Stablecoins: Building a Bridge Across the Fiat Flood
Crypto with training wheels. For now.
Bitcoin is volatile. It’s been known to drop fifty percent in a month. Bounce back. Drop again.
That volatility is fine for storage. It’s fine for long-term investment. But it’s terrible for everyday transactions.
You can’t price groceries in Bitcoin if the Bitcoin price changes five percent in an hour. The store
doesn’t know what to charge. The customer doesn’t know what they’re paying.
Stablecoins solve this. They’re cryptocurrencies designed to maintain a stable price, usually pegged to
the US dollar.
1 Stablecoin = $1 USD. Always.
How stablecoins work:
Option 1: Collateralized
You deposit $1 in a bank account. The smart contract issues 1 Stablecoin. The dollar is locked in the
bank. The stablecoin represents a claim on that dollar.
If you burn the stablecoin, the contract returns the dollar.
This works as long as the dollars actually exist in the bank account.
Option 2: Decentralized (Over-collateralized)
You deposit Bitcoin worth $2. The contract issues 1 Stablecoin. If Bitcoin drops in price, the contract
requires you to add more collateral or it liquidates you.
This ensures that the stablecoin is always backed by more collateral than the coin’s face value.
Option 3: Algorithmic
No collateral. The stablecoin maintains its price through a set of algorithms and incentive mechan‐
isms. If the price goes above $1, the algorithm mints more coins. If it goes below, the algorithm burns
coins.
This is the riskiest approach and has failed multiple times. Terra’s Luna collapsed in 2022 for this reason.
Why this matters:
Stablecoins are the bridge between fiat and crypto. You can hold dollars on the blockchain without
trusting a bank.
You can transfer a million dollars in an hour for next to nothing. Try doing that with traditional banks.
It’ll take days and cost hundreds in fees.
You can earn interest on stablecoins in DeFi. Earn 8-10% per year. Try getting that from a savings
account. You’ll get 0.5% if you’re lucky.
For people in countries with collapsing currencies (Venezuela, Argentina, Turkey), stablecoins are lifesaving. Your savings in Venezuelan bolivars become worthless every year. Stablecoins let you hold
dollars without a bank account.
The risks:
Stablecoins are only stable if they’re actually backed. If USDC claims to have a dollar for every coin
issued, but only has 80 cents, the stablecoin is a fraud.
This happens. In 2023, the stablecoin Luna collapsed because it wasn’t actually backed by collateral.
People lost billions.
Governments also hate stablecoins because they threaten banking. If everyone moves their dollars to
stablecoins, banks lose deposits. Without deposits, banks can’t lend money.
So governments are cracking down. The SEC is trying to regulate stablecoins. The EU is banning them.
The Fed is developing their own central bank digital currency (CBDC) to compete.
Stablecoins vs. Bitcoin:
Bitcoin is designed to be unstable (in price). The volatility is a feature, not a bug. It incentivizes people
to hold long-term and not spend.
Stablecoins are designed to be stable. They’re for daily transactions. They’re for storing value in a way
that’s easier to spend.
Bitcoin is the base layer — the store of value. Stablecoins are the payment layer built on top.
Neither replaces the other. They serve different purposes.
The latchkey angle:
The latchkey kid understood the need for stable money. He got paid in dollars. He spent dollars. The
value of a dollar didn’t change day-to-day (this was before massive inflation). He could plan.
Stablecoins provide that stability in the crypto world. You know what you’re holding. You know it’s
worth a dollar. You can make decisions based on that.
Bitcoin is for people who understand that fiat is decaying and want to escape it. Stablecoins are for
people who want the benefits of digital currency without the volatility.
The future:
Central banks are developing their own digital currencies (CBDCs). The Fed is working on “FedCoin.”
The EU is working on a digital euro.
These will be government-controlled stablecoins. Programmable. Traceable. Controllable. They’ll make
stablecoins created by companies look relatively free.
When CBDCs launch, the government will have complete visibility into every transaction. They’ll be
able to expire your money. They’ll be able to prevent you from sending to “unapproved” recipients.
That’s why decentralized stablecoins (backed by crypto collateral) matter. They’re not governmentcontrolled. They’re not programmable by authorities.
By the time CBDCs launch, if you want financial privacy, you’ll need decentralized stablecoins or Bitcoin.