Stablecoins have become a popular topic in the cryptocurrency world, offering a less volatile alternative in the short term to cryptocurrencies like Bitcoin. As detailed in the introduction to this module, stablecoins are digital assets that are pegged to a stable asset like fiat currency or precious metals, designed to maintain a stable value. Let's, therefore, explore the history of stablecoins and take a closer look at some of the first stablecoins, including Tether’s USDt, the most well-known and widely used stablecoin.

The idea of stablecoins dates back to the early days of cryptocurrency, with the concept of a stable asset-backed cryptocurrency being proposed in 2012 by the Mastercoin project. However, it wasn't until a few years later that stablecoins gained momentum, with projects like Bitshares and NuBits launching in 2014.

Bitshares introduced the first stablecoin called “bitUSD,” which was designed to be pegged to the US dollar, with the value of one bitUSD always equal to one US dollar. This meant that bitUSD was backed by US dollars held in reserve, ensuring that its value remained stable in times of market volatility. NuBits, on the other hand, used supply and demand mechanics to maintain its peg to the US dollar. But more on that in the next chapter.

Despite these early attempts, it wasn't until Tether’s USDt was launched in 2014 that stablecoins gained mainstream attention. USDt, just like bitUSD, is a stablecoin that is designed to be pegged to the US dollar, with the value of one USDt equal to one US dollar. USDt was created by a company called Tether Limited, whose parent company also owns the cryptocurrency exchange Bitfinex.

Initially, Tether was primarily used by traders to move funds between exchanges without the need for conversion to fiat currency. However, as more people started to use Tether, it gained its own momentum and popularity. Today, Tether is the most widely used stablecoin globally, processing over $30 billion daily. To put this number in perspective, MasterCard) and Visa process, on average, $8.1 billion and $12 billion per day, respectively. Essentially, 50% more US dollars are transacted daily on USDt than Visa and Mastercard combined.

Despite its widespread use, Tether has not been immune to controversy. In 2017, Tether and BitFinex, both owned by iFinex Inc, were accused of artificially inflating the price of bitcoin. These accusations were related to the allegation that Tether and BitFinex were issuing new USDt tokens without having the corresponding amount of US dollars to back them up. This would increase the supply of USDt, which in turn was allegedly used to inflate the price of bitcoin artificially.

Tether has consistently denied such allegations. In fact, an independent audit conducted in 2017 found no evidence of price manipulation attempts. Moreover, consider this: if Bitfinex intended to conjure USD seemingly from nowhere to boost bitcoin's value artificially and inflate its own worth, wouldn't it be more straightforward to do so privately and deniably within its own USD internal accounts, making detection more challenging compared to executing such actions on a public ledger like USDt?

However, critics still question whether Tether has enough US dollars to back all the USDt in circulation. To address these concerns and increase transparency, Tether now releases quarterly reserve reports performed by the international accounting firm BDO. These reports provide detailed information about Tether's reserves. While some still have doubts about Tether's reserve practices, the company's efforts to improve transparency have helped to build trust with its users and the broader cryptocurrency community.

That said, in the face of these controversies and questions about its reserves, USDt has managed to maintain price stability since its inception. As a result, it remains the most popular stablecoin in the market, even as many others have emerged and competed for market share. Today, there are numerous stablecoins available, each with its own unique mechanism for maintaining a stable value.

Furthermore, as the stablecoin market has grown, Tether has expanded its reach to keep up with the demand. Initially, Tether only offered USDt on the Bitcoin blockchain using the Omni “metaprotocol,” but as the market grew and on-chain scalability issues became more apparent, it began offering USDt representations on other cryptocurrencies’ blockchains, including Ethereum, Tron, Algorand, and others. Today, there is active research and development to once again add Tether’s stablecoins on top Bitcoin, through RGB and Pear Credit. Tether has also launched new stablecoin products pegged to different fiat currencies like the euro, the yen, and the Chinese yuan.

In conclusion, stablecoins have come a long way since their inception. From the early days of bitUSD and NuBits to the mainstream popularity of Tether products and the emergence of other stablecoins, the stablecoin market has evolved rapidly. While the controversies surrounding Tether have raised concerns about the transparency and accountability of stablecoin issuers, the stablecoin market continues to grow, offering a global and flexible bridge to Bitcoin. However, this convenience comes at the cost of increased centralisation and reliance on trust.