Letter #21: Stablecoins - Combining the Crypto and Fiat Standards
In the early days, it was extremely difficult to execute trades between Bitcoin and fiat currencies (e.g., USD, Euro, JPY). Legitimate and trustworthy cryptocurrency exchange companies were in short supply and decentralized exchanges, as enabled by decentralized finance (DeFi), were not yet ubiquitous. Veterans and newbies alike were largely reliant on peer-to-peer trading in order to buy Bitcoin.
Conversions from fiat to Bitcoin and back again also introduced significant complexity for a variety of reasons. First and foremost, banks and other financial institutions were often quick to block any type of transaction between their depositors and cryptocurrency companies. In many cases, they were even required by local governments to refrain from offering any services to companies within the crypto space. And since the U.S. dollar, Euro, and other fiat currencies are almost exclusively physical rather than digital outside of the banking system, converting physical fiat into digital cryptocurrencies on a cryptocurrency exchange was an impossible task.
It would take several years before the cryptocurrency space would devise a way to convert the supposed “stability” offered by fiat currencies from the physical world into the digital world without having to rely on the traditional banking system. In so doing, the financial tool known as “stablecoins” was born.