Hey everyone and welcome back.
to Cointelligence Academy.
Today we are doing something a bit different.
We'll talk about stable coins and what's so interesting about them why they're even needed and what's their place in the market.
I'd also like to thank our sponsor Puma Pay for allowing us to offer this course for all of you guys.
So here is the first comprehensive crypto payment solution for businesses.
They combine the flexibility of payment cards with the advantages of block chain technology.
We're very excited to be partnering with a company that genuinely wants to increase adoption of crypto currencies and help many people pay less fees and have more control over their own money.
And I'm reminding everyone that we are taking the discussion to our WhatsApp group where you can ask us questions about these sessions about anything in the crypto space.
We'll answer them.
We'll have a discussion about crypto that's the that's what the WhatsApp group is for.
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All right so let's get started.
We'll recap a bit before we dive in.
Just to start on the same page we've started with taking a close look at bitcoin.
And we've explained why it's so important and how it achieved certain things that no other value transfer system has achieved before it mainly its decentralized nature alongside its immutability and a few other important things.
We saw how the organic Rise of Bitcoin led to the creation of a vibrant market of crypto currencies and organizations that are looking to leverage this new technology to enable new methods of value transfer and many of the market participants and actually according to some research most of the participants in the crypto market are traders or investors.
And with this demographic comes a lot of demand for tools to make these people's lives easier.
And if you are a trader you probably know traditional trading has more tools and is more convenient and crypto trading.
It's a bit hectic in crypto.
So before we start talking about stable coins we first have to understand what are the needs that led to their creation.
So that leads me to ask the following question our crypto currencies money are the money.
So to answer that we're gonna have to define what money is.
So let's start by taking a look at the Three Characteristics of money and then we'll try to answer that question.
So I'll just hide my camera.
So the first one is the medium of exchange characteristics.
So we have the requirement from the money to be a medium of exchange which means it can be used to exchange for goods and services on the premise that the receiver of the money will in turn use it to pay for other goods and services which creates this infinite contract between people where they agree to continue exchanging this money between them essentially forever right until a new form of money comes along.
But the idea of value and value exchange means that people will continue exchanging value between them forever.
So for example a certain community can use a beaver pelts to exchange for other things.
And the people who have the most pelts have the most opportunities or ability to use them to exchange for other things.
In other example is using for example a copper coin.
Like thousands of years ago where you could paint coins for these goods and services or you know cash money notes notes you use that to exchange for other goods and services.
So that's the basic one of the basic the three basic premises of money.
The characteristics being a medium of exchange so the second one is to be a unit of account measured and treated as a unit of account which means that it can be enumerated or counted and the people who use it develop in their minds a sort of understanding of prices and price levels which shows that value of things can be measured using these numbers.
And I'll give you an example that you might agree with.
So if you've ever gone on a relatively long trip abroad you know it's your own country you probably noticed that as time progressed you felt more and more comfortable thinking in terms of the local currency.
And after a while prices start to make sense to you in the local currency that you're not familiar with.
And it might even get to the point where you don't have to do these conversions back to the currency that you do know and are used to from home.
And the best example is if I ask you now how much is a regular restaurant meal in your home area right.
How much would it cost in your local currency.
You could probably answer that question pretty easily.
But if I were to ask you how much should the same meal cost in argentinian pesos for for example assuming you're not from Argentina you would have a harder time giving me an answer or even approaching this question.
And that means that you're very accustomed to your local currency as a unit of account and in your own community.
So this process is of course done automatically in our mind all the time without us having to think about it and to sidetrack a little bit here.
What are the things that Bitcoin supporters claim will help increase adoption of Bitcoin is if people start thinking in terms of bitcoins using Bitcoin as a unit of account or even Satoshi which we know is the smallest denomination denomination sorry of bitcoin for example eating at a restaurant and thinking OK.
So this meal costs a hundred thousand Satoshi is or displaying real estate pricings in Bitcoin.
So that's one of the things Bitcoin supporters wants to promote.
To to to increase the usage of Bitcoin as a unit of account.
But that's a little bit sidetracking we'll get back to the characteristics of money now.
So the third one and the final one for four now is the store of value characteristic in a store value means.
And that's in my opinion the most basic characteristic of money.
It has money has to store value and maintain its value over time.
Storing means you know having that over time.
Meaning that whenever I receive money I need to trust that I would be able to use it in the future for my needs.
And if your store of value is not certain then there is a chance that my money will be worth less or even nothing in the future and therefore it threatens the fact that it is in fact money.
So one example is the hyper inflation and specifically what's happened with the currency in Zimbabwe where the hyperinflation was so extreme that the government issued a hundred trillion dollar notes like you see here.
And the inflation itself reached levels of almost 80 billion percent of inflation a year compared to the norm of around 2 percent in Western countries there.
There are countries like the UK which start to feel a little bit itchy when when the inflation goes over 2 percent.
Right.
So there are places where the store of value is nonexistent or so close to zero that it that it just doesn't qualify as money.
As we define money so this is one example of something that was money and lost its value extremely quickly and almost completely.
And there are also reports of bank notes from example for Venezuela being tossed around in the streets because they are worth so little that people don't even bother picking them up.
So that's examples for store of value.
So having defined the characteristics of money we can start to get the question at hand is cryptocurrency money or cryptos money.
So we'll start by looking at the store of value factor in crypto value.
Pretty much exists right.
We have a 200 plus billion dollar market cap of Book of crypto.
As I'm speaking right now I hope to hopefully by the time you're watching this it's much more a much much bigger.
So value pretty much exists but the volatility of it of the value which means the frequent and extreme changes in price they make the value of crypto currencies pretty unreliable.
And since it's changing all the time.
Remember markets in crypto or open 24 hours a day seven days a week 365 days a year.
Sometimes you go to sleep when bitcoin is worth something and you wake up it's worth 10 percent 20 percent less.
It happens so even though many crypto enthusiasts claim it's a great store of value.
The reality is that it's the most volatile asset class today and no one knows what will happen with it tomorrow.
No one knows if it will go to zero tomorrow.
It's a possibility.
So I'm gonna have to say that it's not yet a reliable store of value the second.
The second one is let's look at measuring crypto as a unit of account and we do have a few niche markets that price goods and services in Bitcoin or other crypto currencies.
But these are mostly proof of concepts or vanity products you know small markets that are.
I don't want to offend anyone but pretty insignificant.
And since I'm not seeing any day to day use of bitcoin or any other crypto currency as a unit of account and it doesn't look like we'll get there anytime soon I'll also have to decline this proposition as well.
Unfortunately right and the last one as a medium of exchange we are also having trouble to claim Bitcoin is widely used to exchange for other goods and services.
And the reality is that most people trip Bitcoin as a financial instrument which is destined to have its value severely changed right.
Notice I didn't say investment you know in a long position to to have the price go up but most people who speculate on bitcoin's price believe the price will change very much.
Some believe it will go to incredible heights while others think it will eventually be worth nothing or much less than the price it currently trades at.
So since people have always and still continue to treat bitcoin as a vehicle for price speculation we will have to determine it is not yet a reliable medium of exchange.
Right.
So we kind of failed in all three of these.
If we're you know putting putting very hard standards against our crypto money.
If we're assessing if it is money.
So where's the gap.
What process do we need to take on.
To classify crypto currencies as money.
How do we make it money.
Where at least we try to bridge this gap somehow.
So we have two problems.
The first is that Bitcoin stands completely alone in the world or at least in how Bitcoin itself sees the world.
And many bitcoin supporters as well.
You might be surprised but many bitcoin supporters do not support other crypto currencies.
It's called Bitcoin maximal ism but we're not going to get into that.
It's pretty much a meme also aside from being you know a regular term.
So Bitcoin is a standalone network and therefore it's extremely hard to integrate with any other system since it's designed to work only within itself.
This is actually a very big security feature of Bitcoin and it's also part of what makes the bitcoin protocol so robust and so efficient.
We can also say that bitcoin is agnostic which means it has no knowledge of anything other than itself.
Bitcoin only knows bitcoin.
It doesn't know what the US dollar is it doesn't know what a euro is.
It only knows what a bitcoin is.
Think for a second.
There was this a bitcoin brain somewhere and you could ask it questions.
One of the most popular questions would probably be how much is one bitcoin worth.
And if you ask people that they will probably look up the latest dollar price of bitcoin at which bitcoin is being traded and they will answer that.
But if you could hypothetically ask bitcoin we all know what its answer would be.
It would be.
What do you mean.
Obviously one bitcoin is worth one bitcoin.
There's nothing else other than bitcoin.
I'm trying to get you in the head right of the mindset of thinking and because of that and the fact that Bitcoin was not built with the process of converting it to Fiat in mind whenever we want to convert it to fiat money which as we remember fiat money is government issued money.
Right.
Well like the U.S. dollar like the euro or vice versa if we want to convert fiat money to bitcoin we need to figure out a way to do this which currently almost a decade into having Bitcoin freely traded on markets across the globe it still sometimes prove to be very hard right.
Sometimes converting be a bitcoin to fiat or fiat to bitcoin.
It's very hard.
To some people.
So from all of these we gather that because bitcoin is built in in such a robust way we need to figure out a way to convert it to fiat currency to get out of the Bitcoin ecosystem in a simpler manner in a more convenient and cheap manner.
Right.
So that is our first problem and yeah we need to find a better way to do so.
So the second problem we have a slightly harder issue.
If you thought that when it was hard.
This one is it's a bit harder.
Even so we know crypto is volatile and we can't reliably use it as money like we've just seen.
So the problem is how can we take the advantages of crypto combine them with the advantages of Fiat which is basically being money right and use this new offspring as money which resides completely on the Internet.
In other words we want to take the benefits of Bitcoin the advantages of Bitcoin and other crypto currencies which are of course our security are immutability.
The easy to use that you own your own money right.
The decentralized nature of it and how to do we transact in fiat money using these things.
Some would call it the best of both worlds.
So the answer to both problems the first for one and this one are stable coins and stable coins are crypto currencies that are built on cryptocurrency networks such as Bitcoin such as ethereum and they combined the money aspect of fiat with the borderless and crypto graphically secure nature of crypto currency was a long sentence.
I'll repeat that it combines the money aspect of Fiat with the borderless and crypto graphically secure nature of currency.
These new creatures don't solve all of the problems that we have today because these problems are extremely complicated and it will take years to actually reach significant results.
But they do make life much easier for many people.
And we'll see why in just a second.
So we'll outline the solution.
The stable quick solution and we'll start by stating the definition of a stable coin.
So a stable coin is a type of cryptocurrency that is designed from its inception to maintain a stable market price.
This means that while people are developing the stable coins they must come up with mechanisms that ensure the market price of the stable coin will in fact stay stable.
Now think about the following for a second.
What is the most stable asset we have in the world today.
Fiat currencies included anything else anything in the world that has value.
What is the most stable asset in the world today.
And the answer is that there is no right answer because everything we measure must have a reference point.
Think about the U.S. dollar is it stable.
Absolutely not.
There is inflation which increases the water supply.
There are political forces that increase and decrease the currency's value in relation to other currencies.
And there are a million other factors which produce the reality that the US dollar is simply not that stable.
Same thing with any other fiat currency and other assets which are not currencies as well.
Think about oil.
Silver gold others.
These are not price stable at all.
In fact we have nothing in this world that can be considered truly stable in price or in value in a way that we can rely on it never increasing or decreasing even in a million years so all of this means that eventually when we create a stable coin and want its price to be stable we need to ask the following question in relation to what do we want this stable coin to attain.
Price stability and the answer at least for stable coins is we choose for each stable coin which is a reference asset and we aim to maintain price stability in relation to that asset and the best examples and was mostly used in stable coins are U.S. dollar based stable coins and these are designed to remain price stable in relation to the US dollar.
Simple as that.
So the price of one unit of the stable coin will be worth one U.S. dollar.
That's what most stable coins are doing having their price stable in relation to the US dollar or any other fiat currency.
Most use the US dollar as a reference point.
So make no mistake these stable coins are still cryptos they still are crypto currencies they live on a cryptocurrency network and they work just like other crypto currencies or crypto tokens for some stable coins their issuers and maintainers create a network from scratch just to maintain and house this particular stable coin and others choose to save time and effort and money and rely on an already working crypto network such as ethereum where you can easily and cheaply create tokens and then reliably sorry.
The reality is that most stable coins exist as tokens on crypto network crypto networks that existent beforehand.
The way to store and send these stable coins is exactly like you would store incent other crypto currencies which is using digital wallets like we've learned in our choosing a wallet.
Session session 5 and our introductory course and these can be software wallets.
They can be hardware wallets they can be paper wallets which you secure by safeguarding a mnemonic seed or private key.
Same thing like you would secure other crypto assets and stable coins are transferable to other wallets or addresses just like any other cryptocurrency again stressing this point in the semantics or details of such a transaction.
Depends on which network the stable coin is built on top of.
For example since many stable coins exist as you see 20 tokens on ethereum they are sent out the same way any other year see 20 token is sent and received using in ethereum and wallet and you pay for the transaction fees using each other right.
Using gas.
Same thing as other tokens.
Exactly so the juiciest detail and we'll focus on the most today and the juiciest detail about stable coins in most interesting thing about them is how they keep their price stable.
Right.
How they keep their price stability and maintain it.
So we know that every cryptocurrency that exists on a public network is public and anyone can decide to trade it listed on their exchange.
And no one needs an approval from a certain government agency to decide to enable trading in a certain token or crypto currency.
And this means that no one can force traders to trade a stable coin at a certain price.
And ultimately the free market will decide what the stable coins price is.
Now pay close attention because this is probably the most important point of this entire session.
Only the market decides the true price of a stable coin a company that issued a certain stable coin can say it's worth one U.S. dollar.
All that all at once.
Right.
The company can shout it from the rooftops can send out e-mails and say this stable coin is worth one U.S. dollars.
But if people decide it is worth less or more that's how much it's worth right.
That's how much these people are going to be trading this token for the stable coin for it.
And these companies can wave their arms and write blog posts as much as they want.
If people choose to trade it on the free market at a certain price that's the stable coins price.
And as we see in reality many stable coins are not staying stable on one U.S. dollar 100 percent of the time it goes up a cent it goes down a cent sometimes more than that.
That's that's a very interesting part about stable coins.
So before that most stable coin companies are not stupid they know this.
So they have to think about maintaining the price of their stable coin while you're even designing it before they even put it out to the market.
And in order to do so there are currently three methods that project sorry that project teams and companies use to maintain price stability of a stable coin.
So the first one in the most popular one is making the stable coin centrally collateralized.
Very long word.
And it's also called fiat backed which means creating a situation where you control the supply of a stable coin that is represented as a crypto token and making sure that you also control the corresponding amount in actual real world fiat money that is stored someone somewhere safe.
In other words if you want to create a stable coin which has the price of one U.S. dollar you need to lock up one U.S. dollar in a safe somewhere and make sure you can redeem the crypto token or the stable coin for the actual physical dollar.
This method is by far the most popular one and the one that is mostly used to maintain stable coins and ensure their price stability.
But we will talk about the other two points as well.
So the second most popular way to maintain stable home prices is using a collateral ization mechanism but one that's reliant only on crypto currencies as opposed to fiat currencies having the value that backs the stable coin be derived only from crypto currencies not from fiat currencies.
And this idea was pioneered by maker Dow made its die stable coin which we will talk about in our next session.
But right now we just need to understand the concept that some teams choose to create the collateralized portion of the value behind these stable coins using only crypto currencies in the final method to maintain price stability is through algorithmic balancing or algorithmic central bank meaning that just like a central bank we have something an algorithm that dynamically controls the properties of the stable coin like its supply or the inflation rate to balance for whatever is happening in the market according to the algorithm that's designed to govern this stable coin.
Currently there aren't any significant stable coins making use of this method since it's extremely hard to develop but many project teams are developing such a system.
And it's important to know and recognize that it exists.
There are people working on it and it might you know amount to something in the future.
Right now there is no hard real used stable coin that uses this method but we did include it because it does appear sound the most technologically interesting right so these three are also called like we said Fiat backed stable coins which is essentially collateralized you know having one dollar for one crypto token one dollar in a safe for one stable coin is fiat backed stable coins and we have crypto backed stable coins.
And the third woman is just called algorithmic central bank.
So it was a long long explanation but it was worth it.
So the next thing that we should look at is we should list a few of the properties of stable coins.
So like we said stable coins are first and foremost crypto currencies.
That's the first thing that they are and that they are designed to maintain a stable market price against a certain asset.
Most commonly a fiat currency most commonly in the fiat currencies Department the U.S. dollar.
And again very important extremely important if you have if you take away one thing from this entire session it's this the price of a stable coin is only what's determined in the market.
It does not matter how much someone claims a stable coin is worth.
It only matters what price it trades at.
Why.
Because that signifies the actual price that you would receive if you wanted to trade it right now.
If you have a stable coin and the company saying this is worth one dollar this is worth one dollar but you want to sell that stable coin for for for money right for.
For fiat currencies or for bitcoin and the market says OK you will receive 80 cents on the dollar you will receive 80 percent of what the company says this is worth.
It's you'll say no I'm I'm being I'm losing 20 percent of the value.
But this is the best offer you're going to get.
So the price.
The price of a stable coin is only what it trades on in the market.
So in order to influence the price and encourage it to stay stable.
The people in charge of stable coins is a few different mechanisms to influence or maintain their prices right.
We said it in the stable coins can be thought of as simply digital representations of fiat money.
I can tell you it's just a matter of taking a dollar and instead having it in solid green cash form I'm putting it on a block chain and it's transferable using wallets.
And in reality most of the use that stable coins see right now is simply and only for trading purposes.
Nothing else aside from trading purposes and for example if I have a position in bitcoin right I speculated on the price of bitcoin and I want to get out of the position.
Probably the fastest and easiest thing to do would simply be to sell the bitcoin for a stable coin that follows the US dollar because generally liquidity against the stable coin is much higher than what I would get in a fiat exchange.
And the fees are also generally much lower on exchanges who deal with stable coins than on exchanges who deal with fiat money.
Most people who trade Bitcoin in very very short frequencies they do so against stable coins not against real hard U.S. dollars.
And while it is true that most of the use that stable coins are seeing right now for trading and quickly a way to quickly get in and out of positions there are a few initiatives that are focusing on using stable coins for things that you would actually use real fiat money for right.
Like a medium of exchange for example such as online shopping and financial services because it's lending and borrowing.
There are a few project teams a few companies that are starting to use stable coins actually to use them.
Aside from trading aside from being a sort of synthetic U.S. dollar they actually are making people transact in these crypto currencies.
But this use case is not as big as trading unfortunately or not unfortunately that's just reality.
But that's how it is right now so most of the activity that we see in this field of using stable coins actually takes place around the dice table coin which is a decentralized stable well crypto collateralized stable coin right.
It's collateralized by crypto currencies rather than fiat currencies and also with the US DC by circle and Coinbase two companies that collaborated to create a stable coin.
So most of the use that is other than trading is being done in these two stable coins.
Most of it not all of it
so we'll dive deeper into the central collateralized stable coins or Fiat backed as they're also called.
So we'll explain what this method of maintaining price is and we'll give an example of the stable coins that use these.
So these stable coins are allegedly backed by actual cash that is stored in a safe somewhere and supposedly for each unit that the issuer points puts out on the market there is a unit on a block chain in a one to one ratio.
You've probably noticed I said allegedly and supposedly and that is because these claims of if the stable coin is fully backed or not are made by a stable coin issuer and maintainer which your project teams and companies and when these people tell you that the stable coin you're using is fully backed.
You just have to trust them right.
If you have no way of knowing the money is actually secure somewhere if you don't have the key to the vault and you physically go there and see there is money inside you have to trust them.
And we'll see in a few minutes how these companies sometimes not all the time but sometimes they betray their customers they betray their customers trust and they actually lie about the stable coin being fully backed.
If they're not lying they're misleading.
So there is the element of trust here which is what Bitcoin solves.
Right.
We don't need trusted bitcoin but when we use crypto crypto fiat money which are stable coins we need the trust back in this trust can create problems.
So of course in order to control the supply of the stable coin there is a centralized entity that manages the stable coin and they can put more money in their vault vaults to create new tokens for these coins or they can burn tokens and then withdraw some of the money in their vaults.
Right.
They dynamically adjust the supply they're in charge of it.
And the most commonly the most commonly the ratio of stable coin value is one to one.
And this ratio is determined by the company.
If the company allows its customers to claim actual dollars by sending them the corresponding amount in stable coins then a person holding a stable coin essentially holds an IOU that is issued by the stable coin issuer.
Right.
If the same coin company lets you withdraw actual fiat money if you send them these stable coins then it's an IOU.
As long as you hold the stable coin the company hypothetically owes you real dollars.
Right.
So people are trading in IOUs when they trade in these stable coins.
That's a technical that's in a technical level.
So if a part of the stable coin terms of service allows the customers to claim their dollars that are being held by the company then customers can send the companies these stable coins and they can claim back the money to their bank accounts in fiat form by sending the company its stable coin tokens or they can go the other way around and they can send the company Fiat money and the company will put it in their vault and issue new tokens and send it over.
Right.
I'll give an example say I have 100 stable coins which I want to convert back to dollars and the company allows me to do so.
Right.
The company says OK send us these stable coins it will send you one hundred dollars to your bank account.
So what I do is I go on their online platform the online platform of the stable Coin Company and then I issue a request for withdrawal of fiat funds.
And then it prompts me to send them the stable coins that I send to the stable coins from my wallet to the address that they provide me with.
And after that is done they burn the tokens.
And that means that they send them to an address which we know for fact is not in the control of any person which means these stable coins will never be accessible by anyone again.
And then they send me the same amount of dollars to my bank account via a bank transfer.
Right.
It's been a bit of a long explanation but it works.
It's it's operating today under a few companies now it is a bit complicated right.
But it sounds amazing right.
It sounds like somebody managed to hack this new mechanism together that allows us to deal with digital dollars very little hassle.
But the reality is that anyone who's dealing with stable coins today is taking on a sort of risk and this risk is called In professional terms counterparty risk which means that whenever you deal with a stable coin that is controlled and managed by a company you you are at the mercy of this company.
Essentially what if they lose their bank account tomorrow what if they decide they don't want to honor this withdrawal process anymore.
Just on a one sunny day they decide OK we're finishing up this doesn't we're not going to offer this thing anymore.
This is table coins are still on the market but we're not going to let you convert them to fiat dollars anymore.
Essentially you are at the mercy of these companies and this is some of the risk that you take on by using a certain stable coin.
So the stable coin market today is very very competitive and tether which is the stable coin we'll talk about today is still by far the largest one.
And we have a few smaller ones which are objectively not that small at all but they're way smaller than tether and they're doing things a little differently.
But the main premise of feedback stable coins is the same across the board.
You lock up an amount of fiat money and then you represent this money as tokens on a block chain network.
So moving on from all these walls of text will see a little bit of visual stuff now.
This is a map showing the market size of stable coins measured in US dollars.
Now the only one here that is not fiat backed is die.
But I wanted to include it just for reference.
But let's look at this map for for a moment.
So we have tether.
Obviously the biggest stable coin.
Last time it was updated was November 18th.
And these numbers are updated to that point.
And this is the market size of these stable coins in numbers and these are their logos logos as well.
So tether year is the largest one approaching five billion dollars of tethers being you know shuffled around being sent from one person to another.
And according to what tether says for tether at the company we'll talk about the company but according to what tether says then for each tether that is out there and people are using we have dollars in our vaults right.
We safeguard these dollars
and we'll see why it's a bit problematic in the second.
And we also have our second largest Fiat backed stable coin which is the USD coin.
The US DC which we talked about for a brief moment almost 500 million almost half a billion dollars in outstanding U.S. DC and these you know acronyms T USD USD T G USD here.
These things are the ticker the ticker tickers of these stable coins.
So the stable coins name is tether.
But the way it's used in exchanges and trading venues is USD.
So we have the Gemini dollar by the Gemini exchange from New York.
We have same thing with the Paxos standard by the Paxos exchange previously called it bit USDC as we say it is issued by Coinbase and Circle both American crypto companies both have the bit license I think are licensed in the US.
Tether issued by a company we'll talk about in a second.
True USDA issued by trust token the company based in San Francisco and we have USDA which claims to be algorithmic you know the third option we talked about I'm not going to go into that right now but I think I misled youth before when I said that DAI is the only crypto.
Sorry.
The only stable coin here is crypto backed.
So it's incorrect as you as your synthetics USD is also crypto backed but we're not going to be talking about these today I want to focus on you know these the the big ones the big fish the whales and especially tether today.
So it's a nice visual representation.
But let's take it up a notch and see the same visual map to scale which means that I've calculated according to the actual size of each stable coin you know the actual market cap of each stable coin.
How big they would be displayed on this screen that you're seeing so it's incredibly contrasting when you display it like that.
Right.
I'll take you back for a second.
You see the Gemini dollar is almost five million dollars and you would say it's like I don't know one eighth of the circle itself one eighth of the size of the tether circle or like half that of the 500 million almost USD see it's not to scale.
But when you put it to scale it's nothing compared to what tether is and the biggest one is US DC half a billion dollars and just look how it compares to tether when you put it to scale.
So it just shows you how big is tether and the cryptocurrency market.
And as I've said tether is mostly used for trading.
Right.
Nothing else.
I don't know of any use cases that tether has aside from getting in and out of positions trading maybe you know holding in the wallets for a future trade or something so that's just to show you as a precursor of what we'd do next which is to be to talk about tether so our biggest case study in the field of stable coins is undoubtedly
everything that is always happening with tether.
By far the largest stable coin as we've seen and these guys consistently manage to attract attract controversy time and time again and they are still the biggest fish in this small ocean.
No stable coin seems to be replacing the huge market share that tether takes right now.
So tether is a stable coin issued managed and maintained by a company called tether Ltd..
This is a company which has a very complicated and sort of hidden legal structure they don't really display online.
Their legal structures they have ties to the British Virgin Islands and Hong Kong and even after an online search it's hard to answer the question where this company is located.
And to top it off they were mentioned in the Panama Papers leaks back in 2016.
So if you've read or heard about the Panama Papers they're one of the companies that are mentioned there.
So tether has a few different stable coins for a few different fiat currencies but by far the biggest one is USD.
And that's what we'll focus on today.
So the company claims that for each one U.S. D.T. one tether that they put out to the market they have one U.S. dollar safely guarded in a vault somewhere.
That's their claim.
Tokens were initially back in the day 2015 were initially issued on omni which is a protocol that is built on top of the Bitcoin base layer and it uses the bitcoin block chain in network to function.
But they recently made a very big move to ethereum and other blockchains.
Not only ethereum such as Tron and EOS or EOS.
So the company tether is extremely close to Bitfinex exchange.
That's and the reason we know it part of the reason we know is what was leaked in the Panama Papers and some even claim that the exact same people are running both companies of course.
These companies keep as many secrets as they can so they never announced any such thing publicly.
So now we get to the juicy parts tether have always been a center of controversy and they are currently undergoing a legal process after they've been the subject of a class action lawsuit.
So in October 2018 there was a lot of talk online and on Twitter with people saying that tether is not completely backed right that the assumption that there is for each tether in the market one actual U.S.
dollar in a vault somewhere is incorrect and that the company is actually lying about how much money they keep as opposed to how much they issue to the market.
So there was speculation that much of the tethers that are circulating in the market weren't even backed by anything.
And not only that they also had problems finding a banking partner at some point and there was a lot of talk and and worry about this.
So on one day on October 15th 2018 all of this came boiling down to a boiling point in which very quickly in a matter of seconds of minutes and seconds the price of tether plummeted to zero point eight dollars to 80 cents on the dollar.
So that means essentially that people were trading dollars at a 20 percent discount.
And why would that be right.
Why would someone get less for his dollars than essentially what it's supposed to to to be valued.
The reason for that is there was this sudden and very quick loss of trust in the company tethered.
We've talked about how we have to have trust when dealing with stable coins because we're essentially dealing with people here right.
We're dealing with people's promises.
And this event really showed us how much this market or this poker portion of the market relies on trust alone in how much we need a solution for these problems to allow people to transact in stable value over crypto networks without having to worry that the company is lying to you.
Now I don't know if the company is lying or not but the fact that people believed they were lying and very quickly looking to get rid of the tether that just shows how much one sudden loss of trust can do and these concerns were actually finally confirmed as reality when tethers lawyer admitted that the stable coin was in fact not completely backed by actual dollars but it was only 74 percent back not 100 percent back like they claimed.
But even this number wasn't only backed by dollars really but in other financial vehicles as well.
So which we can assume are more volatile than the dollars.
So the actual backing ratio of real dollars backing tethers could be extremely small for all we know right.
We don't have the data they have the data and they don't tell us and or at least data tell us not.
Not things that are not right.
My point is tether was operating on a fractional reserve just like banks do which is the complete opposite of all the values that we are trying to promote as part of crypto and it's simply a disaster waiting to happen and it happened right.
The moral of the story is to always do your extensive due diligence when choosing which stable coin to use.
And I'll tell you right now there are many you can use which are far more transparent and user friendly than tether.
Now I'm not saying all of this to frighten you out until you never use stable coins because you can't trust anyone.
Stable coins are very useful tools but you've got to remember they are tools.
And until there are robust systems in place that give you an assurance that this money is worth what it is worth without having to trust anyone or at least trying to minimize trust as much as possible you got to be careful around these things.
You got to do your research and be confident in whatever you're putting your money in.
If people tell you OK that is worth just one dollar don't automatically believe it.
Try to see if you believe it isn't good.
It is actually worth one dollar.
Let's get back to our pro plop 2 problems and wrap this up using this.
So our first problem of simplifying the transaction of crypto currencies and fiat currencies kind of solved right because we we rent went around the solution and found a way to transact against something that is kind of like Fiat so we can do it we can transact in in crypto fiat but our crypto Fiat which is our stable coins are kind of synthetic and they're not really Fiat until you've done a few things to release them of their crypto state meaning convert them to actual fiat money.
So we've solved one problem but we did introduce another problem which is how to make claims on the stable coins how to convert these stable coins to actual money you can use to pay rent to buy groceries.
All of that in that in that what each individual stable Coin Company is trying to do better than its competitors.
So a lot of the competitive competition right now is the stable coin space is how to make the process of converting stable coins to fiat money as easy and as user friendly and as quick as possible.
So the second problem of giving our fiat currencies the advantages of public crypto currencies while preserving their widespread usage.
The second problem is far from being solved.
And I'll tell you a secret it'll never be completely solved and that is because the entire nature of Bitcoin in what allows it to be so brutal in its properties and its core values is the complete separation from any sovereign nation state and fiat currencies represent just that the link to a certain state or country.
And this also brings with it a baggage of politics you can never completely get rid of politics unless you use a currency that is designed from the ground up to be truly completely politics free and that is what bitcoin is.
So we've reached the end of the session.
Let's do a short recap and say that we talked about what it takes for something to become money.
In short it needs to be all three of these.
It's to be a unit of account a store of value and a medium of exchange we said also that in their current state rate volatility and low liquidity and people don't accept them at your local laundromat crypto currencies are far from answering all these requirements and therefore they are hard.
Sorry for that they are hard to classify as money for the time being.
We presented two problems.
The reality were it's hard to convert any asset to Bitcoin since it's a walled garden.
And the problem of digitally representing and transacting in fiat currencies which is not even something that the cryptocurrency community thought was their responsibility until we were presented with the opportunity.
This is more PayPal territory but OK we jumped on the challenge.
So I'll just say you know rephrase it to to make it clearer.
We had the first problem that you know crypto is crypto and you get to find a way to have crypto transact with Fiat which is the agnosticism part and the digitization of Fiat.
Right we want to use money in a crypto way in a way where we control our money and we send it easily over the Internet.
We don't have to wait one two three four days and pay exorbitant fees for banks to transfer our money.
We want to use money efficiently cheaply and easily on the Internet.
So it didn't solve these two problems.
We talked about the properties of stable coins mostly that they are crypto currencies which are representations of fiat money and designed to maintain a price that is stable in relation to other assets such as U.S.
dollars.
And we expanded upon the centrally collateralized mechanism and talked about the way it manages the supply of the stable coin right.
There is a company doing what it's doing around the stable coin issuing more stable coins taking away stable coins maintaining the actual real dollars in the vaults.
And finally we brought forward the cautionary tale.
I would call it off tether and all of the controversies that were in there still involved in and the conclusion here again is be smart about it be a smart user try to minimize minimize the amount of trust that you put in anyone and choose the stable coin provider which is the most user friendly and has the risk model that is best suited for you.
I'll give you a hint.
There are many ones out there which might prove to be a better option for you than tether.
Even if their market cap is lower and they're accepted on less exchanges and with that I'll say thank you for listening.
We finished today's stable coin session.
All the links that you saw in today's session and what I've talked about will be in the video description attached to this video in our next session.
We'll continue to talk about stable coins about other mechanisms to ensure price stability and specifically the two ones that we didn't talk about yet which is crypto collateralized in algorithmic balancing and until then make sure to sign up for the Academy mailing list for updates.
Join our WhatsApp group ask us questions we're answering them all the time were you creating a discussion or creating a community and it's super fun to have that.
So thank you all very much for listening today and I do hope to see you in our next session.
Bye bye.