Are stablecoins based on trust?

[tpacavalcante]

Hello guys,

Do you know how exacly the stablecoins track their backed asset's price?

I mean... sure, I know 1 ounce of gold worth $1,841.90 and for that reason I would place a order to sell/buy 1 PAXG for this exacly price. But, the price of this asset is very dynamic in the "real" market and I was wondering if there is an internal mechanism in the protocol that prevents users from offering or demanding a stablecoin for a price very different from it's real market.

If there isn't, then some intraday movement in the real market may not be followed in the stablecoin market. Which is not cool.

Likewise, If there isn't, it means the "mechanism' that guarantees the price of the token at the price of the real asset is the confidence that users have that a token is worth the backed asset. Which implies that if there is any suspicion about the company behind stablecoin or flaws in the protocol or blockchain it can lead to a strong devaluation of the stablecoin.

This hypothesis is exactly what happened at the beginning of the 20th century, during the gold standard, when it was suspected that the Government's money supply was not respecting its backing in precious metals. What ended up generating inflation (devaluation of the currency) among other problems of mistrust.

I know DAI has a different mechanism. My doubt and reflection is more related to the cases of USDT, USDC, PAX, PAXG and others.

Thank you

[NabonitaS]

Here is an article on Tether that mentions the trust factor: https://nowpayments.io/blog/tether-review-what-type-of-tether-to-accept-payments-in-and-why

It says there among other things, "Tether, like any other stablecoin, hopes to keep its value steady and consistent, which has a lot to do with ‘trust.’"

[Bitbtc8]

Out of all the stablecoins we have in crypto space I still feel safe with USDT, they've faced some charges in the past and things are more transparency but the fact that this stable coin is centralized makes many not convenient about the project but for me I would choose this over Decentralized stable coins

[tpacavalcante]

Here is an article on Tether that mentions the trust factor: https://nowpayments.io/blog/tether-review-what-type-of-tether-to-accept-payments-in-and-why

It says there among other things, "Tether, like any other stablecoin, hopes to keep its value steady and consistent, which has a lot to do with ‘trust.’"

It also says:

1- "Stablecoins are cryptocurrencies that are designed to be non-volatile and have a stable price at any given moment".
My question: What make it stable and being "non-volatile'? Our trust that 1 tether = $1 and for that reason our desire to buy and sell only in that value?

2- "In a nutshell, stablecoins operate under a fixed exchange rate system."
My question: What system is that? How it works? What ensure users will buy and sell for the price of the pegged asset? Because we (users) want to, based on the assumption (trust) that 1 tether = $1?

Let suppose there is no sell order of tether in a given time and some user want to buy some tether for whatever reason. In that case, a owner of tether could place the only sell order existent of tether for (let suppose) $1,50 and maybe someone could accept to buy because he/she really want conver their fiat into crypto "stablecoin"?

Is there some "design" or "fixed exchange rate SYSTEM" of the crypto to prevent this kind of thing and insure it will be traded for the pegged price of the asset?

I'm really confuse here... The idea behind stablecoin are great! But realize the mechanism behind it is trust is really annoying.

[bunglor]

some people say that USDT which is stable coin is based on trust some stable coins were based in USD or maybe backup with gold or something but i think most stable coins are not just based on trust.

[covfefe_]

USDC, PAX and the ones from Gemini are regularly audited by third party auditors and they are known to have equal amount of fiat locked as escrow. For those anyone can blindly trust them. USDT too is not as scary as many of the people think as they have a mechanism to regulate the flow and they have gained trust and support from hundreds of exchanges.

[tpacavalcante]

Apparently there is no "design" or "system" that "guarantees" the stablecoin operates at the fixed price of the pegged asset. It looks like they are simply based on the "market system", model of supply and demand + on the confidence that the token can be exchanged for a real asset (fiat dollar or gold, for example).

So, in theory, if there are a lot of people wanting to get rid of the token selling for $ 0.80, the demand will be high because people "know they can" exchange that token for $ 1 and make a profit from it. If the current price is over $ 1, the offer will be high because people "know it is only worth $ 1". Again in theory, the price is not fixed but the market mechanism itself and the trust the token can be exchanged for an asset of that value "guarantees" that there will be only small fluctuations around the value of the pegged asset. Which it will be corrected quickly with people's desire to profit by selling high or buying low.

But again, this is the old gold-standard mechanism used until the 1970s. And so any breach of confidence can make the system collapse.

It is disappointing.

[imstillthebest]

some people say that USDT which is stable coin is based on trust some stable coins were based in USD or maybe backup with gold or something but i think most stable coins are not just based on trust.

who are they , i never heard of other people that say that usdt is based on trust except the op because he came up with this question  .
trust as in trust ? but trust  dont have a value therfor no , stable coins are not based on trust but they are based or backed by a fiat although you need to trust them iif you are investing or converting your cryptos with them so that you will have a confidence  .
 stable coins backed by gold may not be possible because golds value are not stable , only fiat money is known to be verry stable when it comes to value .

[bitmover]

Hello guys,

Do you know how exacly the stablecoins track their backed asset's price?
 

100% trust based.

A stable coin is basically a loan

Bitifenex says "give me 1 usd and I will give you 1 usdt. For each usdt I will pay 1 usd back at anytime"

And a lot of people trust that they will pay back, especially exchanges.

Same with gold or anything else that is "stable"

People wouldn't trust if they know everything about bitfinex or the other companies, imo

[layoutph]

First I though stable coins like USDT are very reliable interms of holding your funds. BUt I heard someone with around $2 million usd was freezed by USDT devs, not sure whats the complete reason. He was only suspected as one of the hackers.

[Ucy]

I think a proper stablecoin would need to be tied to the price of asset it's backed by. The non-backed ones (like those controlled algorithmically) can always have fixed price range that buyers and sellers automatically stick to. I honestly wouldn't trust a stablecoin if it doesn't have strong and transparent mechanism that guarantee stability as long as possible.

 

[Almasani]

Set buy orders that are too low and sell orders that are too high are irrelevant for a stable coin. Because they have to follow real market prices. How can they manage with a high selling price and a low buying price? Suppose 1 USDT is set at a price of $10 USD. This becomes irrelevant to the stable value.

[20kevin20]

The point isn't to manipulate the price of USDT markets so that 1 ETH in USDT is exactly equal to 1 ETH in USD. What stablecoins do is they make sure that 1 USDT = 1 USD at all times instead.

If you take a look over fiat vs stablecoin Bitcoin markets on CMC, you'd notice their prices vary wildly. If a Bitcoin is sold at $20,000 for a USD pair, it could very well be sold at $20,500 for a USDT pair at the same time - but having such wild differences makes it easy for traders to make a profit. Hence, with high liquidity and trading volume you automatically have smaller and smaller differences between fiat and stablecoin Bitcoin pairs.

In the end however, the main idea of this system is making sure that if you have received 20,500 USDT for your Bitcoin, the value of those USDT are constantly equal to 20,500 USD. That is done through a centralized system. Meanwhile, trust is obviously part of the game. Say you had a USDT/USD pair. Although you and everyone else knows that 1 USD = 1 USDT at all times, you decide to sell 1 USDT for $5. Would anyone ever purchase it from you? If they would, then it is likely that nobody else would purchase it from them at a higher price than one buck. It makes no sense to sell or purchase a stablecoin at a value other than $1.00 per coin.

This is why the only way you can sell 10 USD banknotes for 20 USD PayPal balance is when the said buyer is in an emergency. The constant centralized price pegging is there, but it cannot realistically be enforced without our common sense. Makes sense?