In the age of Libra, have you ever wondered who invented the concept of the stablecoin in the first place? No one knows. Their identity is just as much a mystery as Satoshi Nakamoto’s.
Just kidding, it was William Quigley (and his co-founders).
Way back in the early days of crypto, William and his partners at the time co-founded a coin called Tether, which was designed to solve a number of common problems that plagued altcoin traders. The problems were mainly caused by the extremely complicated and time-consuming processes involved when trading altcoins on exchanges that had no banking systems. All that waste of time and money led William and the other co-founders to develop and issue a token that was backed by a U.S. dollar.
Tether also inspired the creation of dozens of other stablecoins in existence today like TrueUSD, USDCoin, Gemini Dollar, and Monarch. “Escaping volatility in crypto is what it will take to bring merchants into the space,” explained Robert Beadles (aka CryptoBeadles) and President of Monarch Pay. “They have tight budgets and need to know their costs; volatility is impossible to factor in. What will bring merchants into the space is a stablecoin that offers speed, security, stability and ease of exiting into the traditional banking system. Currently this does not exist but soon will. That’s what we’re doing with Monarch Pay, and most those boxes I just spoke of are now checked.”
Watch the full episode of WAX ON to get the full origin story of Tether, and subscribe to the WAX YouTube channel for more episodes of WAX ON with William Quigley each week.
Today I'd like to share with you the origin story of Tether. You might know Tether. Tether was the world's first stablecoin, the first coin that was backed by an asset, in this case, a dollar.
Anyway, let me tell you a little bit about how stablecoins got invented. So, the story starts about six years ago. Now, at the time, the crypto space was in many ways a lot different than it is today, in some ways similar. Where it was way different in that there were virtually no exchanges and the few exchanges that existed, almost all of those, what we called altcoin exchanges (anything that wasn't Bitcoin was an altcoin) altcoin exchanges had no banking.
So what you would do is you would go to one of the few exchanges where you can actually send money, buy Bitcoin. Then you would transfer that Bitcoin to the alt exchange and use the Bitcoin on the alt exchange to buy all these other tokens, right? All good; all good except remember, it's very volatile. All of the cryptos are still volatile but they were just as volatile then. And every once in a while, in my case three times a day, I wanted to escape the volatility. But how do you escape volatility in crypto vis-a-vis the dollar or you sell your crypto and your shift it to cash? But of course, the exchanges have no banks so what do you do?
You take your crypto on the alt exchange, you convert it into Bitcoin, send the Bitcoin back to one of the few exchanges that actually had banking, sell your Bitcoin there, have them wire transfer you the money. The in and out of that whole process took a week. Because what would happen is you would get your wire and then you'd be like but now I want to be back in the market. So send the wire back to the original exchange, get it converted into Bitcoin, and transfer it over to the alt exchange. This was how we lived.
Well, my partners and I started to think about, wouldn't it be great if there was a token that behaved like a dollar? So you could just actually mimic a dollar and you could transfer into that token? Well, the only way we could think about doing it was to actually issue a token that was backed by a dollar. Simple conceptual concept, right? So we're like, “Hey, we can do this. Oh, but what blockchain should be used?" Well, as it happened, we had just finished working with some people on something called Mastercoin.
Mastercoin by the way, was the first blockchain to incorporate an intelligent layer, what we now all call smart contracts. Mastercoin was faster, cheaper to use and Bitcoin, we're like, alright, let's issue Mastercoins that will back this new token that will be collateralized by a dollar. So we're thinking to ourselves, okay, we've got the concept; we have the coin, what are we missing? Well, we need a bank account in order to put the dollars into. Now, of course, banks love deposits, particularly deposits that probably aren't going to get redeemed very often, but banks are also wary of crypto.
So we had to find a bank that was willing to do this, what at the time was really a test, with us. So here we are looking for a bank that's going to be crypto-friendly and as a former bank auditor, I can tell you when you say to a bank, "typically this money we're putting in can really be part of your core deposits because it's going to sit there for a long, long time," usually they would love it, but because they were wary of crypto, they weren't willing to partner with us. Eventually, however, we found someone who was. We found a partner who had access to banking and also ran a crypto exchange.
They totally got the concept. So we got the concept down, we got the blockchain, we got banking access, we even have an exchange partner to test this whole thing out.
So that was four years ago and what's happened since? Well that token, Tether, now trades over 4 trillion dollars annually. And something I always thought was really neat - this was the first time I experienced using blockchain technology to solve a blockchain-induced problem so that was pretty cool.
Let me mention a couple of other surprises from my experience creating Tether.
The first really surprised me, which was that it took a lot to explain the concept to people. Which surprised me because I thought, "wait a minute, tokenizing the US dollar? If you're a crypto exchange trader, how hard is this going to be to understand?" But the typical reaction was "you're going to tokenize the dollar, but the dollar is already digitized. It already can move at the speed of light. Why would you even need to tokenize it?" Well, we're like, well, wait a minute you're not familiar with the pain points of trading cryptos and of course we would go into that and sometimes they would get it and sometimes they'd still be like we don't really understand.
Just like today, for all you crypto people, when somebody says, "what do I need Bitcoin for? I've got a PayPal account and I always use it to buy something on Amazon and I'm a U.S. citizen. What do I need it for?" Answer, you probably don't need it, but there's like 7 billion other people in the world who really could use something like that.
Anyway, the lesson from finding it very hard to explain to people initially what the value was of this Tether concept is something I've experienced many times over my career and that is that successful innovation often comes from having a deep insight about a real-world problem, a problem that's really not exposed to outsiders. Something that if an outsider was looking at it, they would perceive it as an inconvenience or maybe not even a problem at all but it's a huge hassle if you're in that industry, if you're an insider.
So note to entrepreneurs - you will be handsomely rewarded when you identify and remove friction within a market that others don't see but you do.
The second surprise I had from working on Tether was the price that Tether traded at. Now, of course, it's backed by $1, but Tether also had the value of tokenization of that dollar. So I thought that Tether should trade at $1 plus the value people got out of it from it being tokenized. Think of like if Litecoin also came with a dollar attached, you'd think, well, it's the price of Litecoin plus a buck. Since each Tether was backed by a dollar but not bolted to the dollar in terms of evaluation, it's like we didn't stipulate anywhere that it was only worth a dollar. I thought Tether would be worth a dollar plus something else, but in fact, no. People valued it at a dollar and only a dollar. It says a lot about human nature and it actually shaped how I think now about security tokens and how they'll be valued.
When we collateralize a token, we tend to remove all the other qualities that that token has other than the value of the collateral and anyone building these sorts of tokens in the future should be thinking about that. If you liked what you heard today, please subscribe.
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