tl;dr Summary: Stablecoins have never been more in the spotlight. TerraUSD turned out not so ‘stable’ after all, and now US regulators have the rest of the stablecoins well and truly in their crosshairs. This article examines the top five stablecoins by market capitalisation, to enable readers to make educated decisions when choosing stablecoins.
In the wake of the TerraUSD debacle, stablecoins are once again in the spotlight for investors and regulators alike. A stablecoin is a cryptocurrency token with a value pegged to a conventional asset, most commonly the US Dollar ($USD). There are currently approaching 100 stablecoins listed on CoinMarketCap, each coming with its own unique features and risk profile. This article examines the top five stablecoins by market cap, to hopefully enable you to make your own decisions about which coin is right for you.
Stablecoins provide various utilities within the crypto market. As the name suggests, a key role is to provide a point of stability to trade cryptocurrencies, which are highly volatile by nature. This volatility makes the process of directly trading two cryptocurrencies incredibly challenging. Most traders would prefer to exchange 1 ether for 2000 dollar-pegged stablecoins, rather than a constantly changing fraction of a bitcoin.
In the same vein, stablecoins provide a simple way to pay for traditional goods and services in crypto, without having to cash out of the market or execute complex mathematics to purchase the weekly shop. Stablecoins do not require a bank account to hold, can be securely transferred around the globe in a matter of seconds, and can earn many multiples of the interest rates paid in ‘traditional’ finance. All of these factors have combined to create significant retail demand for stablecoins, demonstrated by the huge market caps seen below.
1. Tether ($USDT)
Market Cap: $73.2 billion
Tether ($USDT) is cryptocurrency’s largest stablecoin, issued by the Hong-Kong based company Tether Limited. The stablecoin is eclipsed by only bitcoin ($BTC) and ether ($ETH) in terms of cryptocurrency market cap. $USDT was initially created on the Omni protocol, a Bitcoin layer two scaling solution, but now exists natively on ten blockchains. Tether is supposedly a fiat-backed stablecoin, i.e. the one-dollar peg is maintained by physical reserves of US dollars. In the initial Tether whitepaper, it was claimed that USDT could only be issued when customers deposit fiat dollars to Tether, thus ensuring each USDT is physically backed by one US dollar. This claim has been highly controversial, with Tether consistently refusing to publicly disclose their accounts, and facing repeated legal action with claims that the company does not have enough cash reserves to back up its 1:1 peg.
Tether finally released a breakdown of reserve holdings in May 2021, however this has done little to soothe intense speculation surrounding the company. Tether’s 2022 Q1 assurance report was released this week, with independent accountants MHA Cayman attesting that 86% of Tether’s $82 billion on 31st March was held in cash and ‘cash equivalents’ (a term that encompasses both US government bonds and commercial paper). The remainder of the reserve is held in a range of assets, including cryptocurrencies. The security of Tether’s commercial paper has been the latest source of controversy, with the company recently forced to deny they hold any debt belonging to troubled Chinese property giant Evergrande. It seems Tether are aware of this issue, and have consistently decreased the amount of commercial paper held since their first assurance report one year ago.
Despite the company taking clear steps to increase transparency, concerns around $USDT’s backing raised their head once more following the TerraUSD debacle. This can be clearly seen when looking at Tether’s market cap, which has shed over $10 billion since March 12. The intense selling pressure seen was enough to cause a slight de-peg to a low of $0.94 on the same day, however the return to peg was swift, with $USDT currently trading at $0.998. It is important to note that Tether has been processing token redemptions natively via tether.to for 1 USD throughout the crisis. Some have even taken solace in the fact that the company has been able to quickly redeem over $10 billion worth of tokens without significant liquidity issues or loss of peg.
2. USD Coin ($USDC)
Market Cap: $53.1 billion
USD Coin ($USDC) was created in a joint venture between global payments company Circle and cryptocurrency exchange Coinbase. The coin was first issued in September 2018. $USDC was originally designed as an ERC-20 token, but is now native to eight blockchains. With both parent companies having roots in the United States, USDC is subject to far greater levels of regulation than Tether, and addresses many of the transparency issues associated with $USDT. Accounting firm Grant Thornton has released an independent audit of the company’s holdings monthly since inception. The latest report attests to $51 billion of cash and short-dated US treasury bonds, all held in US regulated financial institutions.
The transparency and perceived regulatory compliance of USD Coin has led to $USDC capturing an increasingly large share of the stablecoin market cap since 2018. In stark contrast to $USDT, the market cap of $USDC sharply rose following the TerraUSD de-peg, portraying the general market impression that USD Coin is an inherently more trusted asset to hold.
3. Binance BUSD ($BUSD)
Market Cap: $18.5 billion.
Binance USD ($BUSD) was created in 2019 by the world’s biggest cryptocurrency exchange, Binance, in conjunction with regulated blockchain infrastructure platform Paxos. $BUSD is available as both a BEP-2 and ERC-20 token, and thus is usable across the Ethereum and Binance networks. Much like USD Coin, $BUSD has an emphasis on transparency and regulatory compliance. Monthly attestation reports are provided by audit firm Withum, and the coin has received New York State Department of Financial Services (NYDFS) regulatory approval. $BUSD’s market cap also rose sharply following the TerraUSD de-peg, suggesting a high degree of consumer confidence.
4. Dai ($DAI)
Market Cap: $6.5 billion.
Dai ($DAI) is a decentralised stablecoin, based on the Ethereum blockchain. Dai was launched in 2017, and is governed by the decentralised autonomous organization MakerDAO. MakerDAO describes dai as “the world’s first unbiased currency,” providing the advantages of digital money “to any individual or business.” Unlike the top three stablecoins, dai is backed by cryptocurrency rather than traditional fiat currency. Dai is designed to overcome the key issue of centralisation that is found in all of the ‘Fiat-backed’ stablecoins.
Tether, USD Coin and Binance USD are all operated by a single, centralized entity. That entity can blacklist and freeze wallets at any time, for any reason. Proponents of dai argue that this goes against some of the core values of crypto, including the ability to have control of one’s own money without fear of interference from a third party. Considering some of the questionable motives used recently to seize control of digital assets, the advantages of having a decentralised stablecoin that cannot be altered by a single third-party are clear.
$DAI can be minted when users deposit collateral, in the form of cryptocurrency, to ‘vaults’ on the maker protocol. It is ‘over-collateralized,’ meaning users have to deposit over 1 USD worth of approved collateral in order to mint dai. In the case of falling cryptocurrency prices, it is up to the individuals to ensure that their dai remains over-collateralized, and if the value of the collateral falls significantly, there is a risk of vault liquidation. This protocol ensures that each dai is always backed by >1 USD worth of assets.
The method by which dai stays ‘pegged’ to the value of one dollar is complex, but in its simplest form the peg is maintained by automatic variation of borrowing and saving rates for dai, to alter supply and demand drivers for the coin. The peg has stayed remarkably close to 1 dollar throughout recent market turbulence. Dai is fundamental to Ethereum’s decentralised finance, and held close to heart by many cryptocurrency purists.
5. TerraUSD ($UST)
Market Cap: $731 Million
Current Price: $0.06*
Algorithmic stablecoins have been described as the ‘holy grail’ for decentralised stablecoins, theoretically requiring zero third-party oversight to maintain stability. When sitting down to write this article, TerraUSD ($UST) was the fifth largest stablecoin by market cap. Just days prior it had been the third largest, with a market cap over $18 billion. $UST’s fall from grace has been ugly, dubbed ‘The Lehmann Brothers’ moment for cryptocurrency.
As a pure algorithmic stablecoin, $UST had no fiat or crypto backing, with the peg instead maintained by a ‘mint and burn’ mechanism involving Terra’s native cryptocurrency, $LUNA. This mechanism failed, and the ‘stablecoin’ started to depeg on May 10th, falling as low as 6 cents since. The obliteration in price of Terra’s native $LUNA token has been even more shocking, with a fall from over $90 to mere fractions of a cent. Anyone overexposed to the Terra ecosystem has been devastated. The fallout is still developing, but some people in crypto say it may be best to avoid algorithmic stablecoins for now…
Conclusion
Each stablecoin comes with its own unique set of risks and benefits. It seems only a matter of time before the US government steps in to enforce regulation, adding an extra element of risk that must be considered. For fiat-backed coins, $USDT has enjoyed significant first-mover advantage in the space, but it seems the transparency and regulatory compliance of $USDC and $BUSD now make them favorable amongst investors. Crypto ‘purists’ will continue to advocate for a decentralised stablecoin, of which $DAI is the clear favorite at the moment. Terra’s impressive fall from grace could represent the end of pure algorithmic stablecoins, however as always there are several new projects seeking to provide a new (and hopefully improved!) algorithmic alternative.
*At the time of (starting) writing…
