USDC, USDT, PAX, GUSD: The Stablecoins Taking on Tether and Tokenizing the US Dollar on Ethereum

usdt-The Stablecoins Taking on Tether and Tokenizing the US Dollar on Ethereum

Volatility within the price of cryptocurrencies can both be a huge opportunity and an enormous liability. With prices shifting every second and enormous one-day spikes and crashes commonplace, savvy crypto day traders can make a fortune through moving their funds between different cryptocurrencies. But losses can pile up just as quickly as gains, and moving funds between crypto and fiat currency is both slow and costly. That’s where stablecoins come in – coins that are pegged to the value of a real-world fiat currency, allowing traders to preserve gains and guard against losses without exchange funds out of a cryptocurrency exchange.

For a long time, US Dollar Tether (USDT) was the only widely-available stable coin. However, the past year has seen numerous competing stablecoins created, and there are now five such US Dollar-pegged stablecoins listed among the top 50 cryptocurrencies on coinmarketcap.com (CMC.)

USDT is still the market leader, ranked in 6th place on CMC with a market cap a little above $2 billion. USD Coin (USDC) is next, in 19th place with a market cap just above $300 million. True USD (TUSD) is ranked 26th with a $210 million market cap, while Paxos Standard (PAX) is 39th with $130 million, and Gemini Dollar (GUSD) is 50th with $90.7 million.

These new offering have some powerful supporters, with USDC being supported by a consortium that includes major fiat-to-crypto gateway Coinbase and the Goldman Sachs-backed Circle crypto finance firm. True USD was created by a Silicon Valley start-up called Trust Token. Gemini Dollar is the official stablecoin of the Winklevoss Twins’ New York regulator-approved Gemini exchange. Paxos Standard has also received the approval of the New York Financial Services Department (NYFSD).

All claim to offer parity with the US Dollar, though this can fluctuate slightly at times of high demand. At the time of writing, all five stable coins have a current market price of $1.01 on CMC. Spikes above $1 are often thought to indicate bearish trends and negative market sentiment, as crypto traders pour funds into stable coins to avoid potential losses. CMC records USDT’s price movements since March 2015, and while it has typically kept parity with $1 in fiat, it fell beneath $0.92 in late April 2018, bouncing back as high as $1.04 by late May.

As well as offering crypto traders another way to shift funds away from volatile cryptocurrencies, these new offerings look to bring some of the benefits of cryptocurrency and blockchain technology to US Dollar payments. All are based on the Ethereum ERC20 token standard, meaning they can be transferred between exchanges and any Ethereum wallet. They have been integrated into many of the largest crypto exchanges, with all bar Gemini available as a base pair on Binance, and USDC also being available through Coinbase.

Much of the interest these new stable coins have generated has been based around long-held uncertainty around USDT’s claims to be backed 1:1 by real US Dollars. So how are these new stable coins distinguishing themselves from USDT? And what are the main goals of the teams behind them?

The Trouble with Tether

By providing crypto traders with a way to protect funds from market volatility, Tether is an ingenious tool with widespread use. However, as Juan M. Villeverde puts it in an article for Weiss Crypto Ratings: “Of all the cryptocurrencies in the world today, Tether wins the prize as the most controversial.” Villeverde provides a neat summary of some of the controversies that have long swirled around Tether, the two biggest being that many doubt its claims to be backed 1:1 by real US Dollars, and that Tether is actively involved in market manipulation.

Tether has always vigorously denied the claims that it isn’t fully backed by real US Dollars. In June 2018, Tether released an audit report from Washington law firm Freeh, Sporkin & Sullivan LLP (FSS) that supported Tether’s claims. Tether’s statement regarding the report was unequivocal:

“To address allegations head on, we wish to make a few things clear: All Tethers in circulation are fully backed by USD reserves. Full stop. Memoranda, consulting reports, industry leaders, cryptocurrency pioneers, and competitors have all confirmed this. Reserves have always, and will always, match the number of Tethers in circulation.”

Tether’s statement also stresses the independent nature and thoroughness of the FSS report:

“The FSS report, based on a random date balance inspection and a full review of relevant bank account documentation, confirms that all Tethers in circulation as of June 1, 2018 are fully backed by existing USD reserves. It is important to note that unlimited, unhindered access to Tether’s bank accounts was provided to FSS for their review – the June 1st date was selected by FSS with no input from either Tether or its banking partners, and FSS did not provide notice until the final report was submitted.”

The market manipulation claims referenced by Villeverde are largely based on a June 2018 University of Texas study, which states that:

“…purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices… These patterns cannot be explained by investor demand proxies but are most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices.”

The central accusation of the study was that Tether is used to prop up the price of Bitcoin following declines in its value. This is mainly supposed to have occurred during the 2017 bull run, where the study claims Tether was responsible for as much as 50% of Bitcoin’s price appreciation, and 64% of that of other cryptocurrencies. While not directly addressed in the FSS report, Tether’s accompanying statement also states that it was in no way responsible for cryptocurrency market manipulation:

“Some writers posit an industry rife with money laundering and fraud. If this is the case—and we believe it is not—the state of affairs does not originate with Tether.”

While this has proved compelling evidence to some of Tether’s doubters, many remain unconvinced. A poll conducted by Invest in Blockchain in October 2018 found that more than half of respondents still doubted Tether’s claims to be backed 1:1 by real US Dollars. Evidence that opinions exist is, of course, in no way proof that those opinions are valid. But it shows that even if the controversies surrounding Tether are completely groundless, the number one stable coin still has an image problem with many within cryptocurrency circles.

The newer stablecoins have been keen to avoid being damaged by similar controversies. All four issue monthly attestation reports from independent accountancy firms, which are linked to on their official websites. These have all shown that each stablecoin is backed 1:1 by real US Dollars.

Tokenizing the US Dollar

While Tether’s current $2 billion market cap shows there is a large appetite for stablecoins among crypo traders, the newer stablecoins are all aiming to do a lot more. Coinbase states that USDC’s mission is “to build an open financial system for the world,” where everyone can “enjoy the stability of the world’s fiat currency, the US dollar.” By basing USDC on the Ethereum ERC20 token standard, it becomes possible for anyone in the world – including the billions without a bank account – to store and spend US Dollars using a mobile phone. There are also countless other potential applications:

“Being programmable unlocks a whole new world of applications and businesses: developers can create accounts to store money with one line of code; lending that is faster, cheaper, and more transparent; faster and cheaper payments, including payroll; global crowdfunding; transparent and stable donations to charity.”

The Winklevoss Twins have similarly grand ambitions for Gemini Dollar, as they made clear in a recent Reddit AMA:

“We built the Gemini dollar to bring U.S. dollars onto the blockchain. From there it can potentially power decentralized apps and crypto native services. Yes, it can also be used for money transfers, but we view it more about powering a new future than competing w/ existing payment networks built on legacy banking rails.”

Similar claims and use cases are outlined on the official websites of True USD and Paxos Standard. These stablecoins are all leveraging the power of Ethereum to create cryptocurrencies that leverages blockchain’s benefits – fast transfers and low transaction fees – while eliminating one of its biggest barriers to adoption as a form of payment: price volatility.

We recently wrote of how the Winklevoss Twins are aiming to ‘legitimize’ cryptocurrency through a marketing blitz heavily concentrated on New York City’s financial district. When Goldman Sachs’ recently-appointed CEO David Solomon was asked about cryptocurrency by Bloomberg, he said that the financial services giant had to “evolve its business and adapt to the environment.” Goldman Sachs’ backing of Circle, Coinbase’s partners in launching USDC, show they’re taking the potential of crypto and blockchain seriously.

More than just providing a safe haven for crypto day traders, these new stablecoins are looking to enable a financial revolution. Combining the capabilities of Ethereum-powered DApps with the stability of the US Dollar, they are aiming to play a huge role in pushing blockchain closer to real-world adoption.

About Christopher Williams

Christopher Williams is a British writer based in South Korea with a strong interest in emerging technologies, cryptocurrency, and the development of decentralized apps.