Comparative Analysis Of The Top 5 Stablecoins
Tether, USD Coin, Binance USD, Dai, or TerraUSD: Which Stablecoin Is The Best?
I often get asked about my opinion on stablecoins.
This is to be expected, as they are an important part of the Crypto-sphere and offer valuable functions.
But there are over 100 different stablecoins.
So the problem is, how to figure out which stablecoin is the best and which one should you use?
This is a crucial question. Because as with buying and using other cryptocurrencies, stablecoins come with varying features and risks.
Since it is impossible to cover all of them, I will focus on the most important ones. So here is my comparative analysis of the 5 largest stablecoins by market cap: Tether, USD Coin, Binance USD, Dai, and TerraUSD.
What Are Stablecoins?
Stablecoins are cryptocurrencies that are pegged to other assets with established market value, such as gold, Bitcoin, FIAT currencies, real estate, etc.
What Are Stablecoins Used For?
Stablecoins are used for the following reasons:
- to provide price stability when prices of cryptocurrencies are volatile
- as fast processing medium between other cryptocurrencies and FIAT currencies
- as payment medium
What Are Stablecoins Backed by?
Stablecoins are backed by different assets. Here are the 4 major types:
- Backed by off-chain reserves of FIAT currencies, such as US Dollar or Euro. Examples of this category are Tether, Binance Coin, and USD Coin.
- Collateralized by on-chain cryptocurrencies such as Bitcoin or Ethereum. An example of such a stablecoin is Dai.
- Backed by physical commodities such as real estate, oil.
- Modified by smart contract algorithms. These stablecoins do not have collateral behind them. When their price is below 1 USD, the algorithm will decrease the supply of the coin. When the price is more than 1 USD, the algorithm will increase the supply to bring the price down. Examples include TerraUSD, Basis Cash (BAC), and Empty Set Dollar (ESD).
USDT is the largest stablecoin in terms of market cap. It is created by Tether Holdings Limited, a company located in Hong Kong. USDT runs on the Omni protocol, which is a second layer on Bitcoin blockchain, it also runs on other blockchains such as Ethereum and EOS.
In the whitepaper, the company behind Tether claims that USDT is issued only when customers deposit fiat in their account and that the Tether token is fully backed by FIAT currency to achieve 1 USDT = 1 USD.
Tether’s Audit Issues
Over the years, questions have been raised by different parties whether all the Tether issued are actually backed.
To counter this, Tether’s assets are evaluated (about every quarter) by the independent firm Moore Cayman. According to the most recent report they published on 30 June 2021, Tether’s total assets amount at least to USD 62,773,190,075.
The breakdown of Tether reserve is as follows:
In another step to be more transparent, the company behind Tether now publishes daily reports on their balances. As of November 2021, these reports state that Tether’s reserves amount to more than $73 billion. The problem: these reports are not audited by a 3rd party firm.
But there’s more.
Tether has recently been fined $41 million by the US Commodity Futures Trading Commission (CFTC) for lying to their customers that they have sufficient US dollars to back all the Tether issued.
Due to these transparency issues, Tether is probably the most controversial stablecoin.
What is also worth noting is that Tether can blacklist addresses. That means that Tether Holdings Ltd. can block wallets from using Tether, if they believe that they are involved in fraudulent activities.
There is a function to query whether an address is blacklisted on Etherscan:
What Personal And Systemic Risks Could Tether Carry?
Because Tether is issued by a company that for a long time has been doubted on their transparency, it is worth mentioning the personal and systemic risks of using Tether.
Here is what their whitepaper has to say:
Besides the above-mentioned risks, users should also be aware:
- There is no maximum cap on the Tether issuance.
- Since Tether does not have its own blockchain, it is running on the second layer protocol of other blockchains. For this reason, its security also depends on the algorithms of those chains.
- Tether’s price is not always at 1 USD, though most of the time it is stable. But black swan events such as the company going bankrupt would have a serious impact on its price.
- If Tether crashes, consequences for the whole Crypto space including big currencies such as Bitcoin and Ethereum would be massive. While I don’t think that the damage will be lasting, I believe that there is a systemic risk coming from Tether that seriously could impact Crypto in case there is a major problem. This is one of the reasons why I myself do not use Tether.
The Tether Ecosystem
Launched in 2014, Tether is the oldest stablecoin covered in this analysis. Because Tether was one of the very first stablecoins available to the market, it is being used on many exchanges around the world, regardless of its issues with transparent auditing reports.
Because of its early launch date, Tether profited by gaining a lot of users due to the lack of competitors. An ecosystem was formed automatically without the company actually having to do much.
USD Coin (USDC)
USD Coins is built by CENTRE, an open-source technology project launched by Circle and Coinbase. It is pegged 1:1 to the US Dollar.
What Is USD Coin backed by?
According to the website, USD Coin is “fully backed by cash and equivalents and short-duration U.S. Treasuries”. USDC is available as a token on Ethereum, Algorand, Solana, Stellar, and TRON blockchain networks.
In terms of transparency, the companies behind USDC try to make USDC as transparent as possible:
- Accounting firm Grant Thornton acts as an independent third party auditor and publishes attestation reports of USDC on a monthly basis. Their reports can be found here.
- USDC’s source code is available on Github.
- The USDC smart contract address can be viewed on Etherscan.
Sounds good so far.
But like Tether, USDC can also blacklist and freeze wallets. Frozen addresses are published on their monthly report, which looks like this:
This can also be verified on Etherscan:
The USDC Ecosystem
Let’s take a look at the two companies behind USDC:
- Circle is a peer-to-peer payment company with a global presence, it completed the acquisition of US-based Crypto exchange Poloniex in 2018.
- Coinbase is a Nasdaq-listed Crypto exchange based in the US.
Another important factor: Circle and Coinbase are companies that have to comply with US regulations. Compared to Tether, this gives USDC considerably more credibility.
Binance USD (BUSD)
BUSD is issued by one of the biggest crypto exchanges Binance in partnership with Paxos. It is an ERC-20 token that is centrally minted and burned by Paxos.
What is Binance USD backed by?
According to Paxos, BUSD is “approved and regulated by the New York State Department of Financial Services” and “is 100% backed by U.S. dollars held in FDIC-insured U.S. banks”. This is how BUSD achieves its 1:1 peg to USD.
This is what we like to see with a stablecoin.
Also, a big plus: Withum, a third-party auditing firm publishes a monthly attestation report on BUSD. In terms of transparency, BUSD is very similar to USDC. Because it is a regulated stablecoin, addresses holding BUSD can also be blacklisted/frozen.
The BUSD Ecosystem
Being issued and supported by one of the largest Crypto exchanges worldwide, BUSD is incorporated into the Binance ecosystem. Almost every cryptocurrency listed on Binance exchange can be traded against BUSD.
Binance also provides saving and lending possibilities for BUSD together with many other cryptos. Besides Ethereum blockchain, it can also be supported on Binance Chain and Binance Smart Chain.
Dai is a decentralized stablecoin based on Ethereum. It is part of the Maker protocol and is developed by MakerDao, a decentralized autonomous organization. The Maker protocol is governed by MKR holders.
At first, only Ether could be accepted as collateral. Since November 2019, any Ethereum-based assets which are approved by MKR holders can be used as collateral.
What is DAI backed by?
Dai is soft pegged at 1:1 to USD, meaning that it is allowed to trade within a set level of the peg. Dai is generated by depositing collateral crypto-assets into the Maker Vaults. Each Dai generated is always backed by an approved asset that has more value than 1 Dai because the collateral ratio is more than 100%. The peg ratio 1 Dai = 1 USD is maintained by two rates:
- Stability fee: an interest rate that Dai borrowers have to pay. An increase in stability fees makes it more expensive to borrow Dai. It also encourages Dai borrowers to pay back the Dai they borrowed, thus decreasing the supply of Dai and vice versa. The stability fee manipulates the supply of Dai.
- Dai Savings Rate (DSR): this is the interest rate paid to people who deposit their Dai in the DSR contract. It is paid from the stability fee collected from the borrowers of Dai. DSR manipulates the demand of Dai. The MKR holders can decide to increase or decrease the DSR. If the price of Dai is greater than 1 USD, MKR holders can decrease the DSR to reduce the demand of Dai to adjust the price of Dai to 1 USD and vice versa.
The DAI Ecosystem
Built on Ethereum, Dai takes the benefit to be part of Ethereum’s decentralized ecosystem. It can already be used on more than 40 platforms and Apps, as well as being used as a form of payment.
*** Update May 2022: Terra got nuked and became worthless which makes a lot of the stuff I wrote below obsolete. A quick recap: In early May 2022, TerraUSD (UST) became unpegged. How exactly is still unclear but it’s assumed that someone deliberately dumped $350 million worth of UST to trigger the process. ***
TerraUSD runs on the Terra blockchain and is a decentralized stablecoin. Terra project was founded by Do Kwon, a former software engineer at Microsoft and Apple, and Daniel Shin, an economist. Terra blockchain uses proof of stake (PoS) consensus algorithm. LUNA is the native cryptocurrency on the Terra blockchain.
What is Terra USD backed by?
Different from Dai, UST is not backed by any on-chain asset. It maintains its 1:1 peg to USD by:
- Contracting money supply when 1 UST < 1 USD: the system mints and auctions mining power to buy back and burn UST until the price has reached the target peg.
- Expanding money supply when 1 UST > 1 USD: the system buys back mining power using UST until the target peg is reached.
- UST uses its partner coin LUNA to maintain its value, with each UST token minted resulting in the equivalent of $1 of LUNA being removed from circulation, and vice versa.
The source code of Terra project has been audited by a third-party security firm, the report can be found here.
The UST Ecosystem
Terra blockchain supports other stablecoins on the Terra blockchain such as TerraKRW (already exists), TerraJPY, TerraEUR, etc. which can be added depending on user voting. The system also supports atomic swaps among these currencies at their market exchange rate. This makes Terra stable coins highly scalable and liquid.
The anchor protocol on the Terra blockchain provides saving and borrowing options for stablecoin holders as well as for users who want to take a loan. Terra’s Mirror protocol allows anyone to issue and trade synthetic assets that track the price of any real-world assets without physical backing.
There is also a lot of work being done to bridge Terra stablecoins to other blockchains such as Ethereum and Binance smart chain, as well as different DEX.
The risk of Dai and TerraUSD is similar. Their security is dependent on the blockchain they are based on, Ethereum blockchain and Terra blockchain, as well as the security level of their smart contracts.
Final Assessment Of Top 5 Stablecoins
Please note that this analysis is not exhaustive. But based on the information gathered in this article, we can come to the following conclusions:
Which Stablecoins Are Decentralized?
Among the top 5, Dai (DAI) and Terra USD (UST) are decentralized stablecoins. They are not controlled by large corporations and also aren’t dependable on or bound to traditional finance and governmental regulations.
Dai and UST have different ecosystems. I don’t see them as competitors, even though there will be competition in some areas. There is definitely more space in the market for other decentralized stablecoins.
Which Stablecoin Is The Safest?
*** Update May 2022: Since Terra got destroyed, it is obviously no longer a safe stablecoin. ***
In the list of the largest stablecoins, USD Coin, Binance USD and Dai are probably on a similar level when it comes to safety. However, there are different reasons for that.
While Dai reduces risk by utilizing clever algorithms and decentralized solutions, USD Coin and Binance USD are coins backed by large corporations that have to follow strict governmental regulations.
In comparison, Tether seems to be the riskiest asset. Obscure actions by Tether Holding Ltd. in the past did not build a lot of trusts. And while the situation did improve, I still get the feeling that they should do more to tackle the whole transparency issue.
Which Stablecoin Is The Best?
If you want to be true to the Crypto spirit, you should pick Dai because of its decentralized architecture. With USD Coin and Binance USD you have coins backed by established corporations with a good track record. Tether comes with a lot of uncertainties.