The blockchain system thrives on the utilization of stablecoins. They are prevalent in both centralized exchanges and decentralized finance. They have also bolstered the adoption of the tech for mainstream users, especially for those who don’t wish to expose themselves to the high volatility of the market. Being pegged to the dollar, they allow users to limit exposure through a TRX to USDT exchange, for instance.
The two largest stablecoins by market capitalization are USDT and USDC. But which one should you choose if you are trying to diversify your portfolio with stablecoins? We will try to answer this question by exploring these assets’ fundamentals in this article.
How Do Stablecoins Work?
Stablecoins are crypto assets that reside on the blockchain like any other. This allows them to benefit from the advantages of the technology through near-instantaneous transfers and very low transaction fees.
However, the main difference with the likes of BTC or ETH is that stablecoins are not volatile. In fact, they are always pegged to the value of a fiat currency. In the case of USDT vs. USDC, this fiat is the US Dollar. This means that 1 USDT/USDC will always be redeemable for 1 USD.
To achieve this, the companies that issue stablecoins hold fiat or equivalent assets in their reserves. They use this collateral to be able to mint new coins. This allows the users to use the assets on blockchain platforms like centralized exchanges or DeFi platforms.
As a result, they provide a much more palatable way to enter the crypto space, as they shield users from price fluctuations. This lack of volatility in addition to low fees also makes them ideal for remittances and cross-border transfers. An international fiat transfer can take days and cost a decent percentage of the principal, while stablecoin transactions are fast, cheap, and secure.
What Is USDT?
Tether (USDT) is the stablecoin that started it all. It came out in 2014 as RealCoin but was quickly rebranded to Tether. Over the years, it has managed to capture a huge market cap and now sits in the #3 spot of all cryptocurrencies with $83 billion.
The Tether company guarantees that all USDT is 100% backed by their reserves, in either fiat or other collateral. That said, 85% of the reserves are effectively held in fiat or equivalent assets.
USDT initially launched on the Bitcoin Omni layer, a platform for creating bespoke assets on the BTC network. However, soon after the release of Ethereum, most of the USDT supply migrated to the #1 smart contract blockchain. Today, users can access native USDT on Tron, Solana, Cosmos, and Avalanche, among many others.
Transparency Issues
Over the course of its history, the Tether company has faced a lot of controversy regarding its reserves. For almost a decade, the issuer remained opaque on its holding, causing doubt among the community about a genuine peg for USDT.
However, in the past year, Tether has started providing public audits on its reserves. This has put a lot of the concerns to rest and allowed Tether to grab a significant portion of the market.
Market Position
Due to its longevity and adoption in DeFi and CeFi, USDT is far above the competition when it comes to market positioning. Currently, it accounts for more than 65% of all the stablecoins present in the markets.
What Is USDC?
USDC is a stablecoin issued by the Circle company. Unlike Tether, it is fully regulated by a money transmitter license similar to PayPal.
The company provides monthly attestations of its holdings, and its reserves are held by major institutions such as BlackRock.
Decreasing Market Cap
USDC’s connection with the US government and regulators hasn’t played in its favor lately. Due to the strong regulative measures carried out by the SEC in the US, investors are moving away from US-based crypto. This has resulted in the USDC market cap declining by more than 50% since July 2022.
Market Analysis
Even though the market cap of USDC has been drastically declining, it still remains the most popular stablecoin in DeFi. While its presence might be faltering on CEXes, users are more than ever utilizing it in liquidity poos and lending protocols.
Choosing Between USDC and USDT
Choosing between USDC and USDT can be tough. Both assets are quite centralized, which incurs added risk to users. However, opting for USDT could be the better choice now, as the company provides more transparent reserve reports and isn’t under the US government’s control.
