What are fiat-backed stablecoins?
Stablecoins generally come either as centralized or decentralized.
Fiat-backed stablecoins fall in the centralized category and these two stablecoins are the
best example of fiat-backed stablecoins.
As the name suggests, they are backed by a reserve of fiat currencies in regulated institutions like banks.
Ideally, this type of stablecoins is backed by actual fiat currency such that minted stablecoins can be redeemed for real fiat at a one to one ratio.
The minting and burning processes are tightly controlled to ensure that the stablecoin doesn’t stray away from fiat pegging.
Largest stablecoin in the industry.
In 2014, Tether Holdings Limited introduced the concept of fiat-backed stablecoins with Tether USD. This was the first time any company offered its users a platform to trade a US Dollar-backed Crypto.
By tapping into the best of both worlds, Tether opened up use cases for crypto in payments, and remittances, to name a few.
It wasn’t long till Crypto trading pairs started listing against USDT, therefore, giving the stablecoin a first-mover advantage in the market.
4 years later, Centre, a consortium co-founded by Circle and Coinbase created US Dollar Coin.
USDC solved similar problems to its competitor and on top of that, it wanted to ensure that there is the transparency of 1-to-1 backing.
That is, for every USDC created, $1 of USD is held in reserve, either in the form of U.S. Dollars or other cash alternatives.
This is a big deal for stablecoins as it is a form of assurance for the safety of investors' funds.
We’ll go deeper into this later but in the meantime, let’s compare the two assets head to head starting with volume and market capitalization.
Volume and Market Cap
The trade volume for USDT is a testament to its popularity.
The 24h trade volume of the stablecoin clocks in at almost $46 billion, a higher amount than Bitcoin, and even further ahead of its direct competitor, USDC which has over $3.7 billion in trading volume.
In terms of market cap, USDT’s has risen to over $67 billion compared to USDC's $47 billion making it the third biggest cryptocurrency, behind only Bitcoin and Ethereum. While Tether is still the clear leader in terms of market cap, USDC has been growing considerably faster, especially last year thanks to the push from Defi.
Earlier this year, the total supply of USDC on the Ethereum blockchain even surpassed that of USDT for the first time.
Price Stability
What about price stability?
USDC’s dollar pegging has been solid and tangible slips haven’t been recorded in the past year, even in the face of the UST collapse.
Similarly, USDT’s dollar peg is also tightly maintained and hardly strays away from the $0.99-$1.01 range, however, USDT suffered a momentary de-peg during the Terra-Luna fiasco slipping to as low as $0.95 on May 12, 2022, on some crypto exchanges.
Now, let’s move on to one of the most important aspects of fiat-backed stablecoins, reserves.
Reserves
Tether has had multiple controversies and has been in hot water with several different authorities due to concerns about its reserves.
After its launch, Tether’s website read “Every tether is always backed 1-to-1, by traditional currency held in our reserves.”
However, in 2019, during a court case by the New York Office of the Attorney General, a lawyer representative admitted that the USDT in circulation wasn’t backed by 100 percent USD, but instead, a combination of different liquid assets including cryptocurrencies generally termed as “cash equivalents”.
After the controversy, Tether's website changed to “Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”
After a 22-month inquiry, the New York Attorney General reached a settlement with iFinex, the parent company of Tether accusing the companies of unlawfully hiding losses. iFinex had to pay an $18.5 million fine and is no longer allowed to operate in New York plus it will have to provide quarterly reports on its reserves.
Based on the latest reserves breakdown, just under 80% of its reserves are in cash, cash equivalents, and other short-term deposits and commercial papers, with over 99% of these having a duration of 0-90 days.
USDC is perceived by many as a safer and much more transparent alternative to USDT. Unlike Tether, USDC issuer, Circle has been publishing third-party monthly attestations to confirm that it does possess sufficient capital to back each individual token on a 1:1 basis, since its launch 4 years ago.
Over the past few years, stablecoins have been in the news for controversial reasons, and several attempts have been made to regulate the digital asset.
For instance, custodial financial institutions are establishing rules which stablecoin projects must follow to ensure proper accounting and liquidity for every minted stablecoin. Regulatory attempts have also intensified since the tragic collapse of Terra foundation’s UST stablecoin.
That said, it may take some time before stablecoins become fully regulated as there are many hurdles to overcome.
All in all, while USDC and USDT are the most popular options in the market right now, there’s still a need for increased transparency to better protect investors.
This goes for the whole stablecoin space in general.
In the meantime, remain vigilant and DYOR even when dealing with these ‘less volatile' assets in the industry.
