Stablecoins maintain a stable price through reserves such as fiat currency, commodity, or other cryptocurrencies. The top stablecoins are widely considered an attractive investment option because they don't come with any of the risks inherent to cryptocurrencies, such as price volatility.
This article presents some key points to help you understand the top stablecoins better, including the different types, controversies, and potential issues, the reasons behind Tether's sustained prominence, and more.
Types of stablecoins
The three main types of top stablecoins are fiat-collateralized, crypto-collateralized, and commodity-collateralized. The main kind - fiat-collateralized - is backed by the US dollar, euro, or another fiat currency. Algorithmic stablecoins are also typically pegged to a fiat currency, but they use computer algorithms and smart contracts to keep their value stable. This doesn't always work – TerraUSD, once a top stablecoin, famously lost its peg in 2022, leading to a market catastrophe.
A commodity such as gold or oil backs commodity-collateralized stablecoins, and one or more cryptocurrencies back the last type of stablecoins. The current stablecoin market cap is around $155 billion, and it is expected to reach $2.8 trillion by 2028. In 2018, the market cap was just $3 billion.
Against this backdrop, Ripple recently announced the launch of a stablecoin, which will have a 1:1 peg to the US dollar. Ripple's new product, which the company hopes will become a top stablecoin, will be fully backed by US dollar deposits and short-term US government treasuries. A third party will audit these reserve assets, and Ripple will publish attestations each month.
Top stablecoins: Controversies and potential issues
There are more than 100 actively traded stablecoins on the market. One of the main criticisms of the top stablecoins is that they are backed by a central authority rather than decentralized. There are exceptions, such as DAI. There have been concerns about the auditability and transparency of the reserves.
The remarkable history of Tether
Tether was the second stablecoin to be launched. The first, BitUSD, came to market in 2014 but failed to gain traction due to collateral issues and low adoption. Tether, the top stablecoin of all time, was launched in 2015. Exchange on multiple platforms started soon after, and it became the dominant stablecoin, in part because of its peg to the US dollar.
It remains the leading global stablecoin and has reached the value of $106 billion in circulation. That's more than three times the market cap of USD Coin, its closest competitor. Crypto exchange users who trade Tether find it easy to move in and out of positions. The top stablecoin is accepted by a wide range of businesses and merchants, even online casinos.
How the top stablecoin maintains its peg
Tether claims to maintain its peg via a number of mechanisms, the main one being that each USDT token is backed by a dollar reserve in a bank account. This ensures the necessary liquidity to maintain the peg of the top stablecoin. Tether has also implemented other measures, such as regular audits, collateralized loans, dynamic token issuance, and consistent operations.
The company behind the top stablecoin, Tether Limited, claims that regular audits from third-party accounting firms guarantee that the dollars in reserve are equal to the number of USDT tokens circulating. The parent company also allows users to borrow USDT by providing collateral in Bitcoin, Ethereum, and other cryptocurrencies. This helps maintain the peg by increasing demand for USDT.
To maintain the peg, the supply of USDT tokens in circulation is adjusted. When demand for the top stablecoin increases, the issuer mints new tokens and sells them for US dollars. When demand drops, Tether buys back USDT and retires them to reduce the circulating supply. Finally, USDT Tether has a team of traders who engage in market operations to maintain the peg. These traders buy and sell USDT tokens on various cryptocurrency exchanges to keep the price of USDT close to its peg.
Concerns among analysts and regulators
Tether's large reserves and skyrocketing growth have led to concerns among analysts and regulators about potential financial risks if the top stablecoin fails. Despite these, Tether insists it is committed to financial prudence and transparency.
Lack of transparency has been a major criticism of the top stablecoin. In the past, analysts have accused Tether Limited of not providing enough information about the reserves. In 2019, the company admitted that cash and cash equivalents only made up 74% of USDT's backing.
“Tethering” Bitcoin
Tether Limited has been accused of market manipulation as well. Some experts claim the company prints USDT irresponsibly to manipulate cryptocurrency prices. According to John Griffin, University of Texas finance professor, the top stablecoin, Tether, was behind the Bitcoin price surge in 2017.
The paper titled "Is Bitcoin Really Un-Tethered" and coauthored by graduate student Amin Shams revealed that just 87 hours of trading could have generated a 50% Bitcoin price increase. This time amounts to just 1% of total trading activity. According to Griffin, Tether trading had a pronounced effect on the price of Bitcoin.
The paper focused on the so-called push-and-pull nature of trading the top stablecoin. The push is driven by growth or drop in supply, and pull involves investor demand for Tether. After periods of negative Bitcoin return, the top stablecoin flowed to other exchanges from Bitfinex, according to the paper.
Expressed differently, Bitfinex pushed USDT right after its price declined. According to the authors, Tether is pushed after periods of printing the top stablecoin and after periods of negative returns.
Legal issues
Tether has not been spared legal troubles either. The New York Attorney General's office started investigating Tether Limited and Bitfinex over fraud allegations in 2018. They found Bitfinex had used USDT to conceal a loss of $850 million. Tether Limited paid $18.5 million in a settlement with the authority in February 2021.
In 2022, Tether made a record profit of $700 million despite the collapses of TerraUSD, LUNA, and FTX in what was a terrible year for the crypto market overall. The company benefited as interest rates rose in the US and worldwide. Tether ended the year with excess reserves of $960 million and about $67 billion in assets. It also reduced its secured loans.
As Bankless Times predicted, the top stablecoin continued to do well in 2023. Its success happened despite the company’s outflows of over $21 billion.
Regulations of top stablecoins: How likely are they?
Tether is not the only top stablecoin marred by controversy – so were a few others, as you'll soon find out. The controversies surrounding the top stablecoins, the TerraUSD depegging, and its subsequent crash put stablecoins in the regulatory spotlight. They are often associated with systemic risks.
Global regulators like the International Monetary Fund and the Bank of International Settlement, and the Biden Administration all insist on crackdowns. Officials allege that the structure of stablecoins and the top stablecoins' exponential growth present a unique financial risk.
Before TerraUSD crashed, the US government focused only on asset-backed coins, treating stablecoins superficially. After the crash, regulators claimed the events had been "inevitable," and some stakeholders even used them to argue in favor of a central bank digital currency.
Stiff competition and risks: the cases of USDC and DAI
Stablecoins' proliferation can make it hard to differentiate between valuable and useless ones. The meteoric rise of top stablecoins and emerging new ones presents chances for higher returns and diversification. As the market evolves, investors must remain vigilant and informed to make the most of the opportunities top stablecoins offer.
However, this is easier said than done. When Signature Bank, Silicon Valley Bank, and Silvergate Bank went under, both USDC and DAI lost their peg to the dollar. USDC lost 13% of its value on the secondary market after Circle, its issuer, reported that Silicon Valley Bank held $3.3 billion of cash reserves backing the top stablecoin. Circle also relied on Silvergate and Signature to run redemptions between dollars and USDC.
At the time, USDC holdings accounted for more than 50% of the collateral reserves backing DAI, which is why DAI's value tracked that of USDC closely. After the Fed confirmed support for the banks' creditors, the top stablecoins recovered their pegs.
Tether was not affected by the prominent bankruptcies. As investors rushed to get rid of their USDC and DAI, Tether's value surpassed $1 before returning to parity.
The future of stablecoins
Demand for this asset class is definitely growing, as the financial results of the top stablecoins show. We can anticipate a surge in their future adoption. Investors are always looking for reliable ways to store their assets without losing value, and stablecoins are a possible solution.
As they become established in the market, deeper integration with traditional finance can also be expected. Conventional financial institutions are exploring approaches to include the top stablecoins in their systems. Some banks, like JPMorgan, even launched their own. These initiatives are paving the way for other banks to adopt stablecoins as a smart alternative to fiat currencies.
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