Non-custodial just means you own and control the asset by virtue of being the only person with the private key.
A similar analogy is web servers. Most users are fine to run their website on AWS, but some users would like the ability to host their own servers without dependence on a business corporation. The reasons for doing so might be varied, despite the additional burden of maintenance/costs and higher risk of downtime. A system where this option is possible is better than a system where this option is not possible.
A specific financial example of where custody might prove problematic even in a developed country (where your currency, government, and banks is not causing you financial hardship) is escheat laws[1]. You purchase a stock, mostly forget about it, and come back several years to find that the state has taken control of it and sold it to generate revenue for itself. Some users might prefer to have non-custodial ownership over that stock, despite the additional maintenance burden.
There are other features of ERC20 tokens that you cannot easily achieve with fiat; which may be another reason to hold stablecoins.
Obviously if somebody wishes to avoid risk entirely, and they have access to a suitable bank and government, they should stick with a fiat custodial account and not purchase any assets.
If you assume that smart contracts are useful and important, then stablecoins are a necessary part of any smart contract ecosystem. If a smart contract can perform useful operations on tokens, then it makes sense that people might want to perform those operations on tokens which are stable.
I guess my confusion is that I'm coming from Bitcoin and Tether. Bitcoin doesn't have support for smart contracts (except in the form of Bitcoin Script, which is so limited that I'm not counting it). And Tether is far from non-custodial; it's very centralised. Then it's easy to wonder what Tether is for.
> A specific financial example of where custody might prove problematic even in a developed country (where your currency, government, and banks is not causing you financial hardship) is escheat laws.
Doesn't explain Tether, which does have custody. The market cap of Tether is something truly enormous. I just don't know why and what for.
Any explanation of stablecoins will have to explain the use cases and market cap of Tether.
Tether (USDT) is attractive to high-risk traders who are seeking high return and low exchange fees. This doesn't mean it is good or will remain stable indefinitely—I would not be surprised if it follows a similar path as UST. As it is an ERC20 token[1], it can be held and transferred in a non-custodial fashion as with most other crypto tokens, but with the caveat that it is run by a centralized entity and therefore your address could be frozen/blacklisted by their contract. The same is not true of all stablecoins; DAI cannot freeze an address, for example.
It might be hard to realize, but there are dozens or hundreds of stablecoins. Anybody can publish a new stablecoin as the blockchain is permissionless (literally: nobody needs permission to deploy a new ERC20 token). Obviously not all purported "stablecoins" will be safe, stable, or useful; but it also does not mean that every one will carry the same risks as UST and USDT. A government could issue a ERC20 token for example and it would largely be seen as "safe" with the caveat that it is centralized.
A similar analogy is web servers. Most users are fine to run their website on AWS, but some users would like the ability to host their own servers without dependence on a business corporation. The reasons for doing so might be varied, despite the additional burden of maintenance/costs and higher risk of downtime. A system where this option is possible is better than a system where this option is not possible.
A specific financial example of where custody might prove problematic even in a developed country (where your currency, government, and banks is not causing you financial hardship) is escheat laws[1]. You purchase a stock, mostly forget about it, and come back several years to find that the state has taken control of it and sold it to generate revenue for itself. Some users might prefer to have non-custodial ownership over that stock, despite the additional maintenance burden.
There are other features of ERC20 tokens that you cannot easily achieve with fiat; which may be another reason to hold stablecoins.
Obviously if somebody wishes to avoid risk entirely, and they have access to a suitable bank and government, they should stick with a fiat custodial account and not purchase any assets.
[1] https://www.npr.org/2022/05/04/1096726920/escheat-show-class...