Stablecoins like USDC, USDT and BUSD offer a measure of price stability in a market where volatile cryptocurrencies are the norm. As an asset class, stablecoins can serve as a store of value and a reliable way for investors to remain in crypto at lower risk.
For many newbies, fiat-backed stablecoins like USDC and USDT offer a perfect gateway to understanding the workings of crypto. So, what are fiat-backed stablecoins, and how are they useful for crypto users?
Stablecoins by Market Share
Fiat-backed Stablecoins: What are They?
Simply put, fiat-backed stablecoins are a virtual copy of fiat (real-world) currencies that are minted on the blockchain. To create fiat-backed stablecoins, fiat currencies are locked and an equivalent is minted through smart contracts. The locked fiat serves as the currency backing the stablecoin, thereby determining the value of the stablecoin. This is known as a peg. For dollar-backed stablecoins like USDC and USDT, this peg is 1:1 to the US Dollar, meaning that for every such stablecoin minted, $1 of USD is held in reserve in the form of US Dollars or other asset equivalents.
Unlike the real-world currencies backing them, stablecoins provide a viable alternative for borderless, permissionless transfer of money around the world. Amongst other factors, this has led to a sharp rise in the popularity and usage of stablecoins.
Fiat-collateralized (Centralized) Stablecoins:
- Tether USDT
- USD Circle
- True USD
- Paxos Standard
- Binance USD
At the vanguard of this rise in usage and popularity of stablecoins are USD Coin (USDC), Tether (USDT) and Binance USD (BIUSD). All three stablecoins are significantly ahead of the others, leading the market as the most adopted stablecoins and, consequently, the ones with the highest market caps.
If you are considering which stablecoin is the best for your needs, it’s important to understand what these coins are and how they function.
Stablecoins by Market Cap
What Is USDT?
USDT is a dollar-backed stablecoin. It came into existence when it was first issued by Tether Limited in 2014 ‘to bridge the gap between crypto and fiat’. Tether was the first digital asset to give users access to a blockchain-based, platform-agnostic US Dollar that had the technical advantages of fiat currencies and highly liquid cryptocurrencies, without their volatility.
USDT is also a stablecoin pegged to the US Dollar 1:1. To maintain this peg, Tether holds over $162 million of assets in its reserves.
By tapping into the best of both fiat and crypto, Tether Limited created a permissionless way to transact using crypto-dollars with anyone globally. What’s more, the speed, transparency, and low cost of stablecoin transactions have opened up the use cases of the crypto ecosystem to payments, remittances, and more.
What Is USDC?
USDC is a dollar-backed stablecoin created by the peer-to-peer payments technology company, Circle, in 2018. Like every other dollar-backed stablecoin, its price stays fixed at $1. It is managed by a consortium called Centre, which was founded by Circle and includes Bitcoin mining company Bitmain and crypto exchange Coinbase. Centre Consortium is responsible for overseeing the financial and technical standards for USDC and maintaining the 1:1 peg to the dollar.
USDC is a highly liquid stablecoin that is available on most centralized and decentralized exchanges and can be exchanged via wallets that are ERC-20 compatible.
What Is BUSD?
BUSD, short for Binance USD, is a fiat-backed stablecoin that is pegged to the dollar at 1:1. It was created by Binance, the biggest centralized exchange by trading volume. BUSD is backed by Binance’s cash reserves and cash equivalents managed by Paxos, an American blockchain-focused fintech company, which is also responsible for issuing BUSD tokens. BUSD is audited monthly by an external auditor, Withum, to ensure that the cash reserves which collateralize the stablecoin can support the circulating supply at any given time.
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Comparing the Circulating Supply
Tether’s popularity has made it a ubiquitous stablecoin across the crypto ecosystem. USDT tokens are circulating across most major blockchains, including Bitcoin, Tron, Ethereum, Algorand, Solana, and more. USD Coin can be issued by regulated entities that meet Circle’s requirements.
Traded Volumes
One of the biggest testaments to these stablecoins’ popularity is their daily trade volume.
Market Capitalization
The market capitalization of dollar-backed stablecoins is closely tied to their circulating supply since their value is pegged at $1 (The market capitalization of an asset is the value of an asset multiplied by the number of units of that asset in circulation).
Going their number of circulating tokens, Tether once again comes out tops when the market cap of both stablecoins is compared.
Transparency and Safety
As stated earlier, BUSD, USDC, and USDT are managed by financial institutions that exist in the real world and, as such, these stablecoins are not risk-free, despite their relative price stability. In the past, USDT has been subject to scrutiny due to Tether’s reluctance to publish frequent and comprehensive reports on how the stablecoin is backed.
Although Tether succumbed to pressure and eventually published a breakdown of its reserves for the first time in March 2021, it sought to keep its reserve composition private before then—even asking a New York court to block a Freedom of Information Law request from Coinbase.
Since the March 2021 release, Tether has opened up details of its reserve to the public. It now provides daily updates on changes that occur to the make-up of its reserves. These transparency issues eventually led to a $41 million fine by the Commodity Trading Futures Commission (CFTC).
The parent business of USDC, Centre Consortium, on the other hand, has constantly complied with requirements and has positioned itself favorably in that regard by routinely publishing audited reports on their reserves.
Circle publishes monthly reserve audits conducted by the accounting firm Grant Thornton LLP. Along with promising to solely hold US dollars and short-term government bills, the payments technology giants also state that they might apply for a national charter to establish their own virtual bank.
“There is a reason why USDC is regulated and supervised by banking regulators under the same laws that supervise the balances you hold on PayPal or with Apple or with Square,” Circle CEO Jeremy Allaire once told the Brookings Institute. “Those things have applied to us since day one. And those statutes exist so that people have confidence in these electronic payment systems. And I think that’s really important.” BUSD is approved by the New York Department of Financial Services (NYDFS), a regulator charged with overseeing transparency and safety with the use of digital and financial assets.
To ensure transparency, Binance publishes monthly reserve attestation and monthly holding reports, allowing anyone to verify that BUSD is 100% backed by cash or cash equivalents.
In accordance with strict asset custody regulations enforced by Paxos’ New York state regulators, Binance claims that “BUSD reserves are only held in FDIC-insured, bankruptcy-remote bank accounts or US Treasury instruments.”
Which Stablecoin Should You Use?
All three stablecoins are central to many use cases in crypto and DeFi, from lending to staking to yield farming and more. If you are confident holding or investing using a highly liquid stablecoin with large daily trading volumes, all three stablecoins are great.
Stablecoins by User Dominance
Final Thoughts
Combined with other stablecoin projects, USDT, USDC and BUSD have added a substantial amount of fiat-standard currencies to the crypto sector. More significant are their efforts to keep the value of these coins stable.
They have demonstrated plausible stability when compared to algorithmic stablecoins and have been at the forefront of crypto's phenomenal pace of adoption.
With stablecoins worth over $100 billion created, all three stablecoins are both waxing strong despite constant scrutiny. Both projects continue to be viewed through opaque lenses, having to continuously fend off concerns brought up by independent audits and probes. Although they have both succeeded, more openness is still required, and this is a challenge for any centralized fiat-backed stablecoins.
