We all know that crypto can be volatile, making an option like stablecoins extremely useful to quickly provide shelter from volatility. Stablecoins serve a unique but practical role in the crypto economy and have grown in popularity over the years.
Due to their widespread utility, it is critical that stablecoins be reliable and, unsurprisingly, stable. The meltdown of Terra's algorithmic stablecoin in May proved exactly how important that is. This catastrophe highlighted the need for stablecoins to operate in transparency so that investors and users can be confident that another situation like Terra [now Terra Classic (LUNC 1.68%)] won't happen again.
Now that Terra has lost nearly all credibility with investors, stablecoin users have flocked to two alternatives in particular -- Tether (USDT -0.03%) and USD Coin (USDC 0.00%).
Problems with Tether
Tether is the largest stablecoin issuer in all of crypto and has been for quite some time. Since July 2018, its market cap has ranked among the top 10 of all cryptocurrencies. Since then, its market cap has increased by 3,500%, and it is arguably the most popular stablecoin on the market. However, it hasn't been a smooth ride to the top.
Theoretically, distributors of stablecoins should operate like a bank. They need to maintain enough liquidity to be able to reimburse any user wishing to redeem their stablecoin holdings. Maintaining this balance of distributed stablecoins to the assets in reserves ensures that stablecoins keep their peg.
In recent years, Tether became a familiar face in the courtroom due to increased skepticism that there isn't an equal amount of value in their reserves relative to the number of distributed stablecoins. To date, there have been three lawsuits and tens of millions of dollars in fines assessed. To remedy this bad press, Tether offered to supply the public with a third-party audit in July 2021, but it still hasn't provided the audit.
The clear choice
Meanwhile, the second-most-popular stablecoin, USD Coin or USDC, has taken a different approach to its enterprise. Rather than operating in obscurity, the financial technology company behind USDC, Circle, has taken a stance of openness and transparency. Each year an audit of USDC is released. An additional monthly statement provides insights on the size of the reserve to ensure that it is equal to the amount of USDC distributed.
Despite a widespread decline in crypto prices in 2022 and instability being further exacerbated due to crypto platforms like Voyager and Celsius becoming insolvent, USDC's market cap grew as stablecoin investors looked for more reliable options. Since the failure of Terra in May, USDC has grown by nearly 15%. It is now the world's second-most-valuable stablecoin and fourth-most-valuable cryptocurrency by market cap with a value of around $55 billion. In that same time frame, Tether's market cap has taken a hit of more than 20% but still holds the position as the largest stablecoin with a market cap of roughly $66 billion. At one point this year, the difference between the two market caps was as large as $40 billion. USDC is hot on Tether's heels and could jump Tether if current trends continue.
The last few months have been anything but stable for the crypto economy. Hedge funds have defaulted, lending platforms have gone bankrupt, and some cryptocurrencies are now nearly completely worthless. It is refreshing to see a company like Circle embrace a reputation of transparency and trustworthiness. After all, that is what crypto is all about. Instead of taking a chance on Tether and a potential disaster similar to Terra, investors should consider allocating their stablecoin holdings to a safer, more transparent option, like USDC.
