Crypto

What is BitUSD? Everything you need to know about the first stablecoin ever created

August 12, 2019

Launched in 2014, BitUSD was the first stablecoin ever created. It is a crypto-backed stablecoin issued on the BitShares blockchain. BitUSD itself functions as collateral for a range of other stablecoins pegged to local currencies such as stable.PHP, the Philippine peso stablecoin.

Ever since the announcement of Libra, there’s been a lot of talk about stablecoins. Crypto is breaking out of its shell and the world is paying attention. And it’s not just corporations like Facebook and Walmart that intend to issue their own stablecoins, the option is also being considered by commercial and even central banks. For example, in the Philippines, UnionBank recently announced it will be issuing its own stablecoin.

It’s interesting to see these developments, but it’s also good to know that stablecoins are nothing new. Better yet, there are many different types. BitUSD is a stablecoin, just like Libra and Tether, but it is completely different in pretty much every way, and here’s why. 


Stablecoins: 2 ways to maintain the peg 

A stablecoin is different from ordinary cryptocurrencies like Bitcoin. Unlike the latter, when it comes to price discovery stablecoins are not directly subject to the forces of supply and demand. They are less volatile because they are pegged to the value of a low-volatility asset.

Actually, a stablecoin can be pegged to anything of value. It can be tied to the value of the US dollar, gold, oil, stocks, and so forth. There are many ways to achieve this, but basically, we can distinguish between fiat backed, crypto backed, asset backed, and algorithmically stabilised. Here we only want to discuss the first two.  


Fiat backed 

One way, and this is the most common method, is that you deposit an X amount of US dollar into the issuer’s reserves, and in exchange you get USD pegged stablecoins equal to the same amount of your deposit.

The issuer may keep your US dollars in a vault, lend it to other people at a high-interest rate, invest in the stock market, trade against other currencies, et cetera. Basically, and very similar to commercial banks, the issuer will most likely try and make some money with your deposit, and at the same time, if ever someone wants to withdraw cash in exchange for stablecoins, the issuer must be able to deliver. 

The difference between a commercial bank, and a stablecoin issuer such as Tether, is that if commercial banks don’t have enough cash in their reserves, they can rely on central banks; or if they get robbed or go bankrupt, usually customer deposits are insured up to a certain amount. But this is not the case with issuers of fiat backed stablecoins - at least not at the moment. 

In other words, stablecoin business models such as these expose consumers to quite a lot of risk. 


Crypto backed 

BitUSD, but also other ‘BitAssets’ such as BitEUR, BitCNY, BitJPY, or even BitGold, are set up differently as they are created on the BitShares blockchain.

First of all, there is no central issuer that you’ll need to trust with your cash. In fact, BitUSD is not backed up by cash reserves at all. Instead, it is backed up by BitShares’ core token BTS, and locked away in a smart contract on the blockchain.

This means that behind every BitUSD, there is an X amount of BTS that cannot be touched, traded, moved or spent. This collateral is only released again when the BitUSD is paid back to the network. 

To ensure that 1 BitUSD always equals 1 USD, the amount of BTS used as collateral should be at least 2x the value of 1 USD. 

This makes it sound very complicated, but just think of it like this: for every BitUSD, there is more than 2 USD worth of BTS locked away. If the value of BTS goes down - unless there are extreme market conditions - the collateral will still be enough. 

The most important thing to remember here is that fiat backed stablecoins pose quite some risks to consumers, while crypto backed stablecoins are built to guarantee liquidation. Furthermore, as reserves are held on the blockchain BitAssets are publicly auditable. 

 

BitUSD in action

Once you’ve obtained BitUSD you have effectively entered the crypto market with fiat. Now, you can trade against other BitAssets - for example, you could buy into BitGold if you’re worried about the economy and believe the price of gold will rise.

Another possibility is that if you live in a country with a vulnerable currency, you could purchase Bitcoin or another stablecoin and move your funds into BitUSD as a way to preserve your wealth during recession - depending on your view on the market, of course. 

We have recently launched stable.PHP, a stablecoin pegged to the Philippine peso and backed by BitUSD. The PHP stablecoin has practical benefits as it connects cash-based markets in the Philippines to the world of crypto. In partnership with Okra Solar, the coin is also used to pay for solar electricity bills in Palawan straight from our mobile app

For crypto traders, this stablecoin and others pegged to exotic currencies may be of interest as currencies such as the Philippine Peso usually depreciate against the USD in the long term, which means that shorting stable.PHP can be profitable. 

It’s important to remember that the US dollar remains the most liquid currency on the planet across a wide range of currency pairs. 

BitUSD enables traders to capitalise on this liquidity:

  • consumers can move from weaker currencies into BitUSD without having to pay expensive foreign exchange rates; 
  • traders can participate in a tokenised forex market, without having to go through brokers;
  • holding BitUSD provides easy access to the wider crypto market.

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