USDT and USDC are the two biggest stablecoins right now. Read on to find out why you should include them in your crypto portfolio and why they offer such a high yield.
USDT vs USDC
Both USDT and USDC are popular stablecoins, and both are pegged to the USD. However, that’s where their similarities end. USDT is the most traded cryptocurrency and is slightly more widely available than USDC, while USDC has a lower trading volume, but is perceived to be a safer store of value since it’s backed by cash and cash equivalents. We’ve put together a table with the key traits of both:
What is USDT?
Tether’s USDT is widely recognised as the first stablecoin, where USDT stands for the symbol of Tether’s USD stablecoin (also known as Tether). In terms of market capitalisation, it’s fourth overall. It was launched in 2014 as a digital token backed by fiat currency, where the USDT is pegged at 1:1 to the U.S. Dollar to ensure stability in the exchange price. Once USDT is issued, it can be transferred, spent and traded just like any cryptocurrency. Its price is permanently tethered to the value of the corresponding fiat currency in reserve.
To understand how Tether works, here’s a diagram that shows the cryptocurrency’s life cycle:
Tether promises that USDT holders can exchange and redeem their tokens for USD based on Tether’s terms of service. To ensure that one-to-one backing remains constant, the balance of fiat currency held in Tether’s reserves will be equal or greater than the number of tokens in circulation. Based on Tether’s transparency balances, there is a $162 million excess of assets over liabilities at the time of writing.
Based on the June 2021 consolidated report, 85% of Tether’s assets are in cash, cash equivalents, short-term deposits and commercial papers—an increase of 9% from the previously shared reserves breakdown in March 2021.
Tether’s come under fire for the high percentage of commercial papers and certificates of deposits in its reserve assets, as these lead to perceptions that Tether’s assets are relatively risky. Yet, the focus on short-term deposits and debt obligations and the interest generated remain consistent with Tether’s emphasis on liquidity while providing fuel for growth.
Another common criticism is that Tether is a centralised currency, which is at odds with the decentralisation of the blockchain ecosystem. However, as seen in the recent news about the $611 million Poly Network hack, Tether’s reaction was one of the fastest, freezing $33 million worth of USDT associated with the incident.
Based on historical data, the USDT token price generally holds steady at US$1. While there are slight dips and highs, the market quickly corrects itself to return to the US$1 pegged value.
The trade volume for USDT is a testament to the stablecoin’s popularity. As of this time of writing, the 24h trade volume of USDT clocks in at almost $36 billion — a significantly higher amount than the second-place currency (ETH at $21.3 billion). Meanwhile, USDT’s market capitalisation is still steadily increasing in spite of the competition, with a current value of $78 billion.
What is USDC?
Now that we’ve covered USDT, it’s time for a closer look at USDC (USD Coin) in crypto. USDC was established in 2018 by Circle and Coinbase, and it’s pegged at 1:1 with the U.S. Dollar. Unlike USDT, of which Tether is the only issuer, USDC can be issued and redeemed by other member institutions of the CENTRE Network, such as Coinbase.
Commercial issuers of USDC are required to meet licensing, compliance, accounting, and technical and operational requirements. To ensure that USDC maintains a constant one-to-one backing, issuers also have to back all tokens with fiat reserves and supply monthly proof of reserves.
Based on the latest reserve account report from Circle from December 2021, the total number of USDC stablecoins in circulation is $42.416 billion, with a similar amount of USD (and USD denominated assets) held in reserve. Initially, USDC claimed to be backed by USD in a bank account, but they’ve recently changed their statement to include assets with equivalent fair value. According to their website, the number of USDC in circulation has now crossed over the 50 billion mark — a further testament to the growing popularity of the USDC stablecoin.
As seen in their reserve account breakdown from October 2021, Circle has moved to holding 100% of cash & cash equivalents, which include US dollar deposits at banks and short-term, highly liquid investments that are convertible to established amounts of cash with a maturity of less than or equal to 90 days of purchase, as consistent with US generally accepted accounting principles (GAAP). Proponents of USDC view the stablecoin’s concentration on cash and cash equivalents as indicative of Circle’s capacity to support large-scale USDC redemptions in the event of a crisis.
Like USDT, the USDC coin price remains stable at around US$1. While there have been dips and highs, these are quickly corrected, returning the value of USDC back to US$1.
USDC ranks eighth according to market capitalisation, and it’s on the rise, albeit with a lower value of $50.9 billion. However, the 24h trade volume for USDC remains significantly lower than USDT at only $2.7 billion versus the latter’s almost $36 billion.
Regulations Around Stablecoins in the U.S.
The stablecoin market has grown by 500% over the past 12 months. One of the greatest concerns surrounding stablecoins is the panic that would ensue, in the event of a rush of customers looking to turn their stablecoins into regular dollars, only to find that there is insufficient liquidity, and its subsequent risk to the financial system.
In November 2021, the Biden Administration’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) released the PWG Report calling for legislation to limit the issuance of stablecoins to insured depository institutions to allow serious regulation of stablecoins to address the systemic risk they may pose to the economy and financial system.
This is indicative of congress taking action to bring stablecoins into the traditional financial system, by enforcing audits and other regulatory measures to ensure transparency and protection of users. We’re seeing signs of this as well, as stablecoin issuers are starting to provide regularly audited reports of reserves to ensure the USD reserves held are equal to the supply of stablecoins at a constant rate of 1:1.