From right place, wrong time, to right place, right time

The following is a guest post from Vincent Chok, CEO of First Digital Group.

On 21st July 2014, we witnessed the launch of the world’s first stablecoin, BitUSD. It was a powerful new concept to enter the market, offering the promise of a stable digital currency that could facilitate transactions without the volatility associated with other cryptocurrencies. Yet four years later, BitUSD lost its one-to-one parity with the US dollar and has been unable to recover since. BitUSD was not alone. The early years were mired by numerous failures as the structures, infrastructure and oversight needed to support stablecoins were not yet mature.

Today, the landscape has changed significantly with robust projects and, not least, with highly anticipated stablecoin regulation in Hong Kong. As stablecoins celebrates their 10th anniversary, it is a time to reflect on its journey thus far and why the environment now paves the way to a successful future, demonstrating that stablecoins are now in the right place, at the right time. 

Examining Previous Failures

Ten years ago, the idea of stablecoins was new and exciting, at a time when the world was still reeling from the effects of the global financial crisis. They were seen as a bridge between the volatile world of cryptocurrencies and the stability of traditional fiat currencies. There was also growing recognition that Web3-enabled digital payment rails could also increase the appeal and accessibility of stablecoins to the underbanked.

However, many early projects failed primarily due to poorly thought-out mechanisms, the lack of robust infrastructure and regulatory oversight. In BitUSD’s case, detailed analysis by BitMEX Research found the stablecoin was collateralised with an obscure, volatile, itself-unbacked asset, BitShares. In the event of a fall in the price of BitShares, a single BitUSD could be used to purchase more BitShares and thereby encourage mass arbitrage similar to traders of traditional asset classes. However, the opposite was not guaranteed, thus creating a structural weakness.

Another notable example is TerraUSD (UST), which maintained its price peg through an arbitrage mechanism involving its sister token, LUNA. While innovative, this mechanism had several flaws.

During normal conditions, the redemption fee was 0.5%, but during the collapse, fees skyrocketed to 60%, making it unprofitable for arbitrageurs to restore the peg. Inaccuracies in the Luna Price Oracle contributed to instability, with…