The Origins of the First Stablecoins
Tether (USDT) was introduced in November 2015, and many in the crypto community view it as the forefather of all stablecoins. However, this isn’t entirely accurate. Let’s explore the predecessors of Tether and the lessons learned from their shortcomings.
BitUSD by Dan Larimer
The initial attempt to create a stable cryptocurrency system, reminiscent of a digital dollar yet independent from central banks and governments, came with BitUSD. Dan Larimer (the main architect of EOS and Steem blockchains) and Charles Hoskinson (the creator of the Cardano cryptocurrency) presented it to the crypto community.
Launched in June 2014 on the BitShares PoW blockchain, BitUSD was not backed by the dollar as its name might imply but by the BitShares token itself. It was heralded as a crypto share, smart dollar, and a stable asset. But was it truly stable?
The developers devised a sophisticated price regulation system to ensure the stablecoin's value did not drop below $1:
- BitShares liquidity pools were used as collateral for BitUSD.
- BitUSD holders could exchange their stablecoins for BitShares tokens at any time.
- If the value of the collateral asset dropped, stablecoin holders would receive an amount of BitShares tokens equivalent to $1 for each BitUSD exchanged.
- Blockchain miners were permitted to sell BitShares tokens only if their price was 150% higher than BitUSD's price (i.e., no less than $1.5 on the internal trading platform).
This complex algorithm served as a precursor to the future system of algorithmic stablecoins based on the “seigniorage arbitrage” mechanism.
The primary flaw was that the BitShares token was of little value and highly volatile. The lack of a price oracle, which would provide the system with up-to-date exchange rates, meant that the stablecoin lost its peg whenever there was a significant drop in the price of BitShares tokens.
Effectively, what occurred was similar to the Terra LUNA project with its algorithmic stablecoin Terra USD.
Fortunately, Larimer and Hoskinson did not cause harm to their clients nor did they abscond, as Do Kwon did. Over its lifetime, only about 40,000 BitUSD were created, and they were mostly bought back by team members.
Dan acknowledged the experiment's failure and shuttered the project.
NuBits (USNBT) by the Creators of Peercoin
A second effort to launch a stablecoin was recorded in September 2014.
It was undertaken by the developers of the peer-to-peer payment system PPC (Peercoin), Scott Nadal and Sunny King.
The USNBT stablecoin also had a crypto backing. However, unlike the BitUSD creators, Scott and Sunny chose not to gamble and selected Bitcoin as the collateral asset. Anyone who recalls Bitcoin's fluctuations in 2014, when it dropped from $600 in July to nearly $300 in December, will understand why NuBits could not maintain its peg for longer than a week. The sudden decline in Bitcoin automatically led to a decrease in the value of reserves.
Additionally, the project's founders were hasty in listing this miraculous asset on exchanges, where it was only traded against BTC (!), making the venture conceptually dubious.
Despite several attempts to relaunch the stablecoin during bull markets, these efforts did not succeed.
Current USNBT Price. Source: Crypto.com
Cryptocurrency-backed stablecoins can indeed be issued for the purpose of launching an asset on an external blockchain, as successfully demonstrated with Wrapped Bitcoin (WBTC).
Nevertheless, it appears that stablecoin projects opting for backing with volatile assets must possess a high level of centralization to manually maintain their price (for example, through additional burning, incentivizing arbitrage, or other urgent measures).
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