Standard Kepler
Blockchain Cryptocurrency Research USDT Stablecoins GUSD USDC

USDT Shortcomings Open Door to Alternative Stablecoins

09/24 – 09/30

Blockchain Cryptocurrency Research USDT Stablecoins GUSD USDC
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WEEKLY RECAP

  • Total market cap. reached $222bn (a 1.5% decrease), and 7 day trading volume slumped 0.6% for top 100 crypto


WEEK AHEAD

  • 1 Oct: XLM to launch lightning network beta
  • 4 Oct: ADA to release roadmap update


THOUGHTS OF THE WEEK

The existing shortcomings of USDT presents a significant market opportunity for alternative stablecoins. Financial institutions have in recent weeks been pursuing this opportunity, with Paxos launching PAX, the Winklevoss brothers launching GUSD, and finally Circle launching USD Circle (USDC). PAX, GUSD, and USDC are all ERC-20 tokens, and hence display significant differences to market leader USDT.

USDT is currently the second most actively traded cryptocurrency, with a dominant 93% share of the stablecoin market. Despite its wide adoption, USDT’s lack of transparency has aroused significant public concern. This lack of transparency stems from accusations of running a “fractional reserve”, with both the public and industry experts doubting if Tether Limited (the company behind USDT) holds a sufficient USD reserve to back all USDT in circulation.

Focusing on USDC, the most distinguishing feature of USDC against USDT is the protocol used. Unlike USDT that is built on the omni layer, USDC is a ERC-20 token built on the ETH platform. This means that the development of USDC is open source, with its smart contract code being open to third party auditing. Furthermore, updates to the ETH network can be applied to USDC. However, the difficulty to scale ERC-20 tokens should be a concern, and USDC’s ability to handle bulk transaction volumes is yet to be proven.

This being said, we believe another compelling aspect of USDC over USDT to be its wide support from the industry. This support is focused through the “Centre Consortium” operating entity, which receives the support of major industry participants such as Bitmain. USDC also enhances its compliance by introducing an audited AML and compliance program that meets FATF standards, and USDC is regulated by FinCEN as a licensed money transmitter. These measures help to address the concerns typically associated with USDT.

We may speculate that the key incentive for alternate stablecoin issuers is to attract massive capital inflow from traditional investors, especially given the growing reliance on stablecoins during bear markets.  Although decentralization is a core idea of blockchain technology, we believe that centrally managed yet transparent stablecoins can help endow crypto markets with some much needed stability. We expect the competition among stablecoins to intensify and persist in the long term, and stablecoins of increasing reputability may successively displace each other.

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