Stablecoins have recently attracted the attention of many policymakers due to their rapid growth in use and the potential for creating financial risks. They are a part of the larger world of cryptocurrency, which also includes non-collateralized cryptocurrencies.
The purpose of a stablecoin
The purpose of stablecoins, like USDT and Theter, is to address the strong price fluctuations of cryptocurrencies that do not have real financial support. Due to their low volatility, they are suitable for many processes, but events in May 2020 showed that they may not be as reliable as expected. Stablecoins are directly linked to traditional financial institutions through their reserve assets, which is why policymakers have begun to pay attention to them.
- Stablecoins are digital assets that are pegged to the value of an external asset, usually a fiat currency such as the US dollar.
- The most secure stablecoins are issued by companies that act as a central authority and ensure that each token is backed by actual assets from the real world.
- The two main issuers of these tokens are Tether and Circle, which issue USDT and USDC, respectively.
They are designed to provide traders with a more stable and secure form of trading. They are suitable for traders who want to trade with more certainty, as well as traders who want to protect their positions from market indecision.
- Different types of stablecoins
- 1. Fiat-backed stablecoins:
These are cryptocurrency tokens that are backed by fiat currencies such as the US dollar, euro, or yen. These tokens are designed to maintain a stable value and are usually pegged to the value of the underlying fiat currency. Examples include Tether (USDT), TrueUSD (TUSD), and USD Coin (USDC).
- 2. Cryptocurrency-backed stablecoins:
These are cryptocurrency tokens that are backed by other cryptocurrencies such as Bitcoin or Ethereum. The value of the token is maintained by the underlying collateral, and the tokens are designed to remain stable in relation to the value of the collateral. Examples include Maker (MKR) and Dai (DAI).
- 3. Algorithmic stablecoins:
These are cryptocurrency tokens that are not backed by a specific asset but are maintained by algorithms designed to maintain a certain level of price. Examples include BASIS and Carbon CRBN.
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Comparison of stablecoins
Photo: USDT compared to USDC
When it comes to USDC and USDT, both of which are pegged to the value of the US dollar and available on several blockchain networks, it is difficult to say which is better. So each stablecoin has its own advantages and disadvantages. To answer this question, it is necessary to understand the inner workings of these two stablecoins and how they differ from each other.
Theoretically, USDC and Tether are the same – both act as substitutes for the US dollar on a certain blockchain chain. In terms of market capitalization, these two tokens differ significantly. In addition, these assets cannot be deposited into a bank account and companies generally do not accept them, which means they are not a complete substitute for the US dollar. Despite these minor differences, stablecoins allow the use of the dollar in the crypto ecosystem without the limitations of traditional currency. However, there are major practical differences between the two, as USDC works exactly as expected while this cannot be said for Tether.
Stablecoin USDC
The Circle and Coinbase company established the Centre consortium, which has the power to create or burn the USDC coin. This is similar to the Federal Reserve’s control over the US dollar. The main difference between USDC and the US dollar is that Circle has complete control over the supply of USDC.
This is of course a drawback, as they can change the market capitalization or supply of stablecoins and cancel or delete tokens at any time. This challenges the purpose of cryptocurrency, as it does not protect you from the volatility associated with decentralized coins.
- Market share
USDC is ranked 2nd in terms of market capitalization among stablecoins and 4th in terms of total cryptocurrency market capitalization with a total market capitalization of $44 billion and an average 24-hour trading volume of $1.2 billion. While it has grown since last year, when its market capitalization was $14.4 billion, it still lags far behind USDT in terms of trading volume.
- Security
USDC is considered one of the most reliable stablecoins due to its issuer and support by secure reserve assets such as cash and short-term US government bonds. Circle issues monthly statements of reserve status and is an officially licensed money transmitter in 46 US states.
Through its proof of low volatility, it has been very successful over the years, fluctuating only between $1.0015 and $0.998 in the past year.
Stablecoin Tether USDT
Tether has been criticized in the past for a lack of transparency and accountability in the issuance of their coin. This was exacerbated when it was revealed that the exchange Bitfinex was threatened by a hack and Tether had to lend them half a billion dollars to recover. In 2017, hackers also breached Tether’s reserves, and instead of the company taking responsibility, they initiated a “hard-fork” emergency that triggered an investigation by the New York State Attorney General into their operations. When asked to explain why their tokens were not supported by dollars and why they were lending their reserves, the company instead chose to oppose the Attorney General and thereby shirked all responsibility.
The Tether legal proceedings ended with a relatively minimal fine of $18.5 million, but this was only the beginning of their legal troubles. A key discovery during the review of reserves was that only about 75% of USDT was supported by fiat currency. This inconsistency in their statements has now resulted in a $41 million penalty from the US Commodity Futures Trading Commission (CFTC).
- Market share
USDT has a total market capitalization of $66.2 billion and a 24-hour trading volume of $28.9 billion in May 2022, making it the largest stablecoin and the third largest cryptocurrency by market capitalization. Compared to this time last year, when its market capitalization was $80 billion, USDT has experienced significant growth. It has a significant advantage over USDC in terms of trading volume.
- Security
Many people believe that USDC is a safer currency than USDT, due to the legal issues Tether faces and the uncertainty of USDT’s reserve assets. In contrast, USDC is backed by cash and government bonds and is subject to regular audits to ensure this. USDT is supported by “traditional currency, government bonds, and loans Tether has given to third parties,” which has raised many questions about their liquidity in the event of a rapid collapse.
Tether’s stable dollar has already proven itself to be far from stable to users. This is demonstrated by the fact that in May of this year, it experienced a flash crash, which looked like it was going to lose all support. This happened during a drop in the overall crypto market, when Bitcoin fell from $30,000 to $25,500 in just one day. In this event, traders realized that truly reliable stable crypto currency needs better mechanisms, and companies that are able to withstand such rapid drops and maintain the full meaning of their currency – stability.
Photo: Tether or USDT stable coin crash.
Tether’s high value is still justified by its high usage, as practically any crypto currency can be immediately exchanged for Tether, which has an advantage over USDC, which is not possible to exchange for many currencies with a smaller market capitalization.
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Consequences of the FTX exchange crash
USDT’s market capitalization significantly decreased after the crash of the FTX exchange a few weeks ago, by almost $4 billion. This is believed to be linked to Tether’s current breakout from the $1 USD, which fell to 96 cents on November 10 due to the freezing of $46 million worth of USDT tokens related to FTX. Interestingly, USDC’s market capitalization increased by approximately $2 billion following the FTX incident.
Photo: Transfer of value from USDT to USDC following FTX collapse
The company Circle has established a trustworthy presence in the crypto world, while Tether is considered a symbol of what can go wrong with unregulated centralization. It is known that they are not reliable when it comes to truth, especially regarding the support of their token USDT. It has been found that only 2.9% of Tether is actually supported by USD, with the majority being supported by loans. These data were revealed in the need to prove to governments and regulators that USDT is fully supported. The exact details of their support are unknown due to a lack of transparency and it is therefore also not clear whether USDT is fully supported by fixed currencies.
Tether is one of the most frequently used stable coins, but due to its connection to exchanges and lack of transparency, it is a less desirable option compared to USDC. USDC has the same advantages as Tether, but none of the negative associations. Although USDT still dominates in trading volume, there are increasingly more opinions that USDC is the better choice, which may change the balance of power on the crypto market in the near future.
Therefore, decentralized currencies are at the forefront of the modern financial revolution, which will reduce risk, increase efficiency, and change the way we do business. Stable coins are still a centralized cryptocurrency tied to the dollar, making them a practical option for those who want greater stability.
- In just one week, we witnessed the collapse of 3 banks that operated in the field of crypto - Silvergate, Silicon Valley Bank (SVB) and Signature.
The collapse of Valley Bank (SVB) had a major impact on the value of the USDC stablecoin, which was issued by Circle (SVB’s client). The USDC therefore temporarily lost its stability tied to the US dollar. The price managed to correct in a few days, leading to much talk about the lack of transparency and potential systemic risk as the coins maintain their peg to the US dollar.
This event is a positive call for increased regulation in the field of stablecoins, where regular reporting of reserve amounts and fiat backing is required. Some believe that precisely this opacity of USDC reserves contributed to the uncertainty of users and the consequent instability of the market, i.e. the short-term collapse of the USDC coin, which should always remain 1:1 in ramzer with the US dollar.
Buying cryptocurrency. Buy cheap, sell high. Whoever understands this, achieves everything. We are now entering a period when very favorable purchases of cryptocurrencies will be possible.
- Which cryptocurrencies to buy this year?
- Top 10 crypto projects with the possibility of 100x growth.
- 5 common ways people lose their investments.
All this and more will be discussed in the webinar.
Enter your name and email address now to participate for free.
