Stablecoin Comparison: USDT, USDC, and UST

This article summarizes what stablecoins are and conducts an in depth comparison of the three most popular stablecoins: Tether(USDT), USD Coin(USDC), and TerraUSD(UST).

Stablecoin Comparison: USDT,  USDC, and UST


Some of the most popular cryptocurrencies are subject to high market volatility, and are often considered high-risk investments. Take Bitcoin as an example; it was worth $30,000 in July 2021, but since then it has more than doubled in value. And after it briefly surpassed $65,000 in November, it plummeted back to square one. Bitcoin's instability may be a windfall for profit-seeking speculators, but individuals trapped in its price swings want a fast and easy exit into something more stable – hence the creation of stablecoins.

What Are Stablecoins?

Stablecoins are the response to the earliest crypto investors' requests for a crypto-equivalent to fiat currencies for example, dollars or euros. It had to be something that could keep its worth over time without instability and enable them to simply transfer it. For example, a service that allows Bitcoin investors to immediately transform their Bitcoin winnings into a dollar-like worth and then invest or remove that amount to their bank account. As a result, stablecoins were created to overcome these difficulties.

Why Do Stablecoins Appeal to Crypto Investors and Traders?

The introduction of stablecoins was beneficial to trading, particularly because cryptocurrency trades around the clock — 24 hours a day, seven days a week — in contrast to stock markets. Consequently, investors could cash out and sleep well, without fretting about how their crypto investments had changed overnight. Stablecoins made it easy to move money in, out, and between crypto exchanges without having to wait for time-consuming banking processes.

They also make it simple for investors to treat a portion of their crypto portfolio like currency, allowing them to buy any coin at any time without relying on their banks' servers, which have since been notorious to go down every once in a while due to maintenance.

Many sceptics have even ascribed the expansion of crypto trading since 2014, as well as growing coin values, to the convenience with which stablecoins attract greater involvement in crypto markets.

Since cryptocurrency is a free market, it has promoted the formation of rival stablecoins that work in various ways but serves the same basic demand - that of just being stable in price. That implies that $100 in the cryptocurrency would be the exact same amount afterwards in the following day, or the next month. In reality, a stablecoin whose value rises or falls would be considered a disappointment in respect of its primary aims.

Due to the existing financial system, the most often used stablecoins are those whose value is 'pegged' to the US dollar. Nevertheless, numerous stablecoins are tied to certain other fiat currencies, including the Euro, the GBP, the IMF's SDR, assets like gold, or, strangely, even other cryptocurrencies – Wrapped Bitcoin is a well-known example.

Tether (USDT)

Tether was first introduced in 2014 as RealCoin. Because one Tether is believed to be equal to one US dollar at all times, its production is only restricted by claimed dollar reserves.

Tether, as the leading stablecoin, has been under pressure to produce frequent updates on its holdings to demonstrate that it can keep its peg to a dollar. According to the most current statistics, just approximately 10% is retained in cash or deposit form. Nearly half of Tether's reserves were made up of commercial paper, which is short-term debt issued by firms to raise funds. While this sounds insecure and scary, the rating is said to be reasonably secure and categorized as a cash equivalent.

Tether's Controversial Past

In November of 2017 when Tether was hacked, almost $31 million was lost and once again, in January 2018, it struck another crashing stone when the necessary audit was performed to ensure that the actual stockpile was maintained and did not take place. Rather, it announced its separation from the audit company, following which authorities issued a warrant. People are worried about the business, which has been criticized for lacking clarity, and whether it has adequate reserves to support the coin.

In April 2019, Letitia James who is a New York Attorney General charged iFinex Inc, the holding company of Tether Ltd, as well as the owner and administrator of the cryptocurrency exchange Bitfinex, with concealing an $850 million loss of customer and investors' corporate funds. According to papers from the court, these monies were entrusted to a Panamanian firm named Crypto Capital Corp without a contractual arrangement to handle consumer withdrawal requests. Bitfinex reportedly took a minimum of $700 million out of Tether's cash holdings to offset its losses.

How Does USDT Work?

Tether is a stablecoin, as previously said, and investors acquire Tether primarily to protect themselves from fluctuation in the cryptocurrency market. The notion that it is linked to a real-world currency offers it a significant edge over other cryptocurrencies in terms of reliability and worth.

Bitcoin and Ethereum are not linked to any real-world commodities. As a result, many cryptocurrency traders purchase Tether to protect their financial position if the cryptocurrency market falls one day.

Another explanation for Tether's popularity is its remittance capability. USDT may be transmitted to any location in the globe, converted to US dollars or Euros, and withdrawn much like Bitcoin and Ethereum. While Tether has already fallen below $1 (and climbed over $1), the stablecoin can maintain its value since it is tied to a corresponding fiat currency fund and is entirely guaranteed by Tether's reserves.

What Makes USDT A Special Stablecoin?

Tether (USDT) allows investors to escape the high volatility of other cryptocurrencies. A trader may decrease their exposure to a rapid drop in the price of cryptocurrencies by transferring money to USDT. Transferring BTC into Tether instead of the US currency is also considerably faster and less expensive.

USD Coin (USDC)

USD Coin (USDC) is a digital currency supported entirely by US dollar assets. USDC is a blockchain-enabled US dollar, with one USDC coin worth exactly one US dollar. USDC's value is intended to be steady, making USDC a stablecoin.

To ensure price stability, stablecoins are often backed by currency reserves such as dollars or euros. The price stability of USDC stands in stark contrast to the renowned price volatility of other cryptocurrencies such as Bitcoin and Ethereum.

It is vital to highlight that, despite its name, USDC is neither issued nor supported by the United States government. USD Coin is said to be an open-source project, which means that anybody may look at and contribute to its code.

How Does USDT Work?

Investors who have access to other cryptocurrencies might lessen the unpredictability of their portfolios by deliberately purchasing a stablecoin such as USDC. Possessing USDC in times of high market volatility can assist to stabilize the value of the portfolio.

Using a stablecoin like USDC, digital assets listed on cryptocurrency exchanges may be valued in fiat money. Because of USDC's stable prices, stablecoins may be used to symbolize stock ownership or fund investments. USDC can also stand in for liabilities or debt.

USDC can also be used to transfer money around the world. Recipients can keep USDC without having to open a bank account or worry about price fluctuation.

Non-US investors that want to acquire access to the US dollar might include USDC in their cryptocurrency portfolios and those who are worried about currency devaluation might retain a stablecoin like USDC to help safeguard the value of the investment.

By collecting digital currency, startups and charitable organizations may receive funds from investors and donations all across the world. Collecting funds in the form of a stablecoin, such as USDC, assures that the value of the cash raised doesn't change with time.

Because USDC is interoperable with several independent blockchains, it may be used to connect payment systems and applications across blockchains.

What Makes USDC A Special Stablecoin?

Crypto stablecoins are categorized into four types: crypto-collateralized, fiat-collateralized, hybridized and algorithmic non-collateralized. USD Coin is a regulated stablecoin that falls under the first category of fiat-collateralized currencies. Stablecoins that are linked to a certain amount of fiat cash are included in this category. Almost all the fiat-collateralized currencies are centralized by default.

Generally, all schemes in this category work in this exact manner, with just nominal disparities. Tether (USDT), which is well-known for refusing to conduct a genuinely open audit, and Digix Gold (DGX), which is associated with gold, are two of the most famous. The remaining fiat-collateralized stablecoins are fully supported by US dollars and offer routine proofs. The biggest differences among them include the difference in pricing techniques and the organizations with whom they interact, whereas the economic approach is mostly the same.

TerraUSD (UST)

The TerraUSD stablecoin debuted in 2020, with an intriguing method of maintaining its peg of one UST per dollar. Its availability will be changed algorithmically depending on the price and supply of Terra's native LUNA token, resulting in an equilibrium that will retain its worth.

Terra was created by Terraform Labs, a South Korean company launched in 2018 by Do Kwon and Daniel Shin. Kwon, the current CEO, formerly worked for Microsoft and Apple before launching Anyfi, a firm that provides decentralized wireless mesh networking solutions. Shin is the CEO and Founder of Chai, an Asian payment technology startup and Terra partner.

Terra is an open-source blockchain payment network for algorithmic stablecoins or cryptocurrencies that monitor the value of currencies and perhaps other assets. Terra stablecoins may be spent, saved, traded, or exchanged instantaneously on the Terra blockchain.

The protocol of Terra generates stablecoins that follow the cost of any fiat currency continuously.

How Does UST Work?

The Terra protocol preserves the price of the Terra stablecoin by guaranteeing that the demand, as well as supply for it, are constantly balanced, as the fundamental value of stablecoins is generated from the consistency of the price peg, hence preventing the volatility common with cryptocurrencies.

The variable counterbalance to the Terra stablecoin is Luna, which absorbs its volatility. To grasp how Terra operates, picture the whole Terra "economy" as a Terra pool and a Luna pool. The Luna collection pool increases to or deducted from Terra's supply to maintain Terra's price; consumers burn Luna so that they can mint Terra and they burn Terra so that they can mint Luna. The algorithmic market module of the protocol does this by incentivizing the minting or burning of Terra through arbitrage possibilities.

Expansion (of the Terra pool): When Terra trades at a high proportion to its peg, it implies that the need for the stablecoin is greater than the supply; this suggests that Terra supply should be raised to satisfy demand. The protocol simply encourages users to mint Terra and burn Luna, which lowers the Terra price (because of increased supply) while increasing the Luna price (by reducing its supply). Users will continue to arbitrage until Terra hits its goal peg price.

The Terra pool contraction is said to happen when the contrasting case transpires when Terra markets at a smaller percentage to its peg, meaning that perhaps the stablecoin has far more production than its requirement in the market. This would involve restricting Terra's supply until meets its demand. The protocol then inclines to stimulate consumers to burn Terra and then mint Luna, which raises the Terra price (because of limited availability) while lowering the Luna price (by increasing its supply). Users will keep this arbitrage methodology till Terra trades at its ideal price.

What Makes UST A Special Stablecoin?

Terra stablecoins provide smooth cross-border value exchange and instantaneous exchanges among themselves, all while utilizing quick settlement and extremely cheap charges for use by anybody, anywhere.

Conclusion

Currency

Market Value

24-hour trade volume

Trade to value ratio

Tether/USDT

$73.32 billion

$91.85 billion

125.3%

USD Coin/ USDC

$34.35 billion

$5.41 billion

15.7%

TerraUSD/UST

$2.88 billion

$112.5 million

3.9%

Above is the market value and trade volumes of the three stablecoins mentioned. As you can see, USDT has a larger market portion, while UST has a larger trade volume due to it's staking protocol.

To sum it up, if you want liquidity, go for USDT since it has the largest market value and is the most popular stablecoin; if you want security, go for USDC since it's backed by a reputable financial institution; if you want staking returns, opt in for UST.

Stablecoins would be a far more enticing option for cautious investors who are wary of the cryptocurrency industry's instability. They are accessible across all prominent major exchanges and reflect the finest of both fiats as well as virtual currencies. The price swings of stablecoins are steady and not like Bitcoin, and they will not affect your original investment because they are backed by fiat currencies. Thus, they will always remain an option for people who need a quick break from the volatility of the market.