Comparative Analysis Of The Top 5 Stablecoins

Top 5 Stable Coins Comparison, Source: ren-heinrich.medium.com
Top 5 Stablecoins Comparison, Source: ren-heinrich.medium.com

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:

  1. 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.
  2. Collateralized by on-chain cryptocurrencies such as Bitcoin or Ethereum. An example of such a stablecoin is Dai.
  3. Backed by physical commodities such as real estate, oil.
  4. 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).
Click me.

Tether (USDT)

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.

Tether’s Audit Issues

Over the years, questions have been raised by different parties whether all the Tether issued are actually backed.

Tether Blacklisting Function on Etherscan, Source: etherscan.io
Tether Blacklisting Function on Etherscan, Source: etherscan.io

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.

Tether’s Weaknesses, Source: USDT Whitepaper
Tether’s Weaknesses, Source: USDT Whitepaper
  • 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.
Historical Tether Price, Source: coinmarketcap.com
Historical Tether Price, Source: coinmarketcap.com

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.

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.

  • 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.
USDC smart contract address on Etherscan, Source: etherscan.io
USDC smart contract address on Etherscan, Source: etherscan.io
USDC Blacklisted Account Report, Source: centre.io
USDC Blacklisted Account Report, Source: centre.io
Blacklisted USDC Wallet, Source: etherscan.io
Blacklisted USDC Wallet, Source: etherscan.io

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.

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.

BUSD Smart Contract Code Includes Functions to Freeze Addresses, Source: etherscan.io
BUSD Smart Contract Code Includes Functions to Freeze Addresses, Source: etherscan.io

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.

Dai (DAI)

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.

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.

TerraUSD (UST)

*** 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. ***

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 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.

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.

Which Stablecoin Is The Safest?

*** Update May 2022: Since Terra got destroyed, it is obviously no longer a safe stablecoin. ***

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.

Sources

https://www.gemini.com/cryptopedia/what-are-stablecoins-how-do-they-work

Tether:

https://tether.to/contact-us/
https://tether.to/about-us/
https://tether.to/wp-content/uploads/2016/06/TetherWhitePaper.pdf
https://tether.to/wp-content/uploads/2021/08/tether_assuranceconsolidated_reserves_report_2021-06-30.pdf
https://coinmarketcap.com/currencies/tether/
https://fortune.com/2021/10/15/tether-crypto-stablecoin-fined-reserves/
https://www.theverge.com/22620464/tether-backing-cryptocurrency-stablecoin

USDC:

https://www.circle.com/en/usdc
https://www.centre.io/usdc
https://f.hubspotusercontent30.net/hubfs/9304636/PDF/centre-whitepaper.pdf
https://www.centre.io/usdc-ecosystem
https://fortune.com/2018/02/26/circle-cryptocurrency-trade-bitcoin/
https://www.centre.io/usdc-ecosystem

BUSD:

https://paxos.com/busd/
https://paxos.com/attestations/
https://github.com/paxosglobal/busd-contract
https://www.binance.com/en/busd
https://coinmarketcap.com/currencies/binance-usd/markets/
https://academy.binance.com/en/articles/what-is-busd

DAI:

https://makerdao.com/en/governance
https://makerdao.com/en/whitepaper#abstract
https://ethereumprice.org/guides/article/dai-savings-rate-explained/ sdds

UST:

https://www.terra.money/Terra_White_paper.pdf
https://coinmarketcap.com/currencies/terrausd/
https://docs.terra.money/Reference/ecosystem.html#terra-website-and-socials
https://anchorprotocol.com/docs/anchor-v1.1.pdf
https://mirror.finance/MirrorWP.pdf
https://docs.terra.money/Reference/ecosystem.html#ecosystem-partnerships

Other References:

https://www.gemini.com/cryptopedia/what-are-stablecoins-how-do-they-work
https://medium.com/human-rights-foundation-hrf/privacy-and-cryptocurrency-part-iv-stablecoins-for-human-rights-blacklists-and-traceability-6d74ee17c25d

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Ren & Heinrich

Ren & Heinrich

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Garbage man turned millionaire who writes about crypto and economics. Teaching you how to research & invest 🔬🔑📈 Follow me on Twitter: @ren_heinrich