The most important web3 innovation you (hopefully) don't need to know about

Stablecoins are likely one of the most significant innovations in crypto. But, I'd argue it'll be successful when the average person doesn't even have to understand what it's all about!

This post is my attempt at introducing the concept of crypto stablecoins.

The digital twin of your cash

At its core, a stablecoin is the blockchain representation of currency in the real world (Technically, it can be be anything where its price is pegged to something of value. But for simplicity, let’s just consider fiat currency).

For example, 1 USDT is the digital representation of $1 USD on the blockchain. USDT is called such because this digital twin is issued and maintained by an organization called Tether i.e. USD by Tether.

Similarly, other companies or organizations can make their own stablecoin of the USD. The company Terra issues UST, Circle created USDC, and MakerDAO introduced DAI to the world. Each issuer takes liberties on naming their product.

Stablecoins make finance possible in the blockchain

So why does a digital currency pegged to real world currency matter?

Stability.

Bitcoin and Ethereum, some of the most popular and relatively ‘stable’ cryptocurrencies available can significantly change in value within hours. It’s tough to do business with that kind of uncertainty, to say the least.

Instead, relying on a digital coin that tracks the value of a more stable currency like USD is much more useful for commerce.

Programmable.

As a natively digital currency, you can do fun things with stablecoins. For example, you can use it in apps (called smart contracts in web3). You can stream a transfer per second instead of a lump sum. You can move digital money across the other side of the world in an instant with very small fees, if any.

All of the above wouldn’t be possible with ‘traditional money’. There are strict laws, regulations, and technological limitations which make handling money clunky and expensive.

Access.

Interestingly, traditional digital money e.g. credit cards aren’t very accessible. Billions of people are still unbanked. 14 million American adults don’t have a bank account. Reasons for this include traditional banking fees, documentation requirements, and lack of trust on financial institutions.

Through the blockchain and stablecoins, there’s a world where digital money becomes more accessible to more people. It’s cheaper, you don’t need documents, and people can trust code, not banks.

There’s a lot of work to stabilize stablecoins

The promise of a superior digital twin is enticing. But, the reality is a myriad of technical, legal, and operational complexities to prove stablecoins can deliver what it promises.

For example, some stablecoins promise they have reserves for each stablecoin issued. That is, the organization promises they have actual $USD or some sort of valuable resource to back digital coins they issued. That’s a challenge because:

• How can we be assured they have sufficient reserves?

• What if someone steals those reserves?

• Will they actually be able to convert their digital coins all at the same time (i.e. a bank run can’t happen)?

Companies like Terra are trying to algorithmically maintain the stability of their coins through code. But this introduces technical complexities as well.

I won’t even attempt to unpack the legal and regulatory considerations of building global digital currency representing fiat of a sovereign state.

Maybe more next time

In the future, I hope to dedicate a bit more time further exploring the intricacies and nuances of the stablecoin segment of web3. It’s very complicated, but the impact is wide reaching.

If you have thoughts and research on stablecoins, I’d love to chat and maybe collab. Ping me!

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[Insert multiple disclaimers here] NFA, DYOR, IANAL…

I post web3 stuff in Twitter too: @nigelwtlee