The Functions of Money
Money serves four core purposes in an economy:
- Store of Value: Preserves purchasing power over time
- Unit of Account: Provides a common measurement for pricing goods/services
- Medium of Exchange: Facilitates transactions between parties
- Standard of Deferred Payment: Enables credit/lending systems
Why Bitcoin Hasn't Become Mainstream Cash
While Satoshi Nakamoto envisioned Bitcoin as digital cash, several limitations prevent it from functioning as daily payment currency:
- High Transaction Fees: Network congestion leads to expensive transfers (solved partially by Lightning Network)
- Slow Confirmations: Requires ~6 blocks (~1 hour) for secure transaction validation
- Low Throughput: Limited by block size/speed (small TPS capacity)
- Price Volatility: Rapid value fluctuations make pricing goods/services impractical
Major Stablecoins Compared
USDT (Tether)
👉 Discover how USDT dominates stablecoin markets
Key Characteristics:
- Initially launched on Bitcoin (Omni Layer), later expanded to ERC-20
- Centralized issuance by Tether Limited
- Requires KYC verification for fiat conversions
Business Model:
- Users deposit USD after KYC
- Tether mints equivalent USDT
- Users utilize USDT for DeFi/trading
- Redemptions trigger USDT burn
- Fiat returned to user (minus 1% fee)
Revenue Streams:
- Transaction fees
- Investment returns (commercial papers)
- Lending activities
Critical Concerns:
- Lack of transparency in reserve composition
- Centralized control (blacklisting capability)
- Commercial paper risk during market downturns
USDC (USD Coin)
Security Advantages:
- Monthly third-party audits published publicly
- Regulatory compliance focus (faster/safer positioning)
- Backed 1:1 by cash/short-duration treasuries
Use Cases:
- Preferred by institutional DeFi participants
- Common in regulated financial applications
BUSD (Binance USD)
Key Facts:
- Issued by Paxos (NYDFS-regulated)
- Binance-branded but independently managed
- Full dollar backing (redeemable 1:1)
- Ethereum-only (ERC-20 standard)
- Discontinued in 2023 due to regulatory pressure
Decentralized Alternatives
Dai (MakerDAO Ecosystem)
👉 Learn about decentralized finance with Dai
Core Mechanics:
- Crypto-collateralized (ETH, USDC, etc.)
- Governance via MKR token holders
- Dynamic interest rates (DSR/Stability Fee)
Vault Creation Process:
- User deposits collateral (min. 150% ratio)
- Generates Dai against collateral value
- Repays loan + interest to reclaim assets
Liquidation Scenario Example:
- ETH price drops below collateral threshold
- Collateral auctioned at 3% discount (increasing 0.5% increments)
- Keeper bots trigger liquidations
- Penalty fees fund Maker Buffer pool
Supply Control Mechanisms:
- Debt Auction: MKR minted to cover shortfalls
- Surplus Auction: Excess DAI buys back/burns MKR
- Rate Adjustments: DSR/Stability Fees balance circulation
Governance Powers (MKR Holders):
- Add new collateral types
- Modify risk parameters
- Select oracle providers
- Emergency protocol shutdown
AMPL (Algorithmic Stablecoin)
Key Differentiators:
- Supply adjusts daily based on price
- No collateral backing (pure algorithmic)
- Rebase mechanism expands/contracts wallets
- High volatility during adoption phases
Stablecoin FAQs
Q: Which stablecoin is safest for large holdings?
A: USDC offers superior transparency with regular attestations, while Dai provides decentralized alternatives without single-point failure risks.
Q: How does Dai maintain its peg during market crashes?
A: Through automated liquidation auctions, debt auctions with MKR issuance, and dynamic interest rates that incentivize supply adjustments.
Q: Why choose algorithmic stablecoins like AMPL?
A: They offer censorship resistance and scalability, but require sophisticated mechanisms to maintain pegs during volatility.
Q: What happens if Tether's reserves are insufficient?
A: Potential de-pegging could occur, though USDT has historically maintained liquidity through market-making activities.
Q: Can stablecoins replace traditional banking?
A: They enable borderless transactions and programmable money, but lack deposit insurance and regulated lender-of-last-resort protections.