May 27, 2023

Everyone who is at least superficially familiar with the topic of cryptocurrencies and digital finance probably knows what stabelcoins are. They are cryptocurrencies whose value is tied to the value of certain fiat currencies. Their price consistency (relative, of course, because we should not forget that the fiat currency market is also subject to price fluctuations, even if not as significant as the cryptocurrency market) makes them convenient to use even between people who are far from the topics of trading and investment. After all, they can be used for all kinds of settlements and transfers just like fiat currencies are already used, only with all the advantages of the digital form of money. They are also more suitable for storing assets than cryptocurrencies with high volatility, because there is no risk of depreciation of savings during sharp fluctuations in the cryptocurrency market.

Let’s look at the two most famous and popular coins – USDT and USDC:

What is USDT
As easy to guess from the name, this stabelcoin is tied to the value of the U.S. dollar (USD). This coin is owned by Tether and is the most sought-after stabelcoin on the cryptocurrency market. Its dominance in exchange trading exceeds 70% in 2022, which is a serious bid to take over the market. In addition to the fact that USDT is used as a digital analogue of dollars, the coin is in demand in the now popular DeFi projects – they use it to increase liquidity.

Aggressive domination of the cryptocurrency market is not the only problem with USDT. There are rumors that the coins are not backed by real financial value. This issue could easily be resolved with an independent financial audit, but the company is in no hurry to conduct one, despite the growing distrust of the general audience. The coin does not fall under the clear legislative regulation, being in the gray zone, which means that in case of any changes in the cryptocurrency legislation there is a risk of legal problems, due to which its large holders can incur huge losses.

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In addition, USDT regularly appears in high-profile lawsuits related to financial fraud by platforms that hold Tether shares. But despite all these alarm bells, the coin remains one of the most in-demand on the cryptocurrency market and enjoys the trust of investors.

What is USDC
USDC is a new stabelcoin created by Circle as an alternative to USDT. Its value is also tied to the value of the U.S. dollar, but the company is positioning this product as more open and transparent than the “dark horse” Tether. USDC is open source and the company provides all necessary financial reporting information. The coin operates under U.S. law and is supported by all Ethereum wallets, as it is an ERC20 token.

Stablecoin has gained the support of a number of banks and cryptocurrency exchanges, in the listings of which it appears more and more often. The project is gaining new partners and in general, there are high expectations for it in the cryptocurrency community. Since this stabelcoin was only recently released, its trading volume is not yet comparable to USDT. Transparency, security, and the cryptocurrency market’s objective need for a worthy competitor for the No. 1 stabelcoin promise USDC good prospects for adopting and high chances to oust the untrustworthy token from the market.

Other stablecoins
Dai is a decentralized stable currency pegged to the U.S. dollar at a 1:1 ratio.
Binance USD (BUSD) is a new stable dollar-denominated coin approved by the New York State Department of Financial Services, launched in partnership with Paxos and Binance. BUSD is 100% backed by reserves.
Terra USD (UST) – the project collapsed and the coin dropped to cents. It deserves mentioning only in the sense that even with stabelcoins you should always be careful.

Centralized stablecoins have a significant number of drawbacks. The problem with centralization is probably the biggest risk associated with stackablecoins at the moment, and something that is completely contrary to the overall ideal of blockchain technology. Often there is one entity that controls and manages the stablecoin with off-network transactions and dealings. For example, USDT is actually controlled by a company called Tether, which acts just like any other profit-maximizing company in its own interest. Tether controls both the supply and the rate of distribution of USDT and is not responsible to outsiders for how they want to manipulate the market supply. Being a centrally backed asset is contrary to the nature of blockchain technology. This lack of decentralization creates obvious risks for anyone who holds USDT, since a collapse of Tether for any reason also means a collapse of USDT, which could cause the value of your digital U.S. dollar to plummet to zero.

The best protection for the trader and investor is diversification. Since each instrument has pros and cons, it is worth diversifying your portfolio with both centralized and decentralized stablecoins. For long-term investing, stablecoins may not be the best option: there is no appreciation and the risk of depreciation remains (as it recently happened with UST). But for current settlements USDT (especially TRX network, aka TRC20 ) is quite convenient: it is accepted by many companies and services, and the transfer fee and crediting speed are fantastic.

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