While the stablecoin industry is, beyond any doubt, diverse and rich in innovation, with so many USD stablecoins of various collateralization and (de)centralization models to choose from, two tokens — Tether&'s USDT and Circle&'s USDC — still dominate roughly 87% of the market cap value. As billions are at stake, the competition for the top spot can get quite fierce, causing the stablecoin market to undergo significant reshuffling from time to time, with numerous crypto users diverting their focus from USDT to USDC and vice versa. However, Tether&'s dominance has been on the rise since March, when its rival USDC depegged to $0.86 following the bank run on the Silicon Valley Bank that held some portion of issuer Circle’s funds.
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That being said, while Tether&'s USDT currently reigns supreme in the market, that doesn&'t mean USDC is out of the running. Circle&'s USD Coin has built a solid reputation for being one of the more transparent and regulated stablecoins, frequently audited and generally considered more reliable than its rival.
Still, functionally these two stablecoins are nearly identical, so choosing between USDC and USDT isn&'t a straightforward task. In this article, we will take an in-depth look into the two of the most popular stablecoins in the market and learn how they compare in terms of their reserves, transparency, liquidity, and overall trustworthiness.
USDT vs USDC: Exploring the Stablecoin Landscape
Before we delve into the technicalities of USDT and USDC, let&'s first get a quick refresher on what are stablecoins and what sets the two market leaders apart from the rest.
In the crypto market, which is characterized by extreme volatility when compared to traditional markets, stablecoins are designed to offer a spot of stability — hence the name "stable." They serve as a safe haven for crypto investors, a medium of exchange in the crypto ecosystem, and a bridge between traditional finance and the digital world.
The desired stability is achieved by "pegging" a stablecoin to a specific reserve asset — a US dollar in like 90% of cases, although there are also some exotic stablecoins that aim to track the price of other crypto assets, fiat currencies, or even precious metals. But how exactly do they maintain their value?
In terms of collateral that maintains the peg, most USD stablecoins generally fall into one of three categories, which are:
Fiat-backed stablecoins: The most common type where each token is backed by an equivalent amount of fiat currency and its equivalents (like Treasury bills) held in reserve by a central entity, often a bank. Both USDC and USDT follow this model, as well as other stablecoins with a smaller market share, such as Gemini Dollar (GUSD), True USD (TUSD), and Paxos Standard (PAX).
Crypto-backed stablecoins: Backed by other crypto assets, such as Ether. The stablecoins of this type are often over-collateralized to account for the volatility of the underlying asset, and usually employ smart contracts instead of relying on a centralized issuer. The most prominent stablecoin in this category is DAI, which is maintained and regulated by a decentralized autonomous organization, MakerDAO.
Algorithmic stablecoins: Use algorithms and smart contracts to automatically adjust the supply of the token to maintain its value. The collapse of Terra&'s UST stablecoin in May 2022 was perhaps the highest-profile example of an algorithmic stablecoin failing to sustain its peg. On the other hand, there are also a number of algo stables that enjoy continued success and stability, such as FRAX and RAI.
What is USDT? Tether&'s Journey So Far
Tether (USDT) is the first fiat-backed stablecoin to ever come to the market, issued in 2015 on Bitfinex crypto exchange. Initially, it was called RealCoin but was rebranded later. Thanks to its first-mover advantage, USDT became the first such crypto asset to gain widespread adoption, surpassing even Bitcoin in 2019 in trading volume. First launched on the Bitcoin blockchain through the Omni Layer, USDT stablecoins have since expanded to other blockchains like Ethereum, Algorand, EOS, and Tron. Despite its widespread use, Tether has faced controversies and skepticism regarding its reserves and regulatory scrutiny.
Although USDT has always been the largest stablecoin in the space, the gap had been closing in during 2021 and 2022 as the asset’s dominance recorded a decline. Currently, however, USDT is on the rise, boasting a market cap of $82 billion, making it more than three times the size of USDC, its closest rival.
What is USDC? A Brief Overview
USDC, or USD Coin, is a stablecoin managed by Centre Consortium that was founded by Circle and Coinbase, two of the most well-known companies in the crypto space. First introduced in 2018, USDC has positioned itself as the more transparent alternative to murky USDT, focusing on full reserves, regulatory compliance, and monthly audits. It has gained significant adoption, especially in decentralized finance applications, where its transparency and regulatory oversight make it a favored choice.
During a certain period in 2021-2022, USDC stablecoins were gaining ground and had, at one point, come quite close to Tether. However, the cryptocurrency’s dominance has taken a hit in the last few months, with the beginning of the decline dating back to the Silicon Valley Bank debacle. The hiccup caused a temporary depeg for the stablecoin, which, as some analysts estimate, may have caused a lasting loss of credibility that contributed to USDC&'s shrinking market share.
Reserves and Transparency: How USDC and USDT Maintain Stability
While both Tether and Circle claim that they maintain $1 of asset reserves for each stablecoin issued, their commitment to transparency is radically different, and this has become a defining feature that sets the two stablecoins apart.
While USDT is the most traded and liquid stablecoin that makes up most trading pairs on crypto exchanges and decentralized finance protocols, its popularity doesn&'t necessarily make it a safe investment. The stablecoin&'s parent company Tether has a long trace of questionable attestations about its fiat currency reserves and legal troubles. In February 2021, Letitia James, the New York attorney general, said that there had been times in 2017 and 2018 when USDT tokens in circulation weren&'t fully backed. The attorney general also claimed that Tether and Bitfinex moved hundreds of millions of dollars between two companies to conceal $850 million in losses.
"Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines," James said in a statement. "Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system."
According to Tether&'s financials obtained by CoinDesk in June 2023, the stablecoin issuer&'s reserves are composed of a basket of assets including cash & cash equivalents, secured loans, corporate bonds, and other investments. A pie chart published by Tether in May showcased it had 75.9% in "cash and cash equivalents," but only a small proportion of it is held in actual cash reserves while the bulk of this category is mostly made up of unspecified commercial papers, a large percent of which were later revealed to be from various Chinese banks and financial institutions.
While nothing is inherently wrong about Chinese commercial papers, the thing about such a type of asset — a short-term loan that&'s usually made to corporations — is that depending on the issuer&'s rating and market conditions, they may not be as safe and liquid as cash. This, in turn, means that if there was a massive run on Tether, there&'s no guarantee the company would have enough cash on hand to process all redemptions.
Worries about Tether&'s backing have been voiced by many prominent individuals in the crypto industry, including Ethereum co-founder Vitalik Buterin, who once called the company "a ticking time bomb" for the Bitcoin ecosystem and cryptocurrency market in general that can cause a severe liquidity shock if traders lose faith in the stablecoin.
On the flip side, Circle&'s USDC tokens are fully backed by cash stored at banks and Circle Reserve Fund, which is an SEC-registered government money market fund that holds a portfolio of short-dated US Treasuries, overnight US Treasury repurchase agreements, and cash. The Reserve fund is custodied at The Bank of New York Mellon, managed by BlackRock, and is attested monthly by a Big Four firm, Deloitte.
Regulatory Oversight: Complying with Laws and Regulations
Another significant distinction between the two stablecoins lies in the area of regulatory compliance. USDC has proactively engaged with regulators and aims for full compliance with U.S. laws. Tether, on the other hand, has had a more complicated relationship with regulatory authorities, facing lawsuits and investigations over the years.
As a part of the settlement agreed to with the New York Attorney General’s Office (NYAG) over papering a $850 million hole in Bitfinex&'s budget using Tether&'s reserves, iFinex, the parent company of both, agreed to pay an $18.5 million fine and is no longer allowed to operate in New York. The stablecoin issuer also agreed to provide quarterly breakdowns of its reserves to settle charges.
Stablecoin Adoption: Who is Using USDC and USDT?
Both USDT and USDC have widespread adoption and are available on almost every blockchain you can think of, but their utility to crypto traders is rather different. USDT is the most traded cryptocurrency that is used primarily in trading pairs, while USDC is preferred by many as a store of value due to its transparency and reliability. However, the recent depegging of USDC in March 2023 has shaken investors&' confidence in USDC.
Both stablecoins are integral to the DeFi ecosystem, serving as collateral and a medium of exchange in various protocols. However, USDC&'s regulatory compliance makes it more appealing for more risk-averse institutional participants.
USDC vs USDT: Comparing Liquidity and Market Cap
In terms of market capitalization and liquidity, Tether still leads. It has been the go-to stablecoin for traders and has established significant liquidity across multiple cryptocurrency exchanges. USDC, while being close to its rival in July 2022, has not yet matched Tether&'s scale.
Risk Factors: Concerns and Controversies
Tether&'s murky reserves and regulatory concerns make it a riskier proposition for long-term holding. USDC, with its clear regulatory framework and transparent auditing, presents fewer risks but is not entirely without its challenges. The possibility of future legal actions against Tether is a looming threat that could significantly impact its valuation and, by extension, drag the larger crypto market down given its volume and adoption rate.
USDC, on the other hand, with its clear regulatory framework and transparent auditing, presents fewer risks but is not entirely without its challenges. The primary risk surrounding USDC comes from the broader landscape of regulatory uncertainties concerning stablecoins and cryptocurrencies in general. Even with its adherence to transparency and compliance, changes in regulatory policies or legal requirements could impact USDC&'s operations. For instance, SEC Chairman Gary Gensler has suggested that stablecoins should fall under his agency&'s jurisdiction, which isn&'t particularly good news given the Commission&'s anti-crypto stance.
In remarks at the Aspen Security Forum, Gensler mentioned that stablecoins “also may be securities and investment companies. To the extent they are, we will apply the full investor protections of the Investment Company Act and the other federal securities laws to these products.”
Additionally, while the backing and regular audits by reputable financial institutions offer a layer of security, it&'s worth noting that no investment is entirely risk-free. External economic factors, such as inflation or financial instability, could pose challenges even for stablecoins that are fully backed and audited.
Real-World Applications: Beyond DeFi
While both stablecoins are essential for DeFi activities, such as liquidity mining, yield farming, and token swaps, they are also making inroads into real-world applications. USDT and USDC are increasingly used for everyday payments, competing with payment processors like Venmo and PayPal. Most of the time, the transaction speed and fees are superior to those offered by centralized platforms.
Crypto dollars like USDC and USDT are also used as a way to store value when investors exit their cryptocurrency positions without the need to wait a couple of days for a transfer from the crypto exchange to be credited to your bank account.
Determining the "King of Stablecoins" is not straightforward and depends on what metrics you consider most important. If regulatory compliance and transparency are your top concerns, USDC may be the clear winner. However, if liquidity and market adoption are your main criteria, Tether still holds the crown. Ultimately, the choice between USDC and USDT will depend on your specific needs, risk tolerance, and how you plan to use the stablecoin.
Remember that in the ever-changing crypto landscape, market dynamics could shift, especially with new entrants like PayPal&'s PYUSD coming into the fray. But as of now, both USDT and USDC continue to play critical roles in the stability and utility of the larger crypto ecosystem.