely to dent the prominence of major reserve currencies, but it could become a viable

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particular would constitute a significant challenge to Canada’s monetary sovereignty—our ability to control monetary policy and provide services as lender of last resort.” Stablecoins and digital payment systems could well displace cash, a matter of valid concern to a central banker who feels that the public has a right

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or sell tokens, coupons, and digital tokens to replace RMB in circulation in the market,” making it clear the PBC would frown upon any stablecoins pegged to the renminbi. The e-CNY has given China a head start over other major economies in introducing a retail CBDC. It is worth

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long-predicted dethroning might finally be closer at hand as a result of technological rather than just economic forces. Is it likely that cryptocurrencies or stablecoins issued by major corporations could displace the dollar? Could digital versions of currencies such as the Chinese renminbi or, perhaps someday, the euro make

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rather than over a matter of days, which is typically the case now. A longer-term and perhaps less likely outcome is the emergence of stablecoins, or at least decentralized payment systems, that function as mediums of exchange in international transactions. These forces, to varying extents, will diminish reliance on

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even without involving the costs of hedging. What if the day arrived when it was possible to use a cryptocurrency such as Bitcoin or a stablecoin such as Diem for denominating and settling cross-border transactions? In that event, the only exchange rates that would matter would be those between

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These are fanciful but unlikely outcomes, given the volatility of unbacked cryptocurrencies’ values and the likelihood that CBDCs will compete with single-currency or multicurrency stablecoins. For the foreseeable future, exchange rates for each country’s currency relative to those of their trading partners as well as major currencies that serve

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if they are created and used by informal financial institutions that will be harder to regulate. The existence of a privately issued currency or a stablecoin such as Diem that is recognized and accepted worldwide would also affect governments’ ability to control capital flows across their borders. If money can

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prone to. Nevertheless, this shift could occur over time as the payment functions of cryptocurrencies take precedence over speculative interest in them, especially if private stablecoins gain more traction. The changing landscape of cross-border payments will have repercussions. The decline in costs and easier settlement of cross-border transactions across

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September 2019, Benoît Cœuré, then a member of the Governing Council of the ECB, gave a speech in which he speculated on whether a global stablecoin such as Libra/Diem “may be a contender for the Iron Throne of the dollar.” He argued that “in specific circumstances, and if allowed

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that matter, an electronic payment platform is then put to other uses over time. Adding a payment function using a digital token or a global stablecoin to an existing messaging platform such as WhatsApp would enable direct transfers of money between users of the platform. The underlying business model, a

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messaging and communication service, would not be affected by these additional payment-related functions. Such stablecoin initiatives built on top of service platforms that have extensive international reach could indeed make domestic and cross-border payments, at least between individuals and

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of incumbency no longer as powerful as they once were. Given the extensive frictions that beset international payments, it is certainly a plausible proposition that stablecoins could gain traction as mediums of exchange that supplement, but do not supplant, existing payment currencies. In any event, the dollar is least likely

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the shares of currencies such as the euro, the British pound sterling, and the Japanese yen, while the dollar remains largely unscathed. After all, stablecoins pegged to the dollar would simply make it easier to gain access to the world’s leading currency. If Diem were to provide equally accessible

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initially, demand would be strongest for the dollar-backed coins. Moreover, it is a stretch to suggest that such stablecoins would represent alternative stores of value. Indeed, the allure of stablecoins is precisely that their value is tightly linked to existing reserve currencies in which savers and investors around the world

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are willing to place their trust. In short, the emergence of stablecoins linked to existing reserve currencies will reduce direct demand for those currencies for international payments but will not in any fundamental way transform the relative

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. One part of his speech received considerable attention and set off extensive discussion in global central banking circles. As an alternative to a private multicurrency stablecoin such as Diem, Carney proposed the creation of a synthetic hegemonic currency (SHC) that would be “provided by the public sector, perhaps through a

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US dollar. Unbacked cryptocurrencies are much too volatile to be considered reliable mediums of exchange or stable sources of value. On the other hand, stablecoins backed by major corporations such as Facebook are likely to gain traction as means of payment. But insofar as their stable values depend on their

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being backed by fiat currencies, stablecoins are unlikely to become independent stores of value. The topography is likely to shift a great deal more for smaller and less-developed economies.

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National currencies issued by their central banks could lose ground to private stablecoins and perhaps also to CBDCs issued by the major economies. Even among the major reserve currencies, there are some shifts in store. The US

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do little to boost its status as a reserve currency. The renminbi’s further rise, even if gradual and modest, and the emergence of additional stablecoins could reduce the importance of the second-tier reserve currencies, including the euro, the British pound sterling, the Japanese yen, and the Swiss franc.

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be used more widely as mediums of exchange and stores of value in EMEs that do not have trusted domestic currencies. Moreover, while cryptocurrencies or stablecoins issued by multinational corporations such as Amazon and Facebook might not gain traction in advanced economies with trusted fiat currencies, they have the potential to

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CBDC? An initial step for such an economy would be to explicitly link its CBDC to a major reserve currency, as is the case with stablecoins like Tether and Diem. This could facilitate adoption of the CBDC by ensuring the stability of its value. The CBDC could then eventually be

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CBDC if and when it was delinked. Or, more likely, it would just lock in the dollarization, with the domestic CBDC amounting to an official stablecoin. EMEs taking a collective rather than individual approach to these issues might reap some benefits. A coordinated approach among countries in a particular region could

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in the Libra Investment Token for their initial contributions. The concerns about a run on the Libra are addressed in “The Regulatory Regime for Stablecoins,” Libra Association, October 2019, https://www.key4biz.it/wp-content/uploads/2019/10/Libra-Association-Response-to-G7-The-Regulatory-Regime-for

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lending platforms, see Li (2020). The United States Weaves a Regulatory Web A Patchwork The Brainard speech is at Lael Brainard, “Update on Digital Currencies, Stablecoins, and the Challenges Ahead,” Federal Reserve System, December 18, 2019, https://www.federalreserve.gov/newsevents/speech/brainard20191218a.htm. CTF, or combating terrorism financing, is

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-dollar-digital-currency-officially-launched-in-abaco/. The sand dollar is an identifiable liability of the central bank. Thus, it would not be a stablecoin, or a parallel currency, in the sense that it would not derive any value separately from the external reserves backing afforded to the central bank

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the World Bank’s World Development Indicators: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD. International Payments For an official perspective on how global stablecoins could improve the efficiency of international payments, see this joint report by the Group of 7 countries, the IMF, and the BIS: Investigating the

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Impact of Global Stablecoins, October 2019, https://www.bis.org/cpmi/publ/d187.pdf. Outrunning SWIFT See https://www.swift.com/about-us and https://www.swift.com/about

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-law-to-ban-trading-in-cryptocurrency. Capital Controls Face Erosion The report about capital flight from China is available here: “East Asia: Pro Traders and Stablecoins Drive World’s Biggest Cryptocurrency Market,” Chainalysis (blog), August 20, 2020, https://blog.chainalysis.com/reports/east-asia-cryptocurrency-market-2020. The report notes

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that the stablecoin Tether, whose value is pegged to the US dollar, has become a popular cryptocurrency in China and other parts of East Asia. Is the Dollar

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regulations on, 151, 156–157, 165, 168, 170–171, 175–182, 185–186, 257, 405–406n; smart contracts, 159–162, 161f, 173, 182–187, 398n; stablecoins, 10, 155–157, 169, 201, 287, 296, 300–301, 311–312, 351; supply of, 154, 358; tokens, 150–151, 162–168; transaction fees with, 152

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, 371n South Africa, 54 South Korea, 30f–31f, 177, 341 Spain, 91, 92, 93–94, 215, 295 Special Drawing Rights (SDRs), 304–307, 308, 441n stablecoins, 10, 155–157, 169, 173, 201, 287, 296, 300–301, 311–312, 351 Sweden: cash in, 3, 4f, 11, 31, 32f–33f, 46, 210

DeFi and the Future of Finance

by Campbell R. Harvey, Ashwin Ramachandran, Joey Santoro, Vitalik Buterin and Fred Ehrsam  · 23 Aug 2021  · 179pp  · 42,081 words

DECENTRALIZED FINANCE A BRIEF HISTORY OF FINANCE FINTECH BITCOIN AND CRYPTOCURRENCY ETHEREUM AND DeFi NOTES III DeFi INFRASTRUCTURE BLOCKCHAIN CRYPTOCURRENCY THE SMART CONTRACT PLATFORM ORACLES STABLECOINS DECENTRALIZED APPLICATIONS NOTES IV DeFi PRIMITIVES TRANSACTIONS FUNGIBLE TOKENS NON-FUNGIBLE TOKENS CUSTODY SUPPLY ADJUSTMENT INCENTIVES SWAP COLLATERALIZED LOANS FLASH (UNCOLLATERALIZED) LOANS NOTES V

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Decentralized finance (or DeFi) has always been a big part of what I hoped to see people build on Ethereum. Ideas around user-issued assets, stablecoins, prediction markets, decentralized exchanges, and much more had already been at the top of my mind as well as the minds of many others trying

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, and even support applications with components that are not financial at all. People in the Ethereum community started working on applications such as on-chain stablecoins, prediction markets, and exchanges almost immediately, but only after more than five years did the ecosystem truly start to mature. I believe that DeFi

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will create a new, easy-to-use and globally accessible financial system for the world. For example, applications like stablecoins are some of the most valuable innovations to come out of DeFi so far. They allow anyone in the world to benefit from the censorship

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DeFi offers over the traditional financial system. The authors also explain the in-depth workings of many of the most important DeFi protocols today, including stablecoins, automated market makers, and more. I recommend this book to anyone interested in learning more about Ethereum and DeFi protocols. Vitalik Buterin Co-founder

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oracle problem later in more depth. Oracles are surely an open design question and challenge for DeFi to achieve utility beyond its own isolated chain. STABLECOINS A crucial shortcoming of many cryptocurrencies is excessive volatility. This adds friction to users who wish to take advantage of DeFi applications but don't

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-tolerance for a volatile asset like ETH. To solve this, an entire class of cryptocurrencies called stablecoins has emerged. Intended to maintain price parity with some target asset, USD, or gold, for instance, stablecoins provide the necessary consistency that investors seek to participate in many DeFi applications and allow a cryptocurrency

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its peg varies by implementation. The three primary mechanisms are fiat-collateralized, crypto-collateralized, and non-collateralized stablecoins. By far the largest class of stablecoins are fiat collateralized. These are backed by an off-chain reserve of the target asset. Usually they are custodied by an external entity or

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group of entities that undergo routine audits to verify the collateral's existence. The largest fiat-collateralized stablecoin is Tether5 (USDT) with a market capitalization of $62 billion, making it the third largest cryptocurrency behind Bitcoin and Ethereum at time of writing.

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USD and vice versa for no fee on Coinbase's exchange. USDT and USDC are very popular to integrate into DeFi protocols as demand for stablecoin investment opportunities is high. There is an inherent risk to these tokens, however, as they are centrally controlled and maintain the right to blacklist

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accounts.8 The second largest class of stablecoins are crypto-collateralized, meaning they are backed by an overcollateralized amount of another cryptocurrency. Their value can be hard or soft pegged to the underlying

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asset depending on the mechanism. With a market capitalization of $5 billion as of writing, the most popular crypto-collateralized stablecoin is DAI, created by MakerDAO9 and and backed by ETH and other crypto assets. It is soft pegged with economic mechanisms that incentivize supply and

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will do a deep dive into MakerDAO and DAI in Chapter 6. Another popular crypto-collateralized stablecoin is sUSD, which is hard pegged to $1 through the Synthetix10 network token (SNX) exchange functionality. Crypto-collateralized stablecoins have the advantages of decentralization and secured collateral. The drawback is that their scalability is

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limited. To mint more of the stablecoin, a user must necessarily back the issuance by an overcollateralized debt position. In some cases like DAI, a debt ceiling further limits the supply growth.

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The last and perhaps most interesting class of stablecoins are non-collateralized. Not backed by any underlying asset and using algorithmic expansion and supply contraction to shift the price to the peg, they often

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peg price. There is still much work to be done – and regulatory hurdles to overcome – in creating a decentralized stablecoin that both scales efficiently and is resistant to collapse in contractions.14 Stablecoins are an important component of DeFi infrastructure because they allow users to benefit from the functionality of the applications

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as of February 28, 2021. This is a one time analysis of holdings - not a regular audit. 7. “USDC: The World's Leading Digital Dollar Stablecoin,” Circle Internet Financial Limited, 2021, https://www.circle.com/en/usdc. 8. Of course, from a centralized regulatory perspective, blacklisting may be a desirable feature

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https://www.ampleforth.org/. 13. Empty set dollar, https://www.emptyset.finance/. 14. See, e.g., Financial Stability Board, “Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements,” October 13, 2020, https://www.fsb.org/wp-content/uploads/P131020-3.pdf. IV DeFi PRIMITIVES Now that the DeFi infrastructure has been discussed

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and to pay application-specific fees (e.g., ZRX, DAI, LINK). The latter includes all stablecoins, regardless of whether the stablecoin is fiat or crypto-collateralized or algorithmic. In the case of USDC, a fiat-collateralized stablecoin, the utility token operates as its own system without any additional smart contract infrastructure to support

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tokens like cTokens for Compound that are discussed in Chapter 6) Increase scarcity to drive the price up (e.g., AAVE in Chapter 6, Seigniorage Stablecoin models like Basis/ESD) Penalize bad acting Mint: Increase Supply The flip side of burning is minting, which increases the number of tokens in circulation

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a pool and acquiring corresponding ownership share (common in equity tokens like cTokens for Compound) Decrease scarcity (increase supply) to drive the price downward (seigniorage Stablecoin models like Basis/ESD) Reward user behavior Rewarding user behavior with increases in supply (inflationary rewards) has become a common practice to encourage actions such

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sales and any remaining funds stay with the original owner. An example of slashing due to market changes not related to debt is an algorithmic stablecoin. This system might directly reduce a user's token balance when the price depreciates to return the supply-weighted price to, say, $1. Direct

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or the direction of the trades. Because of path independence, impermanent loss is minimized on trading pairs that have correlated prices (mean-reverting pairs). Thus, stablecoin trading pairs are particularly attractive for AMMs. COLLATERALIZED LOANS Debt and lending are perhaps the most important financial mechanisms that exist in DeFi and, more

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utility mechanism or represent a complex financial derivative, such as an option or bond (e.g., Synthetix Synth and Yield yToken; see Chapter 6). A stablecoin that tracks the price of an underlying asset can also be a synthetic token of this type (e.g., MakerDAO DAI; see Chapter 6). FLASH

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of applications to build on each other, there must necessarily be a foundation. The primary value-add of MakerDAO is the creation of a cryptocollateralized stablecoin, pegged to USD. This means the system can run completely from within the Ethereum blockchain without relying on outside centralized institutions to back, vault,

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and audit the stablecoin. MakerDAO is a two-token model where a governance token MKR yields voting rights on the platform and participates in value capture. The second token

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is a stablecoin called DAI – a staple token in the DeFi ecosystem with which many protocols integrate, including a few we will discuss later. DAI is generated

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is that its supply is always constrained by demand for ETH-collateralized debt. No clear arbitrage loop exists to maintain the peg. For example, the stablecoin USDC is always redeemable with no fees by Coinbase for $1. Arbitrageurs have a guaranteed (assuming solvency of Coinbase) strategy in which they can buy

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minimal transaction costs. Lack of interoperability: Cannot trustlessly use USD or USD-collateralized token in smart contract agreements. Issuance of DAI, a permissionless USD-tracking stablecoin backed by cryptocurrency. DAI can be used in any smart contract or DeFi application. Opacity: Unclear collateralization of lending institutions. Transparent collateralization ratios of vaults

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underlying assets and profit from the price movement. The fees earned from trading volume must exceed impermanent loss for liquidity providing to be profitable. Consequently, stablecoin trading pairs such as USDC/DAI are attractive for liquidity providers because the high correlation of the assets minimizes the impermanent loss. Uniswap's k

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level for any two trading pairs. In practice, however, we would expect much lower slippage for a stablecoin trading pair than for an ETH trading pair because we know by design that the stablecoin's price should be close to $1. The Uniswap pricing model leaves money on the table for

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arbitrageurs on high correlation pairs such as stablecoins because it does not adjust default slippage lower (change the shape of the bonding curve) as expected; the profit is subtracted from the liquidity providers.

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presents a legal gray area with an uncertain regulatory future, little doubt exists that regulation will arrive once the market expands. A well-known algorithmic stablecoin project known as Basis was forced to shut down in December 2018 due to regulatory concerns.25 A harrowing message remains on its homepage for

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Nader Al-Naji, “Dear Basis Community,” Basis, December 13, 2018, https://www.basis.io/. 26. Brady Dale, “Basis Stablecoin Confirms Shutdown, Blaming ‘Regulatory Constraints,’” Coindesk, December 13, 2018, https://www.coindesk.com/basis-stablecoin-confirms-shutdown-blaming-regulatory-constraints. 27. https://basis.cash/. 28. “ICO Issuer Settles SEC Registration Charges, Agrees to

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gold, silver, or other assets. Collateralized debt obligation. In traditional finance, a debt instrument such as a mortgage. In DeFi, an example would be a stablecoin overcollateralized with a cryptoasset. Consensus protocol. The mechanism whereby parties agree to add a new block to the existing blockchain. Both Ethereum and Bitcoin use

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digital token that is cryptographically secured and transferred using blockchain technology. Leading examples are Bitcoin and Ethereum. Many different types of cryptocurrencies exist, such as stablecoin and tokens that represent digital and non-digital assets. Cryptographic hash. A one-way function that uniquely represents the input data. Can be thought of

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initial exchange rate for a new token. A user can be the first liquidity provider on a pair, such as the new token and a stablecoin such as USDC. Essentially, the user establishes an artificial floor for the price of the new token. Invariant. The result of a constant product

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burn. Often occurs when a user enters a pool and acquires an ownership share. Minting and burning are essential parts of non-collateralized stablecoin models (i.e., when stablecoin gets too expensive more are minted, which increases supply and reduces prices). Minting is also a means to reward user behavior. Networked liquidity

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and copper) that has value on its own (i.e., if melted and sold as a metal). Stablecoin. A token tied to the value of an asset such as the U.S. dollar. A stablecoin can be collateralized with physical assets (e.g., U.S. dollar in USDC) or digital assets (

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to use some functionality of a smart contract system or that has an intrinsic value defined by its respective smart contract system. For example, a stablecoin, whether collateralized or algorithmic, is a utility token. Vampirism. An exact or near-exact copy of a DeFi platform designed to take liquidity away

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, 92–94, 160 Credit/lending, 69–95 Aave, 89–94, 94t–95t Compound, 78–88, 88t MakerDAO, 69–77, 77t–78t Cryptoassets, 120 Crypto-collateralized stablecoins, 25–26, 70 Cryptocurrencies, 12–15, 20–21, 148, 160 Cryptographic hash, 160 cTokens, 84, 85f Curve, 99 Curves: bonding, 42–46, 159 buying,

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. See also specific ERCs Exchange-traded funds (ETFs), 125 Externally owned accounts (EOAs), 30, 48–49, 163 F Facebook, 3 Fees, 49–50 Fiat-collateralized stablecoins, 25 Fiat currency, 1, 14, 163 Fidelity Digital Assets, 145 51% attack, 19 Finance, history of, 8–10 Fintech, 10–12, 163 Fixed-rate

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, 18–28 blockchains, 18–20 cryptocurrencies, 20–21 dApps, 27–28 oracles, 23–24 replaced by smart contracts, 16–17 smart contract platforms, 21–23 stablecoins, 24–27 Initial DeFi offering (IDO), 62, 165 Interdependence, of platforms, 54–55 Interest rates, 80 and inefficiency, 4 speculation on, 109 Internal Revenue

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166 Maintenance margins, 115–116 MakerDAO, 69–77, 73f–74f, 77t–78t Compound supplied by, 80 governance risk for, 135 governance token of, 36, 37 stablecoins created by, 26 Margins, 114–115 Margin class, 71 Margin trading, 110 Mastercard, 10 Maximum slippage, 100, 111 Mean-reverting pairs, 54 Memory pool, 31

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New York Stock Exchange (NYSE), 11 New York Times, 145 NFTs (nonfungible tokens), 23, 37–39, 175n2 Nodes, 167 Nonce, 167 Noncollateralized currency, 1 Noncollateralized stablecoins, 26–27 Nonfungible tokens (NFTs), 23, 37–39, 175n2 O Off-chain assets, 128 Off-chain data, 137 Off-chain order books, 144 On-chain

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for, 23 Smart contract risk, 57, 131–135 SNX tokens, 26, 120–122 Social Trading, 126 Software, risks of, 131 Solana, 140 Specie, 1, 170 Stablecoins, 24–27 defined, 170 on MakerDAO, 70 as synthetic tokens, 56 trading pairs of, 98–99 Stable rate loans, 92 Staked incentives, 46, 47, 170

How to DeFi

by Coingecko, Darren Lau, Sze Jin Teh, Kristian Kho, Erina Azmi, Tm Lee and Bobby Ong  · 22 Mar 2020  · 135pp  · 26,407 words

(DeFi)? Part Two: Getting Into DeFi Chapter Three: The Decentralized Layer: Ethereum Chapter Four: Ethereum Wallets Part Three: Deep Diving Into DeFi Chapter Five: Decentralized Stablecoins Maker Chapter Six: Decentralized Lending and Borrowing Compound Chapter Seven: Decentralized Exchanges (DEX) Uniswap dYdX Chapter Eight: Decentralized Derivatives Synthetix Chapter Nine: Decentralized Fund Management

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explaining what DeFi is and how it is important for the community. We will be looking at the various elements of DeFi such as decentralized stablecoins, decentralized exchanges, decentralized lending, decentralized derivatives, and decentralized insurance. In each of these chapters, we will be providing step-by-step guides to assist you

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’s move on to key categories of DeFi. ~ DeFi Key Categories In this book, we will be covering the following 8 major categories of DeFi: Stablecoins The prices of cryptocurrencies are known to be extremely volatile. It is common for cryptocurrencies to have intraday swings of over 10%. To mitigate this

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are pegged to other stable assets such as the USD were created. Tether (USDT) was one of the first centralized stablecoins to be introduced. Every USDT is supposedly backed by $1 in the issuer’s bank account. However, one major downside to USDT is that users

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need to trust that the USD reserves are fully collateralized and actually exist. Decentralized stablecoins aim to solve this trust issue. Decentralized stablecoins are created in a decentralized manner via an overcollateralization method, operate fully on decentralized ledgers, are governed by decentralized autonomous organizations

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, and its reserves can be publicly audited by anyone. While stablecoins are not really a financial application themselves, they are important in making DeFi applications more accessible to everyone by having a stable store of value

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-smart-people-too-ab178299c82e Part Three: Deep Diving Into DeFi Chapter Five: Decentralized Stablecoins The prices of cryptocurrencies are extremely volatile. To mitigate this volatility, stablecoins that are pegged to other stable assets such as the USD were created. Stablecoins help users to hedge against this price volatility and was created to be

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a reliable medium of exchange. Stablecoins have since quickly evolved to be a strong component of DeFi that is pivotal to this modular ecosystem. There are

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19 stablecoins currently listed on CoinGecko. The top 5 stablecoins has a market capitalization totaling over $5 billion. Top 5 Cryptocurrency

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Stablecoins (Feb 2020) Rank Bank Market Cap. ($ million) 1 Tether (USDT) 4,284 2 USD Coin (USDC

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Standard (PAX) 202 4 True USD (TUSD) 142 10 Dai (DAI) 123 Source: CoinGecko.com We will be looking into USD-pegged stablecoins in this chapter. Not all stablecoins are the same as they employ different mechanisms to keep their peg against USD. There are two types of pegs, namely fiat-collateralized

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and crypto-collateralized. Most stablecoins employ the fiat-collateralized system to maintain their USD peg. For simplicity, we will look at two USD stablecoins, Tether (USDT) and Dai (DAI) to showcase the differences in their pegging management. Tether (USDT) pegs

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itself to $1 by maintaining reserves of $1 per Tether token minted. While Tether is the largest and most widely used USD stablecoin with daily trading volumes averaging approximately $30 billion in the month of January 2020, Tether reserves are kept in financial institutions and users will have

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to trust Tether as an entity to actually have the reserve amounts that they claim. Tether is therefore a centralized, fiat-collateralized stablecoin. Dai (DAI) on the other hand, is collateralized using cryptocurrencies such as Ethereum (ETH). Its value is pegged to $1 through protocols voted on by

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any given time, the collateral to generate DAI can be easily validated by users. DAI is a decentralized, crypto-collateralized stablecoin. Based on the top 5 stablecoins’ market capitalization, Tether dominates the stablecoin market with approximately 80% of market share. Although DAI’s market share only stands at about 3%, its trading volume

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4,000% relative to Tether’s growth of 126% since the start of January 2020. DAI is the native stablecoin used most widely in the DeFi ecosystem. It is the preferred USD stablecoin used in DeFi trading, lending and more. To understand DAI further, we will introduce you to its platform, Maker

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. Maker What is Maker? Maker is a smart-contract platform that runs on the Ethereum blockchain and has three tokens: stablecoins, Sai and Dai (both algorithmically pegged to $1), as well as its governance token, Maker (MKR). Sai (SAI) is also known as Single Collateral Dai

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future. To reiterate, Single-Collateral Dai = Legacy Dai = Sai Multi-Collateral Dai = New Dai = Dai Moving forward, Multi-Collateral Dai will be the de-facto stablecoin standard maintained by Maker and eventually, SAI will be phased out and no longer supported by Maker. For brevity, we will only be using Multi

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helps ensure that Dai remains pegged to $1. We will briefly go through three key parameters which you will need to know in the Dai stablecoin ecosystem: I. Collateral Ratio The amount of Dai that can be minted is dependent on the collateral ratio. Ether (ETH) collateral ratio = 150% Basic Attention

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value of assets they are entitled to. ~ Why Use Maker? As previously mentioned in Section 2: Stablecoins, there are many stablecoins out there and the core distinctions of these coins lie in their protocol. Unlike most stablecoin platforms, Maker is fully operating on the distributed ledger. Thus, Maker inherently possesses the characteristics of

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’s infrastructures have strengthened the security of the system with comprehensive risk protocols and mechanisms via real-time information. And that’s it for Makers’ Stablecoin, Dai—if you’re keen to get started or test it out, we’ve included step-by-step guides on how to (i) mint some

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) https://docs.makerdao.com/maker-protocol-101 Maker for Dummies: A Plain English Explanation of the Dai Stablecoin (Gregory DiPrisco) https://medium.com/cryptolinks/maker-for-dummies-a-plain-english-explanation-of-the-dai-stablecoin-e4481d79b90 What’s MakerDAO and what’s going on with it? Explained with pictures. (Kerman Kohli) https

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the supply and demand of the asset. Generally, the higher the borrowing demand, the higher the interest rate (APY) and vice versa. Using the DAI stablecoin as an example, a lender would earn 7.58% (as of Feb 2020) in a year while a borrower would be paying 8.00% interest

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Step 5 After confirmation, you will be able to see your wallet balance as shown above. ~ Recommended Readings Crypto Derivatives, Lending, and a touch of Stablecoin (Gary Basin) https://blockgeeks.com/guides/defi-use-cases-the-best-examples-of-decentralised-finance/#_Tool_2_DeFi_Derivatives DeFi Use cases: The Best Examples

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of Decentralised Finance (Rajarshi Mitra) https://hackernoon.com/crypto-derivatives-lending-and-a-touch-of-stablecoin-59e727510024 The Ultimate Guide To Synthetix. (DefiZap and @DegenSpartan) https://defitutorials.substack.com/p/the-ultimate-guide-to-synthetix Synthetix (Cooper Turley and Lucas Campbell

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to any one token and spreads the risk over other tokens. Trend Trading: This strategy uses Technical Analysis indicators to shift from target asset to stablecoins based on the implemented strategy. Range-Bound: This strategy automates buying and selling within a designated range and is only intended for bearish or neutral

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Yurtaev) https://blog.zerion.io/returns-of-holding-vs-defi-ing-c6f050e89c8e Chapter Ten: Decentralized Lottery Thus far, we have gone through various protocols for stablecoins, decentralized exchanges, swaps, and derivatives - all of them serious stuff. In this section we will introduce you to something light and fun - a decentralized, no

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is Opyn? Opyn is another DeFi app that provides insurance for smart contracts. Currently, Opyn has protection for USDC and DAI deposits on Compound and stablecoin deposits on another DeFi dapp, Curve. Opyn provides protection against a number of risks beyond smart contract failures such as financial risks and admin risks

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users to hedge against the risk of a black swan event happening on Compound by allowing users to buy Put options on USDC and DAI stablecoin deposits. As mentioned earlier in the Compound section, when someone loans DAI, they would get cDAI tokens in return. By using Opyn, a trader can

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survive in Argentina, Mariano requested for his salary to be fully paid in DAI. As you may know from our previous section, DAI is a stablecoin pegged to the USD. According to Mariano, Argentinians value the USD a lot. Despite the USD having problems like it being inflationary as well, compared

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DAI for crypto transactions, such as purchasing ETH and putting DAI into Dai Savings Rate. From this, he is able to earn interest on a stablecoin which he would otherwise not have access to. While he does acknowledge that by using DeFi Dapps, he exposes himself to risks such as smart

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Wright, M. (2020, February 13). Argent: The quick start guide. Retrieved from https://medium.com/argenthq/argent-the-quick-start-guide-13541ce2b1fb ~ Chapter 5: Decentralized Stablecoins The Maker Protocol: MakerDAO's Multi-Collateral Dai (MCD) System (n.d.). Retrieved February 20, 2020, from https://makerdao.com/whitepaper/ MKR Tools (n.d

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cryptocurrencies. Custodian Custodian refers to the third party to have control over your assets. Fiat-collateralized stablecoin A stablecoin that is backed by fiat-currency. For example, 1 Tether is pegged to $1. Crypto-collateralized stablecoin. A stablecoin that is backed by another cryptocurrency. For example, Dai is backed by Ether at an agreed

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the creator of Maker Platform and DAO stands for Decentralized Autonomous Organisation. MakerDAO’s native token is MKR and it is the protocol behind the stablecoins, SAI and DAI. Market Maker Mechanisms A Market Maker Mechanism is an algorithm that uses a bonding curve to quote both a buy and a

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contract is a programmable contract that allows two counterparties to set conditions of a transaction without needing to trust another third party for the execution. Stablecoins A stablecoin is a cryptocurrency that is pegged to another stable asset such as the US Dollar. Spot market Spot market is the buying and selling

Mastering Blockchain: Unlocking the Power of Cryptocurrencies and Smart Contracts

by Lorne Lantz and Daniel Cawrey  · 8 Dec 2020  · 434pp  · 77,974 words

Summary 7. Decentralizing Finance and the Web Redistribution of Trust Identity and the Dangers of Hacking Wallets Private Keys Naming Services Decentralizing Finance Important Definitions Stablecoins DeFi Services Lending Savings Derivatives Decentralized Exchanges Decentralized Versus Centralized Exchanges Flash Loans Creating a Flash Loan Contract Deploying the Contract Executing a Flash Loan

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and the Beginning of Regulation The FATF and the Travel Rule Skirting the Laws Avoiding Scrutiny: Regulatory Arbitrage Malta Singapore Hong Kong Bahamas Crypto-Based Stablecoins NuBits Digix Basis Tether Initial Coin Offerings Founder Intentions Token Economics Whitepaper Exchange Hacks Mt. Gox Bitfinex Coincheck NiceHash Other Hacks Bloomberg TV BTC Stolen

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trying to gain a comprehensive view of the incredible impact of this technology on the world. Jeremy Allaire, CEO Circle Internet Financial Cofounder, Centre USD Stablecoin Consortium As someone who teaches blockchain, this book would be a great accompaniment to a course, providing a much more robust offering than almost anything

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only for fundraising. In addition, any project looking for stable asset value will not find a token to be a suitable solution, although assets like stablecoins may be. Any processing function that has an asset that is unstable could prove to be problematic in the future. This is an issue already

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higher price—through the traditional banking network. Arbitrage keeps prices relatively close between these exchanges. Unregulated exchanges (category 4) do not have banking and use stablecoins such as USDT (tether) to arbitrage between exchanges to maintain relatively similar prices (see “Arbitrage”). Wash Trading Wash trading is a form of market manipulation

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for hackers to exploit. This is why trust in an oracle system is paramount. Stablecoins As blockchain-based assets that peg to the US dollar and other fiat currencies, stablecoins underpin services that don’t require banking intermediaries. Many stablecoins do have some regulatory risk (discussed in Chapter 6). In addition, there are

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various levels of governance and centralization between different projects. Nevertheless, interesting experiments are being done with stablecoins. We’ll briefly look at a few of them here. DAI In the volatile world of cryptocurrencies, DeFi requires a stable asset in order to

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properly service users. The major stablecoin cryptocurrency used for this today is the Maker project’s DAI. DAI, launched in 2018, was originally a “single-collateral token” backed by Ethereum’s

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cryptocurrencies, including ETH and BAT (Basic Attention Token, the Ethereum token that powers the Brave browser) and others. However, the cryptocurrencies that back the DAI stablecoin are inherently volatile. So how does Maker create a stable asset from volatile markets? By locking in assets. Here’s how it works: A user

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(KYC) information to participate. The only thing required to interact with it is a private key and access to some ether. USDC An ERC-20 stablecoin, USD Coin (USDC) is supported by two of the largest and best-known companies in cryptocurrency: Coinbase and Circle. USDC is part of a larger

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consortium called Centre, whose members collaborate on the stablecoin’s governance and use cases. Grant Thorton, LLP, is the auditor for USDC. The firm provides monthly attestations that there are enough reserves to back

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the USDC stablecoin. The system requires users acquiring or redeeming USDC from the issuer to submit personal information for KYC checks. TrueUSD Backed by a US-based company

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called TrustToken, TrueUSD (TUSD) is a dollar-based stablecoin that uses the ERC-20 protocol. TrustToken also has stablecoins backed by the Canadian dollar, the British pound, the Australian dollar, and the Hong Kong dollar. TrustToken uses the auditing

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from users, TUSD and USDC do. Because of banking relationships, TUSD and USDC require users to provide personal information to redeem their stablecoins for fiat. However, inside the blockchain ecosystem, the stablecoins can be used pseudonymously, changing hands while leaving a blockchain record, as Figure 7-4 illustrates. Figure 7-4. How

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stablecoins can be used pseudonymously Although DAI is the most used stablecoin in DeFi applications, bank-backed solutions are competitors. The main difference is that TUSD and USDC are backed by fiat, whereas

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DAI is currently backed by cryptocurrencies. DeFi Services With increased stablecoin liquidity, financial services are being built on top of crypto. The website DeFi Pulse is a good barometer for projects that are getting traction. By

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the dollar, can be sold on the market for fiat or used to invest in other cryptocurrencies. Savings DeFi savings involves users locking cryptocurrency, usually stablecoin, into a smart contract. The contract then provides a yield in the native cryptocurrency. The concept is similar to staking (discussed in Chapter 2), except

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new framework, newer kinds of games are being invented—for example, no-loss gambling. One example is a DAO pool in which everyone puts in stablecoin, which earns returns. The pool goes through a randomized selection process to pick the winner; the winner gets all the interest earned from the pool

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, and the losers get back their original amount of stablecoin. Summary Web 3.0 technology is based on a disruption of the traditional centralized services model. That model, though it has been successful for some

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Genesis block of Bitcoin, so in theory the easiest proof would be to uncover evidence of the identity behind that address. Crypto-Based Stablecoins In the previous chapter, we discussed a few examples of stablecoins, which use blockchain technology to peg a cryptocurrency to another, more stable asset. For the most part

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, stablecoins are pegged to the US dollar, since it is known as a global reserve currency, but other assets have been used too, including gold

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, agricultural commodities, and the euro. Many stablecoins are unregulated in the cryptocurrency world, although there are several

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stablecoin projects that are working with regulators and banks to foster a future where stablecoin assets are a large part of the ecosystem. While stablecoins attempt to stay pegged to their linked real-world

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into difficulties in the past, and others becoming mired in legal problems. This section discusses a few examples. NuBits Introduced in 2014, NuBits was a stablecoin pegged to the US dollar. It used fractional bitcoin reserves, similar to how a bank keeps only a percentage of account balances, to “back” the

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developing world, crowdfunding, and exchange trading. After the large fundraise, Basis started to confront the legal realities of being a US-based company launching a stablecoin. This included the bond and share tokens being recognized as securities by the SEC. In addition, KYC rules would have required Basis to keep a

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reaches across several blockchains, including Ethereum, TRON, EOS, Liquid, and Algorand. Tether is nominally pegged to the US dollar and is by far the largest stablecoin in the cryptocurrency ecosystem, with over $15 billion in market capitalization in 2020. As a result of its prevalence across blockchains and exchanges, it is

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, “chaincode” is a smart contract JPMorgan Investment bank JPMorgan has developed Quorum as its own blockchain based on Ethereum. It has also created its own stablecoin, JPC Coin. The cryptocurrency will be used as a method of making cross-border payments, which can be expensive and inefficient, via the Quorum blockchain

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The Libra cryptocurrency is expected to hold a stable value, backed by a basket of assets that will include fiat currencies and treasuries. Unlike most stablecoins, it does not plan to peg to the US dollar and will instead exist as a digital currency with its own valuation against fiat. Libra

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, Arbitrage Trading basic mistakes in, Basic Mistakes exchange risk, Exchange Risk involving fiat currency, banking risk, Banking Risk regulatory, Avoiding Scrutiny: Regulatory Arbitrage-Crypto-Based Stablecoins timing and managing float, Timing and Managing Floatfloat configuration 1, Float Configuration 1 float configuration 2, Float Configuration 2 float configuration 3, Float Configuration 3

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and Private Keys in Cryptocurrency Systems regulatory bodies in the US, FinCEN Guidance and the Beginning of Regulation security, Security Fundamentals-Recovery Seed stablecoins based on, Crypto-Based Stablecoins-Tether stakeholders in ecosystem, Stakeholders-Informationanalytics services, Analytics brokerages, Brokerages custody solutions, Custody exchanges, Exchanges information services, Information theft from ownersexchange hacks, Exchange

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with exchanges, Counterparty Risk, Custody and counterparty risk crypto custody solutions, Custody custody providers, Counterparty Risk cyberbucks, DigiCash D DAGs (directed acyclic graphs), DAGs DAI stablecoin, DAIsavings rates for, Savings Dai, Wei, B-Money DAML, DAML DAOs (decentralized autonomous organizations), Decentralized Autonomous Organizations-Other Ethereum forks, Important DefinitionsThe DAO project on

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-Naming Servicesidentity and dangers of hacking, Identity and the Dangers of Hacking naming services, Naming Services services, DeFi Services-Derivativesderivatives, Derivatives lending, Lending savings, Savings stablecoins, Stablecoins-KYC and pseudonymity traditional versus decentralized financial system, Decentralizing Finance DeFI Pulse website, DeFi Services delegated proof-of-stake, Alternative methods deposit contracts, Ethereum Scaling

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(Ethereum testnets), Authoring a smart contract Federal Reserve (see US Federal Reserve) federated sidechains, Sidechains fiat currencies, Electronic Systems and Trustblockchain-based assets pegged to, Stablecoins mint-based model, The Whitepaper file storage in web applications, Web 3.0 Financial Action Task Force (FATF), Travel Rule, The FATF and the Travel

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Risk, DAIon centralized and decentralized exchanges, Know your customer crypto laundering and, The Evolution of Crypto Laundering implementation in Novi wallet, Novi in Singapore, Singapore stablecoins requiring/not requiring, KYC and pseudonymity L LBFT consensus protocol, How the Libra Protocol Works Ledger wallet, Wallets ledgers, Storing Data in a Chain of

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Challenges speculation in cryptocurrency, Market Infrastructure, Tulip Mania or the internet? spoofing, Wash Trading spot exchanges, The Role of Exchanges Square’s Cash App, Brokerages stablecoins, Stablecoins-KYC and pseudonymityDAI, DAI JPC Coin, JPMorgan JPM Coin, Payments Know Your Customer rules and pseudonymity, KYC and pseudonymity problems with, Crypto-Based

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Stablecoins-TetherBasis, Basis Digix, Digix NuBits, NuBits Tether (USDT), Tether TrueUSD, TrueUSD USDC, USDC use by unregulated exchanges, Jurisdiction stakeholders in cryptocurrency ecosystem, Stakeholders-Informationanalytics services,

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crisis, The 2008 Financial Crisis transaction transparency, How Corda works Travel Rule (FATF), The FATF and the Travel Rule triangular arbitrage, Arbitrage Trading TrueUSD (TUSD) stablecoin, TrueUSD Truffle Suite tools for smart contracts, Authoring a smart contract trustblockchain's effort to reestablish, Electronic Systems and Trust challenge of, Bitcoin's effort

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud

by Ben McKenzie and Jacob Silverman  · 17 Jul 2023  · 329pp  · 99,504 words

BRRR For skeptics like Jacob and me, there was one corporation that reigned supreme when it came to our suspicions about the cryptocurrency industry: the “stablecoin” company Tether and its assorted entities such as the exchange Bitfinex. Tether was arguably the most important cryptocurrency of them all: At the time, 70

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all transactions in cryptocurrency were conducted in it, more than in either Bitcoin or Ethereum. Founded in 2014, Tether claims to be the first stablecoin ever created. (A stablecoin is a cryptocurrency pegged to an actual currency such as the US dollar.) On the crypto exchanges, one Tether (USDT) equals one US

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wanted to keep their money in the crypto system but not be exposed to the wild volatility associated with any particular coin would instead hold stablecoins like Tether. Theoretically, your money was safe: One USDT was supposed to always be worth one US dollar. And if you were making huge gains

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or moving money between jurisdictions, Tether helped avoid the imposition of regulated banks with their pesky reporting requirements. Stablecoins provided the liquidity necessary for the crypto industry to function: As long as there were poker chips to play with, the games could continue. Interestingly

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had fined Tether $18.5 million, stating the company and several associated entities (iFinex and Bitfinex) had made false statements about the backing of its stablecoin. In exchange for avoiding prosecution, Tether agreed not to conduct any business activities in the state of New York, the heart of global finance. The

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, but it would hardly be the last. Crypto has its own lexicon, with many words representing the opposite of what they claim to be. Many stablecoins ultimately proved to be not so stable. Smart contracts were neither smart, nor contracts in any familiar sense. Decentralized invariably meant centralized, only in private

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O.C. Charles continued making crude—and legally actionable—passes at the publicist, who insisted in a whisper she could handle herself. Strangers pontificated about stablecoins and big tech and the next cool party they would attend. Eventually, I realized that I was maybe a decade too old to be doing

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legs were pumping almost as fast as his mouth. It was Brock Pierce, the former child actor of Mighty Ducks fame and cofounder of the stablecoin company Tether. From his home base in tax-friendly Puerto Rico, Brock maintained numerous crypto business interests and had become one of the industry’s

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a wireless networking startup before getting involved in crypto projects, sometimes pseudonymously. Eventually he launched a company called Terraform Labs, which managed a dollar-pegged stablecoin called TerraUSD (UST) and another token called Luna (LUNA). The two were bound together via an arbitrage system designed to keep Terra, a so-called

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a bit complicated, so think of it this way: Luna is the counterweight to Terra, a way of balancing supply and demand for the supposed stablecoin. When Terra trades at a price that’s higher than its 1:1 peg, that should mean that demand for the

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stablecoin is higher than supply, so the supply of Terra ought to be increased to match demand. The protocol incentivizes users to create (or “mint”) new

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Terra coins, which they could then “lock,” or deposit, onto Anchor in exchange for an improbably high yield of 20 percent. Terra became a popular stablecoin, with exchanges like Binance marketing it as a safe investment. FTX also listed it. Some South Koreans put their retirement savings into it. In early

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empire. Major investors and day traders flocked to him, supporting his projects financially, sharing his roguish media appearances, touting his tokens as the future of stablecoin economics, and generally hanging on his every word. He developed a cultish following of fans who proudly called themselves Lunatics. Mike Novogratz, a billionaire Goldman

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what kind of shady players? And then to refuse to even account for it? There are a few possible signs of trouble with almost any stablecoin. One is if it depegs, that is, if its value goes below one dollar. The lower it goes—a few cents is considered significant—and

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the situation may be. Another obvious sign of trouble is if users seem to be moving their funds out of a particular stablecoin and into other tokens, especially competing stablecoins. By the first week of May, Terra was exhibiting both. On May 8, UST slumped to $0.985 as the markets showed

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. And he had much of the industry’s support. On May 28, Do Kwon launched what some called TerraLuna 2.0. There was no algorithmic stablecoin this time, but there was a new coin with the ticker LUNA, though, confusingly, it was called Terra. Its decimated predecessors were renamed Terra Classic

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as an investor in Celsius and other companies, and as a key business partner of many more. The entire crypto economy depended on Tether’s stablecoin—it was by far the most traded token each day. But its murky operations, uncertain financial backing, and bloviating executives—to say nothing of those

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authority over crypto, rather than the better-heeled, enforcement-ready Securities and Exchange Commission. There were other political battles at play—over derivatives regulation, over stablecoins and banking—and SBF seemed to have his hand in all of them. Not that he always won every hand he played: He poured $12

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transparency notwithstanding (and would certainly bet as much!).” How true: SBF had bet billions of dollars on Tether, helping make it the industry’s leading stablecoin as his own trading empire blossomed. If anyone knew what was going on there, Sam did. It was time to speak to SBF. Jacob formally

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media company renowned for its skepticism, revealed that Alameda Research was one of the largest (perhaps even the largest) customers of Tether. The notoriously shady stablecoin company had printed $36.7 billion for Alameda. We’re supposed to believe Alameda gave over $36 billion to buy thirty-six billion Tether? Where

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but I wasn’t there to argue bankruptcy law. Eventually, Sam got back to the original question. He estimated that there were $100 billion of stablecoins left and that they were “roughly backed” 1:1. (No, I don’t know what “roughly backed” means either.) He estimated there were “another one

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hundred billion of non-stablecoinized dollars that have entered the ecosystem.” That would add up to around $200 billion of real money left in crypto. I pointed out to Sam

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an exchange shuts down. Sam again agreed this was a “big problem.” We moved on to stablecoins. SEC Chair Gary Gensler called stablecoins the “poker chips at the casino,” I said. Tether was the biggest stablecoin in terms of trading volume by a country mile. “Your company Alameda is one of Tether’s

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, and worth noting I don’t run Alameda anymore . . .” “But you own it, right?” “Yeah. And I, uh, know in general what it does with stablecoins. And basically what happens is, to walk through an example which represents the bulk of what goes on here, is somewhere in the crypto ecosystem

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-maker in crypto.” Sam launched into a long-winded explanation of how market makers like Alameda and Cumberland work in crypto. He moved on to stablecoins, and how he thought two of them, USDC and Paxos, were safe. Eventually he turned to what he described as “the other end of the

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spectrum” risk-wise: Terra, the algorithmic stablecoin that blew up a few months prior. Sam continued, “In retrospect, I’ve obviously thought a lot more about this than I did prior to

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Sam to throw shade at them; Changpeng Zhao, the CEO of Binance, was one of FTX’s first investors. Jacob asked if USDD, a new stablecoin, could be an eventual replacement for Tether. Recently Alameda had announced a financial partnership with Justin Sun, the entrepreneur behind USDD. Sam responded as if

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he had never heard of USDD. “USD what?” “USDD.” “Which is DD?” “The new Justin Sun algorithmic stablecoin.” “No, no. I don’t know where on the scale from DAI (another algorithmic stablecoin) to LUNA it is, but I think it might be on the bad end of that spectrum.” It

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world of crypto, he stood out not only for the size of his crypto empire—a varied group of blockchain companies, exchanges, DeFi protocols, and stablecoins that likely made him a billionaire, at least on paper—but also for his peripatetic travels and strange affiliations. In his relatively short career, Sun

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’m-just-winging-it confidence. In an industry of colorful figures, Mashinsky the carnival barker wasn’t necessarily that different from the crackpot VCs, fugitive stablecoin dealers, or serial scammers who promised that this new project was legit (just trust me, bro). In short, he wasn’t atypical, which meant that

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look. The NFT wallet, it turned out, had sold more than six million CEL tokens, for which Mashinsky received about $12 million worth of USDC stablecoins. It was clear that, besides being a Ponzi scheme run by some truly unimpressive operators, Celsius was a money machine for the Mashinskys. Whatever crypto

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to me of a coming conflict dividing the industry. Binance was pushing its customers to convert their stablecoins into BUSD, Binance’s own dollar-pegged token. “It’s the beginnings of the second great stablecoin war,” he messaged me on September 5. “All the stables are gearing up for it. Taking this

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benefit of printing your own money. (The other asset FTX used to buy out Binance was more than $1 billion worth of BUSD, Binance’s stablecoin.) Now CZ was announcing his intent to sell a major quantity of an illiquid shitcoin, upon which FTX/Alameda’s solvency happened to depend. The

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the situation with their customary levelheadedness and grace. As the Wall Street Journal and other publications took a look at Tether’s lending activities, the stablecoin company began issuing defiant statements denouncing the media for calling Tether “sketchy” while overlooking the FTX fraud. The defensiveness was more than a touch ironic

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13, the New York State Department of Financial Services ordered Paxos, a finance and tech company based in the state, to stop issuing the Binance stablecoin, BUSD. Investors started to get the picture and headed for the exits. The market cap of BUSD was over $23 billion in November 2022. By

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into our banking system. If that had happened, things could have been a helluva lot worse. The other major player left standing was Tether. The stablecoin company, valued at $71 billion as of March 1, 2023, had miraculously survived while the industry around it bit the dust. But there were signs

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24, 2023. 261 the New York State Department of Financial Services: Patricia Kowsmann and Caitlin Ostroff, “Regulator Orders Crypto Firm Paxos to Stop Issuing Binance Stablecoin,” Wall Street Journal, February 13, 2023. 262 the government charged . . . Bitzlato: press release, “Founder and Majority Owner of Bitzlato, a Cryptocurrency Exchange, Charged with Unlicensed

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Journal, March 8, 2023. 264 four men . . . Tether holdings: Ben Foldy, Ada Hui, and Peter Rudegeair, “The Unusual Crew Behind Tether, Crypto’s Pre-eminent Stablecoin,” Wall Street Journal, February 2, 2023. 264 who is known as Christopher Harborne: Protos, “Brexit’s top donor outed as Bitfinex, Tether parent shareholder,” April

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smart contracts social psychology Solana Solomon, Ben Sorkin, Andrew Ross Soto, Darren South by Southwest (SXSW) Spaceballs (film) Special Purpose Acquisition Companies (SPACs) Stabenow, Debbie stablecoins Stallion Wings Stark, John Reed Sternlicht, Lin and Aaron Stone, Jason store of value Stornetta, W. Scott Strange, Susan subprime crisis Sun, Justin Super Bowl

Number Go Up: Inside Crypto's Wild Rise and Staggering Fall

by Zeke Faux  · 11 Sep 2023  · 385pp  · 106,848 words

Businessweek walked by my desk and floated a crypto assignment, I was ready. “What do you know about stablecoins?” he asked me. * * * — THE ANSWER WAS Not much. But I did know they were called “stablecoins” because, unlike coins with prices intended to go up, they were supposed to have a fixed value

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of one dollar. That was because each coin was supposed to be backed by one U.S. dollar. The biggest stablecoin by far was called Tether. Tether seemed to be at the center of the crypto world: More Tethers changed hands each day than any other

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company called Celsius Network. I’d read that Tether was one of Celsius’s early backers, so I figured he would know a lot about stablecoins. Mashinsky seemed to be everywhere at the conference—on stage, on the floor of the convention center, and in the media room doing back-to

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lose money, or possibly a Ponzi scheme. I decided to move on to Tether. “Do you deal with stablecoins yourself as part of your business?” I asked. “We have billions of dollars in stablecoins,” he said. Celsius, it turned out, had $18 billion in assets. I couldn’t believe it. Somehow Celsius

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what I was imagining,” I murmured, trying to keep a straight face. Mashinsky said there was no reason to worry about what was backing Tether. “Stablecoins are basically just a digital version of the U.S. dollar, right?” he said. “There’s no monkey business.” But then he described what sounded

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soon sent me back downstairs. When Pierce and I did catch up, by phone, he told me he’d dreamed up the idea for a stablecoin back in 2013. He said he knew from the start it would change the course of history. “I’m not an amateur entrepreneur throwing darts

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that were backed by U.S. dollars. He laid out pretty much the whole plan that Tether would later use. He even anticipated—correctly—that stablecoins would be attractive to criminals. “If you think Bitcoin has a reputation problem for money laundering now, just wait until you can store ‘USDCoins’ in

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he would fund programmers who came up with new uses for it. Pierce told me it was his idea to use it to create a stablecoin. “I came up with the idea for Tether on my own,” Pierce said. “Well, I mean, God’s will, I guess.” Pierce got in touch

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transferred anonymously, like any other cryptocurrency. Using Willett’s MasterCoin protocol, they were able to encode the data into the Bitcoin blockchain. They pitched the stablecoin business to the venture capital firm Sequoia Capital and some crypto investors. No one was interested. “You can’t even imagine how stupid of an

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was charged with money laundering. And in May 2013, just as Pierce and his compatriots were trying to pitch Tether, the creator of a proto-stablecoin, Liberty Reserve, was arrested. Liberty Reserve allowed users to send and receive money using only an email address. Prosecutors said the anonymous online currency appealed

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exploiting Bitcoin price discrepancies around this time. For Giancarlo Devasini, the ICO craze was good for both of his companies: his exchange Bitfinex, and his stablecoin Tether, which by then he’d taken over. For Bitfinex, more trading meant more fees. And those fees added up to $326 million in profits

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, Phil Potter, Bitfinex’s chief strategy officer, had pitched his boss Devasini on the idea that banks would be more willing to work with a stablecoin company. That idea convinced Bitfinex to buy out Brock Pierce and carry on with the project. But Potter turned out to be wrong: Most banks

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person I was about to meet caught my eye. “Imagine waking up, brushing your teeth, drinking some coffee, then spending 16 hours getting mad at stablecoins online,” a crypto influencer wrote. I laughed to myself. Then I realized I could just as easily be the butt of the joke. A man

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was sure it was a lot riskier than keeping the money in cash. Tether could be investing in anything at all. “It’s not a stablecoin, it’s a high-risk offshore hedge fund,” Betts said. “Even their own banking partners don’t know the extent of their holdings, or if

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its portfolio, and so did the rest of the crypto world. As risky as that seemed, it hadn’t set off a run on the stablecoin. In fact, by then, Tether had grown to 79 billion coins. And it was becoming clear that Bankman-Fried was a big enough user of

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had taken in more than a billion dollars. It was paying as much as 12 percent interest to users who sent in Tether and other stablecoins. That meant Mashinsky needed to find ways to invest the billion dollars that earned at least that much. DeFi seemed like it could work. Mashinsky

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with Tether then. He continued to belabor his confectionary analogy. Sometimes, customers would all deposit Bitcoin, but he could earn more interest if he had stablecoins instead. When that happened, he said, he would call Tether’s Devasini. “When I don’t have enough sugar, I go to Giancarlo and I

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, in March 2022, North Korean hackers broke into a sort-of crypto exchange affiliated with the game and made off with $600 million worth of stablecoins and Ether. The heist helped Kim Jong Un pay for test launches of ballistic missiles, according to U.S. officials. Instead of providing a new

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a house of cards collapse in slow motion. The whole time, I was watching Tether prices to see if a run would start on the stablecoin. The crisis started in May. Token prices had been falling, along with tech stocks and other day-trader favorites. Then a crypto company run by

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at the time, but this would bring down a huge portion of the crypto economy. Kwon’s main coin was called TerraUSD. It was a stablecoin like Tether, intended to always trade for one dollar. But Kwon didn’t promise to back his coins with dollars in a bank account. Instead

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Terra-Luna topped $60 billion. But starting on May 7, after traders were spooked by a large sale of TerraUSD, many started cashing in their stablecoins for Luna tokens and selling them, driving down the price. The lower the price of Luna went, the more Luna tokens Kwon had to issue

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of the lenders to Three Arrows messaged an executive at the hedge fund asking for repayment, saying he would accept payment in Tether or other stablecoins. “Yo,” the Three Arrows executive wrote back. “Uhh, hmm.” The fund did not repay the loan. On June 14, two days after Celsius’s “pause

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, would have reason to cash theirs in. Investors wouldn’t even have to leave the crypto world. Tether could be easily swapped for a competing stablecoin, called USDC, which was based in the United States and didn’t have the same checkered past. I read that in some countries with high

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from time to time in other cases. When North Korea sent workers overseas to earn cash, it would have them paid in Tether or other stablecoins. The nonprofit Transparency International Russia found that many crypto exchanges in Moscow would accept Tethers from users, with flimsy ID checks, and, in exchange, have

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a cryptocurrency called Tether. She told me it was safe, because Tether is a “1:1 cryptocurrency with the US dollar, also known as a stablecoin.” But Vicky told me I wasn’t ready to trade like her and recommended I read a few books about Bitcoin first. For days, she

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follow the money.” I told Bernasconi what I’d learned about Tether’s use by organized crime in Southeast Asia. Criminals were likely using the stablecoin to move billions of dollars anonymously. American retirees were being tricked into sending huge sums of Tether to scammers across Southeast Asia. And I explained

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E-Gold Indicted for Money Laundering and Illegal Money Transmitting,” United States Department of Justice, April 27, 2007. GO TO NOTE REFERENCE IN TEXT proto-stablecoin, Liberty Reserve: Jake Halpern, “Bank of the Underworld,” The Atlantic, May 2015. GO TO NOTE REFERENCE IN TEXT moved to Costa Rica: “Founder of Liberty

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John Oliver, HBO, April 23, 2023. GO TO NOTE REFERENCE IN TEXT Tether’s tech chief, Paolo Ardoino: Olga Kharif, “Tether Takes Victory Lap After Stablecoin Regains Peg,” Bloomberg, May 12, 2022. GO TO NOTE REFERENCE IN TEXT more and more Tethers: Ryan Browne, “World’s Biggest

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Stablecoin Regains Dollar Peg After $3 Billion in Withdrawals,” CNBC, May 13, 2022. GO TO NOTE REFERENCE IN TEXT But behind the scenes: The details and

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24, 2023. GO TO NOTE REFERENCE IN TEXT Transparency International Russia: Transparency International UK, “From Russia with Crypto: Moscow-Based Exchanges Offering to Anonymously Convert Stablecoins for Cash in the UK.” Available at: https://www.transparency.org.uk/​news-and-events/​press-releases/​item/​1936-from-russia-with-crypto-moscow-based

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-exchanges-offering-to-anonymously-convert-stablecoins-for-cash-in-the-uk. GO TO NOTE REFERENCE IN TEXT Russian money launderer: U.S. v. Orekhov et al., 22 Crim 434 (E.D

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, https://twitter.com/​paoloardoino/​status/​1593298288568049664?s=20. GO TO NOTE REFERENCE IN TEXT “Every single token”: Vicky Ge, “Tether to Buy More Bitcoin for Stablecoin Reserves,” Wall Street Journal, May 17, 2023. GO TO NOTE REFERENCE IN TEXT U.S. prosecutors were still investigating: Tom Schoenberg and Matt Robinson, “Tether

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facts about, 24, 109–110 on Celsius’s interest rates, 161 CEL token, 118 DeFi and, 114–115 on safety of Celsius, 117, 164 on stablecoins, 24, 25 Stone and, 110, 112–113, 116, 240, 241 Tether loan to Celsius and, 109 on Tether’s investment and loan to Celsius, 25

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–143 process of buying, 147–149 RR/BAYC, 157 theft of, 153 Three Arrows’s ownership of, 166 North Korea hacking and, 12, 97, 127 stablecoins and, 170 Novogratz, Mike, 50, 162 Number go up mantra, 21, 22 O OHM, 110 O’Leary, Kevin, 132 Oliver, John, 162 O’Neal, Shaquille

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, 32 appearance of, 27, 31 Bukele and, 201 as cryptocurrency promoter, 27 DEN and, 32, 33 EOS promoted by, 49 EverQuest and, 33 genesis of stablecoins and, 32, 36 home of, 29 IGE and, 34 MasterCoin investment of, 36 move to Puerto Rico by, 115–116 Tether and, 36, 38, 52

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Solana, crash of, 236 Solana Monkey Business, 139, 144 Solano, Greg, 154, 156 Soriano, William, 203 Sotheby’s (auction house), 144–145 Spitzer, Elliot, 59 Stablecoins Celsius Network and, 24 described, 11, 25 genesis of, 32, 36 North Korea and, 170 TerraUSD as, 162, 163, 165, 166, 226 Tether as, 11

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purchase of Bitcoins by, 239 redemption guarantee, 163 run on, 163, 164, 170 growth during Covid-19 of, 65 solvency of, 63, 239–240 as stablecoin, 11, 57–58, 95, 170 traditional currency as backing of, 37, 63, 64 used in Cambodia, 191–192, 193–195, 199 Thailand, 104 Thatch, Edward

The Currency Cold War: Cash and Cryptography, Hash Rates and Hegemony

by David G. W. Birch  · 14 Apr 2020  · 247pp  · 60,543 words

, has changed quite unpredictably in its decade of existence, which is why people have begun to talk about creating a different kind of cryptocurrency – a ‘stablecoin’ – that might be more suited to the mainstream. I do not think this is the cause of Bitcoin’s lack of adoption, however. For this

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held by a sweatshop owner or by a money launderer. It has significant information content. While early experiments with Ethereum and smart contracts, CryptoKitties and stablecoins gave us a sense of the direction of travel, it is hardly wild to speculate that as new technologies connect with these basic building blocks

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digital currency based on some form of cryptocurrency would need to demonstrate that it is reasonably stable in order to obtain hegemony. Hence the term ‘stablecoin’, which is being bandied about by Libra and others. But what does it actually mean? The Bank of England’s excellent Bank Underground blog explains

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that there are generally two designs of stablecoin: those that are backed by assets and those that are unbacked or ‘algorithmic’ (Dyson 2019). This is right, of course, but I would like to

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present a slightly more granular classification of stablecoin currencies. Barry Eichengreen of UC Berkeley identifies four kinds, as shown in table 7 (Eichengreen 2019). I will use his helpful breakdown here. Table 7

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. Categories of stablecoins. CATEGORIZATION BACKING EXAMPLE Fully collateralized Assets (including ‘tier 1’ capital and fiat currencies) Libra, e-Krona Cryptocollateralized Cryptocurrencies Dai Uncollateralized Algorithms Basis Partially collateralized Assets

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contexts and at different times, so while it is still early days, we can look at some of these examples for illumination. A fully collateralized stablecoin: e-Krona Collateralization includes ‘self-collateralization’, where a central bank creates a digital currency as a claim on itself. One such experiment already in progress

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is the Swedish central bank’s e-Krona pilot project, which I discussed earlier. A cryptocollateralized stablecoin: Dai The first attempt to scale a stablecoin came from Maker. At the time of writing, there are about half a billion dollars worth of cryptocurrency tied up as collateral

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for this stablecoin – the Dai – whose value is pegged to the US dollar. The peg operates through feedback loops using collateralized debt positions (CDPs). With a CDP, a

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they are based on adjusting the supply of Dai according to the demand for it (DiPrisco 2017). An uncollateralized stablecoin: Basis Basis, originally known as Basiscoin, was an attempt to build a stablecoin wholly supported by algorithms as opposed to assets. It was a well-funded start-up (with $100 million plus

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global currency. In the end, however, they found the regulatory problems (specifically, regulatory uncertainty) to be an insurmountable barrier. A partially collateralized stablecoin: Saga An example of a stablecoin that illustrates a few of these design choices rather well is Saga (or SGA). This was launched at the end of 2019 by

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, in which an asset or basket of assets is used to back the digital currency. I do not know why people refer to these as stablecoins, since they are stable only against the specific assets that back them: an asset that is backed by, say, crude oil is stable against crude

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. Now, this may well be an advantage in terms of cost and convenience in some use cases, but it is a long way from the stablecoin as it was originally envisioned. In November 2019, the head of the Financial Crimes Enforcement Network (FinCEN) made it clear that, as US regulators are

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technology neutral, transactions using any of these kinds of stablecoin are covered by the Bank Secrecy Act (BSA), and that, for AML/CTF purposes, the administrators of any such services have to register as Money

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is the asset-backed currencies that are most interesting and most likely to succeed in causing an actual revolution in finance and banking. Algorithmic stablecoins and fiat ‘stablecoins’ exist to serve a demand for value transfer, but this is increasingly being served – and well – by conventional means. I have noticed, for example

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a future in which the mere possession of an anonymous cryptocurrency becomes a prima facie case for money laundering. Looking at the ‘stable’ part of stablecoins, then, I am putting my money on the second mechanism. There is a real marketplace logic to the trading of asset-backed currencies in the

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or algorithms’. He also claimed that Saga is using this structure ‘as a means of avoiding regulation’. 27 This is also what was meant by ‘stablecoin’ in the original crypto use of the term. Chapter 5 Rethinking money The instruments of trade and finance are inventions – products of the human imagination

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(and, of course, on market manipulation of various kinds). It is not set by an institution, government or otherwise. Is it a ‘stablecoin’? No, it is not. A stablecoin has its value maintained at a certain level with reference to a fiat currency by managing the supply of the coins. The value

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fiat, which will provide a risk-free substitute for commercial bank deposits. The ECB modelling of this kind of digital fiat, in comparison with a stablecoin currency board or a commercial bank digital currency, seems to indicate that the business case for what I have labelled the two tier34 digital currency

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Pseudonym: a persistent alias to an identity PQC: post-quantum cryptography SDR: special drawing right SEC: Securities and Exchange Commission SGA (Saga): a partially collateralized stablecoin SHC: synthetic hegemonic currency Sibos: The annual SWIFT banking conference SIM: subscriber identification module, the chip inside a digital mobile phone that links the device

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. Bjerg, O. 2017. Designing new money: the policy trilemma of central bank digital currency. Working Paper, Copenhagen Business School, June. Brainard, L. 2019. Digital currencies, stablecoins and the evolving payments landscape: speech at The Future of Money in the Digital Age, sponsored by the Peterson Institute for International Economics and Princeton

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currency. Wall Street Journal, 21 November. URL: https://on.wsj.com/33EAZAU. DiPrisco, G. 2017. Maker for dummies: a plain English explanation of the Dai stablecoin. Medium, 20 November. URL: http://bit.ly/2wEfSCe. DuPont, Q., and B. Maurer. 2015. Ledgers and law in the blockchain. King’s Review, 22 June

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. Dyson, B. 2019. Can ‘stablecoins’ be stable? Bank Underground, 28 March. URL: http://bit.ly/2SwuY5a. Dyson, B., and G. Hodgson. 2016. Digital cash: why central banks should start issuing

Cloudmoney: Cash, Cards, Crypto, and the War for Our Wallets

by Brett Scott  · 4 Jul 2022  · 308pp  · 85,850 words

build DLT infrastructure to service its corporate partners. There are ambiguous zones of hybridisation occurring, but perhaps the most ambiguous is the emergent world of ‘stablecoins’. These are becoming of crucial importance in debates about the future of our monetary system, and stand to disrupt that system in unexpected ways. Decentralised

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’ backed by bank dollars, partially backed by the state dollars of the Fed. These decentralised promises for bank dollars subsequently came to be known as stablecoins. The term ‘coin’ was supposed to evoke the idea of Bitcoin – thereby emphasising decentralisation – but with ‘stable’ added as a contrast. The reason a

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stablecoin is stable, however, is that it’s just an extension to the normal monetary system. Most of what we call money is bank-issued or

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in the world, which means there is (supposedly) $69 billion in the company’s bank accounts, wherever those may currently reside. In their early iterations, stablecoins could be characterised as a raid by crypto-pirates into the world of fiat money, but by 2018 many other companies started getting into this

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might otherwise have earned on that), and then issuing a crypto-dollar called USD Coin to you in return, via an Ethereum smart contract. Other stablecoins such as DAI have a more advanced mechanism for associating themselves with the US dollar, using pegging to make their token mimic a dollar without

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being directly tied to banks. These stablecoins are interesting in the context of the war on cash: unlike Bitcoin, they are usable as a stable form of money, and – given that they

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can be used (semi)-pseudonymously – have a better claim to being called ‘digital cash’. But the stablecoin concept itself can be re-raided. Earlier I showed how the corporate incursion into blockchain technology resulted in private DLT systems, and these can now

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be used to implement a carefully controlled semi-centralised corporate stablecoin, not dissimilar to a centralised PayPal. This is precisely what happened in 2019, in one of the biggest money stories of the year, and one

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that still looms over us. Big Tech raids the stablecoins A dollar-promise can be rebranded. A casino chip that says ‘Caesar’s Palace Casino’ is a rebranded US dollar promise, as are countless privately

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into those in exchange for a new Libra unit recorded on a private consortium blockchain controlled by the corporate members. It would be a corporate ‘stablecoin’, backed by a range of global bank chips. The corporate members included Silicon Valley super-powers like Uber, and the role of these partners would

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Facebook to back down and return to the drawing board. In 2021 it rebranded Libra as Diem – planning to issue standard US-dollar backed corporate stablecoins like Tether – but the US government blocked Diem from being developed further, forcing Facebook to sell the technology to a new

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stablecoin contender called Silvergate. The state raids everyone We have seen commercial banks raid the blockchain concept to co-ordinate their oligopolies, and we have seen

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crypto-entrepreneurs raid the tethering concept to create so-called stablecoins. We have then seen corporations like Facebook raiding the results of both to create oligopoly-run stablecoins. Now it is time for central banks to stage their own raids. Many digital money systems have

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replicate cash on one or more dimensions. Bitcoin has left us with a movable pseudonymous token, but it largely fails to operate as money, while stablecoins get closer but remain third-tier chips dependent on banks. What we call cash is anonymous physical legal tender issued by states, which suggests that

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country where your citizens use apps controlled by US corporations, you face the prospect of those apps being used to fob off US dollar corporate stablecoins on them. Maybe the only means to compete is to offer your citizens direct access to your central bank as an alternative, even if it

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carry out its foreign policy via private corporations. Perhaps the US government may come to be swayed by the idea that corporate-issued US dollar stablecoins should be promoted to my Zimbabwean family members, lest they begin using the digital yuan. Where does this leave us? Blockchain technology certainly has disrupted

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other, while the underlying technology has been co-opted into co-ordinating oligopolistic cartels, which is hardly novel in the grand scheme of capitalist history. Stablecoins and CBDC certainly do cause waves in the monetary system but, despite their differences, all these digital options have one feature in common: they can

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out of business. If, however, they do not provide a form of ‘digital cash’, they risk creating public demand for dark-market alternatives like the stablecoins Tether provides. Over the coming years we are likely to see the mega-players getting locked into a Mexican stand-off (the phrase refers to

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situation for themselves). The financial giants have undermined cash, but that now risks inducing central banks to compete with them digitally, or alternatively to allow stablecoin players to rise. One way to break this stand-off would be for central banks to step up and promote physical cash, but that would

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nation states they base themselves in, and they are opportunistic: if Facebook feels the need to let Indian WhatsApp users, for example, pay with a stablecoin backed by the Chinese CBDC, who is to say it will not do so? These messy commercial geopolitics will continue to unfold over the next

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distributed form. That vision is partially fantasy, because the greatest hope for the Ethereum (and other crypto) communities lies in stablecoins, which remain tethered to, or pegged to, the normal monetary system. Stablecoins are now being used to build so-called ‘DeFi’, or ‘decentralised finance’, platforms. Much in the way ordinary fintech

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companies rely upon digital bank money, DeFi involves setting up smart contract systems that will administer, lend or route digital stablecoins, and thereby replicate – in a more decentralised form – the same processes of financial automation that mainstream fintech promotes. A DeFi platform, for example, may seek

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to push out stablecoin loans, providing a partially decentralised fintech platform. In blockchain technology circles this term ‘decentralised’ often means ‘a large, distributed infrastructure controlled by nobody in particular

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of reporting on the Tether controversy, but for an illustrative piece, see Nikhilesh De, ‘Tether Says Its Stablecoin Is “Fully Backed” Again’ Coindesk, 8 Nov. 2019, https://www.coindesk.com/tether-says-its-stablecoin-is-fully-backed-again to which Tether’s US dollar reserves could be moved: See Amy Castor, ‘The

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mutual credit systems and, 260 oligopolies and, 229–33, 246 politics and, 191–3, 211–12, 215–17, 225–6 smart contracts, 220–24, 258 stablecoins, 233–41, 245–6, 255 Currency Conference (2017), 60 Curse of Cash, The (Rogoff), 93 Cyber Monday, 86 cyberattacks, 32, 48 cybercrime, 34 cyberpunk genre

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tax, 55 National Arts Festival, 144 rolling blackouts, 247 syncretism in, 175–6 South Sudan, 105 Spiegel, Der, 112 Spotify, 166 spread-betting companies, 26 stablecoins, 233–41, 245–6, 255 Standard Bank, 95, 144 states, 42–5, 50–64, 176–85, 215 anti-statism, 42, 184, 215–16 base money

Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead

by Kenneth Rogoff  · 27 Feb 2025  · 330pp  · 127,791 words

had adopted a stronger kind of exchange rate peg, a currency board, which for younger readers one might say is more akin to a dollar “stablecoin,” a topic we will turn to in a later chapter. In principle, the Argentine government was holding one dollar of hard currency reserves for every

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ever comes when authorities can effortlessly and costlessly trace bitcoin, its value will collapse. At present, that day is far off. We now turn to stablecoins, which are a very different animal than bitcoin, though some of the appeal is the same. There are a few distinct kinds of

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stablecoins, but the two most widely used coins, tether and USD coin (USDC), are by far the most important. Both have their value fixed at one

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dollar, although on occasion they trade for less. Stablecoins have become popular over time precisely because cryptocurrency prices are so volatile. Indeed, tether is more traded than bitcoin, although as of mid-August 2024

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tether and $34 billion for USDC).24 Central bankers tend to be far more open minded about integrating stablecoins into the financial system than integrating cryptocurrencies with their wildly gyrating prices. Dollar-linked stablecoins provide a potential alternative to bank debit accounts and credit cards as a payment mechanism. If sufficiently regulated

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—and this means that regulators must be able to easily identify the underlying holder at all times, which is not always the case now—stablecoins also might provide an alternative to a central bank digital currency (discussed in chapter 19) that could prove attractive to the Fed. For example, in

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contrast to having just a single government provider of digital currency, there can be multiple private dollar-linked stablecoins that create an ecosystem where competition and innovation can thrive. The most sophisticated stablecoins are already far more developed than any central bank digital currency. There are, however, three key issues. First

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, if a stablecoin provider does not have a lender of last resort behind it, it will be subject to runs unless

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the stablecoins are sufficiently backed by safe dollar securities such as Treasury bills; there is a very close

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analogy with runs on fixed exchange rates.25 Second, it is the stablecoin provider, not the government-owned central bank, that collects the interest

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payments on the securities it holds. Third, if stablecoins became sufficiently pervasive and convenient, they could disintermediate banks in the sense of bidding away the ordinary depositors who provide a critical component of the

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can be addressed in principle, although there are many obstacles and complications. For example, at present, even though interest rates have risen sharply, the major stablecoins are reluctant to pay interest because doing so would radically change their regulatory status, and they would be required to register as securities with the

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government. Legacy financial firms (banks) are plenty nervous about losing business to dollar-linked stablecoins, and for the moment are heavily lobbying regulators to restrict stablecoins—and will likely keep doing so until they have their own stablecoin product. As for having access to the Fed’s balance sheet in the event of

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a run on a stablecoin, the issues are pretty much the same as with any bank or financial institution. Explicit insurance creates a moral-hazard problem. Capping the amounts insured

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partial solution, but in practice it is very hard for the government to avoid protecting all depositors no matter how large. In the end, although stablecoins offer new technological possibilities in transactions, the regulation issues are really very similar to old-fashioned banking and must be taken up if

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stablecoins continue to grow in importance. In sum, cryptocurrencies can definitely compete for business with the dollar in the global underground economy, and this is a

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interacting with CBDCs from other countries. The contestants included a dizzying array of computing giants, major banks, and credit card companies, but also blockchain and stablecoin operators, crypto banks, identification specialists, operators of cross-border payment systems, and many others. The ultra-brilliant group was remarkably diverse, representing every continent in

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States, serving from 1977 to 1981. 24. Prices from Binance, accessed May 12, 2024, www.binance.com/en/price. 25. There are remarkable parallels between stablecoins and the private moneys of the nineteenth-century free-banking era in the United States. See Gary Gorton et al., “Leverage and

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Stablecoin Pegs,” Working Paper No. 30796 (National Bureau of Economic Research, December 2022). Chapter 19. Central Bank Digital Currencies 1. Anneke Kosse and Ilaria Mattei, “Making

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(January 2021): 113–172, which also discusses several other options for re-lending CBDC funds. 6. G30 Working Group on Digital Currencies, Digital Currencies and Stablecoins: Risks, Opportunities and Challenges Ahead (Washington, D.C.: Group of Thirty, July 2020). 7. Co-sponsors of Singapore’s CBDC competition included the IMF, the

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crisis, 54, 55, 118, 124, 285 Trinity Default, 3. See also peseta (Spain) Spassky, Boris (World Chess Champion), 21 special drawing right (SDR), 175–80 stablecoins, 196–98 Star Trek, 174: Latinuum currency, 314 n.4 Stiglitz, Joseph, 129, 177, 303 n.6 Globalization and Its Discontents, 78 stock exchanges, 299

Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies

by Nik Bhatia  · 18 Jan 2021

The Infinite Machine: How an Army of Crypto-Hackers Is Building the Next Internet With Ethereum

by Camila Russo  · 13 Jul 2020  · 349pp  · 102,827 words

Kings of Crypto: One Startup's Quest to Take Cryptocurrency Out of Silicon Valley and Onto Wall Street

by Jeff John Roberts  · 15 Dec 2020  · 226pp  · 65,516 words

Fixed: Why Personal Finance is Broken and How to Make it Work for Everyone

by John Y. Campbell and Tarun Ramadorai  · 25 Jul 2025

Gilded Rage: Elon Musk and the Radicalization of Silicon Valley

by Jacob Silverman  · 9 Oct 2025  · 312pp  · 103,645 words

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them

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Magic Internet Money: A Book About Bitcoin

by Jesse Berger  · 14 Sep 2020  · 108pp  · 27,451 words

The Pay Off: How Changing the Way We Pay Changes Everything

by Gottfried Leibbrandt and Natasha de Teran  · 14 Jul 2021  · 326pp  · 91,532 words

Limitless: The Federal Reserve Takes on a New Age of Crisis

by Jeanna Smialek  · 27 Feb 2023  · 601pp  · 135,202 words

Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy

by George Gilder  · 16 Jul 2018  · 332pp  · 93,672 words

Going Infinite: The Rise and Fall of a New Tycoon

by Michael Lewis  · 2 Oct 2023  · 263pp  · 92,618 words

Practical Doomsday: A User's Guide to the End of the World

by Michal Zalewski  · 11 Jan 2022  · 337pp  · 96,666 words