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AAX Trends

An In-Depth Comparison of Stablecoins USDT, USDC & BUSD

An In-Depth Comparison of Stablecoins USDT, USDC & BUSD

Explainers Cryptocurrencies

08 Nov 2022

While stablecoins only had a combined market capitalization of $3.3 billion in January 2019, they have since become integral parts of the cryptocurrency space.

Due to the volatility of the crypto industry and the ever-changing nature of digital assets, this article has been updated in November 2022 so that the information remains relevant and up to date with current market trends.

In a little more than three years, stable fiat-pegged assets feature a total supply of over $181 billion, representing a nearly 5,400% growth between January 2019 and April 2022. During the same period, the adjusted on-chain stablecoin volume has surged from $8.81 billion to $580 billion, representing an increase of over 5,150%.

In the meantime, while Tether's USDT dominated the market for a long time, Circle's and Coinbase's USDC has been continuously growing in popularity in the last two years. At the same time, Terra's algorithmic UST cryptocurrency - previously known for being the third-largest stablecoin on the market for the longest time - dramatically crashed on May 9, 2022, in what was known as one of the biggest black swan events of the crypto industry. The UST stablecoin lost its peg to the US dollar, freefalling until it no longer carried any value and shedding billions in market cap. Meanwhile, Binance USD (BUSD) has been steadily gaining traction and popularity on its end.

But what is the difference between UST, USDT, USDC, and BUSD? Let's find out together by exploring these three stablecoins and how they compare with each other.

What Are Stablecoins?

Before we jump right into analyzing USDT, USDC, or UST, it's essential to first define what stablecoins are and why they are useful for crypto users.

A stablecoin is a digital asset pegged to the value of a commodity or a currency that feature a stable price. In most cases, the underlying asset is a major fiat currency like the USD, but there are also stablecoins such as Pax Gold (PAXG) that are tied to commodities like gold.

As stablecoins function just like "standard" cryptocurrencies on the blockchain but without the high volatility associated with these coins, digital asset investors can leverage stablecoins for many things, such as:

  • Storing value on the blockchain while reducing the risks of volatility
  • Sending and receiving fiat-pegged money without the limitations of the traditional financial system (e.g., slow and expensive cross-border transfers, high credit card processing costs)
  • Moving money fast across multiple blockchain networks, decentralized finance protocols, and dApps
  • Participating in crypto activities, such as lending and yield farming, to earn much better interest on stablecoins than what most banks offer to consumers
  • For exchanges and DeFi protocols, stablecoins present an excellent way to attract increased liquidity and replace fiat currencies in trading pairs with fiat-pegged stable assets to facilitate easier and more efficient crypto trading

Stablecoins utilize various mechanisms to maintain their value pegs to their underlying assets. How they achieve this is generally based on the category a stablecoin falls into:

1. Fiat-backed stablecoins

As their name suggests, fiat-backed stablecoins are backed by real-world cash held in physical reserves to follow the price dynamics of their underlying assets. In practice, however, most stablecoins falling into this category utilize a wide variety of general market instruments (e.g., government and corporate bonds, commercial paper, fiduciary deposits, secured loans) to complement cash reserves. Due to the requirement of real-world reserves, fiat-backed stablecoins are centralized, as they are operated and issued by single or multiple entities (e.g., Tether for USDT or Circle and Coinbase for USDC).

2. Crypto-backed stablecoins

As a decentralized alternative, crypto-backed stablecoins utilize digital asset reserves instead of cash reserves to achieve price stability. Instead of physical deposits, coins like DAI are minted using a wide variety of supported cryptocurrencies as collateral held transparently in smart contracts. These cryptocurrencies are unstable in price and are prone to fluctuations. Crypto-backed stablecoins are generally overcollateralized to decrease the risks of becoming undercollateralized due to excessive volatility. To redeem the assets held as collateral, users must burn their stablecoins.

3. Algorithmic stablecoins

As a decentralized alternative, crypto-backed stablecoins utilize digital asset reserves instead of cash. Unlike the previous two types, algorithmic stablecoins don't keep any fiat, crypto, or other reserves to peg their values to underlying assets like the USD. Instead, an algorithm is responsible for achieving the same goal by executing various tasks as part of a price stability mechanism. For example, an algorithm incentivizes users to sell UST that is trading above $1 for $1 of LUNA at a profit to drive the stablecoin's price down to its $1 peg.

Each category has its own set of benefits and drawbacks.

For example, while fiat-backed stablecoins are the first successful forms of blockchain-based stable assets and are more available than the others, their centralized operations increase counterparty risks, especially when the project is not transparent about its reserves.

At the same time, crypto-backed stablecoins offer a decentralized alternative to fiat-backed ones with good price stability but at the cost of overcollateralization that keeps a significant amount of liquidity out of the market. And despite their overcollateralization, there is still a risk of becoming undercollateralized due to the high volatility of crypto reserves.

Finally, an algorithmic stablecoin also leaves room for mistakes, especially when the project behind it fails to make the right decisions before launch. As an autonomous algorithm maintains the value peg instead of fiat or crypto reserves, its creators have to design it carefully as well as develop a business model around it that is sustainable in the long run. Failure to achieve these can lead to grave consequences, such as the coin's price becoming unstable, which renders it unusable.

This is what happened with Terra's UST, a fiat-backed stablecoin that fell from grace on May 2022. For the longest time before its downfall, UST excelled at maintaining its price stability. However,

Analyzing Stablecoins: USDT vs. USDC vs. UST vs. BUSD

Now that you know the essentials about stablecoins, let's see how USDT, USDC, and UST compare with each other.

USDT

Since the dawn of stablecoins, Tether's USDT dollar-pegged cryptocurrency has been the most popular and widely available stable asset. As the top stablecoin by market capitalization ($83.1 billion) and also volume ($82 billion in the last 24 hours), USDT is available on most digital asset exchanges as well as a great share of decentralized finance protocols.

Founded in 2014 originally as "Realcoin," Tether is the name of the stablecoin project that issues USDT as well as the company that manages it -Tether Ltd. While they initially claimed otherwise, Tether and the cryptocurrency exchange Bitfinex are owned by the same enterprise called iFinex.

Originally, USDT launched on the Omni Layer Protocol (formerly Mastercoin) and later expanded its support with different blockchains that include Ethereum, Tron, Algorand, Solana, and Binance Smart Chain.

Tether is a fiat-backed stablecoin that has maintained excellent price stability since its launch-with only a few exceptional instances where it fell short. For a long time, the company stated on its website that every USDT had been backed "1-to-1" by US national currency held in the project's reserves. Thus, 1 USDT was theoretically the equivalent of 1 USD in Tether's reserves.

However, due to Tether's lack of transparency and previous scandals with Bitfinex -both companies were fined multiple times by regulators-, it has always been a great question whether USDT is backed by real USD reserves.

Later on, probably because of the pressure from US authorities, the company revealed that cash represented less than 3% of the assets held in its physical reserves. In addition to real-world USD, the stablecoin is primarily backed by:

  • Commercial paper (49.59%)
  • Fiduciary deposits (18.35%)
  • Secured loans (12.55%)
  • Corporate bonds (9.96%)

As a result, it's safe to conclude that USDT is not even close to being 1:1 pegged to the USD.

However, despite these controversies around Tether's reserves as well as multiple scandals such as the alleged usage of $850 million USDT to cover Bitfinex's losses a few years ago and lawsuits the company has been involved in, USDT's price remains very stable.

At the same time, while it has lost some of its market share to competitors over the years, it is still the leading stablecoin within the crypto industry.

USDC

Issued and managed by the blockchain payments firm Circle as part of the Centre consortium of which the crypto exchange Coinbase is also a founding member, USD Coin or USDC is another fiat-backed stablecoin that launched in September 2018.

Similar to Tether's case, while it was also advertised for awhile as a stablecoin featuring a 1:1 peg with the USD, there was a time when USDC was not 100% backed by cash.

In July 2021, a third-party audit revealed that USDC's reserves consisted of 61% cash and its equivalents, 13% Yankee CDs, 12% US Treasuries, 9% commercial paper, 5% corporate bonds, and 0.2% municipal bonds and US agencies.

Later on, due to pressure from US regulators, Circle radically changed its reserves breakdown. As a result, the same auditing firm's investigation concluded that USDC was 100% backed by cash and its equivalents.

For that reason, 1 USDC is indeed backed by 1 US dollar. There are instances where there may be discrepancies between the two assets due to USD bank deposits and short-term, highly liquid investments made but as a general rule of thumb, USDC is closely pegged to the US dollar.

Despite USDC’s centralized management and issuance, the regulatory pressure on fiat-backed stablecoins, and the company's initial miscommunication about the actual breakdown of its reserves, most of the crypto community regards USDC as a trustworthy stablecoin project.

Unlike Tether, its issuer Circle operates as a regulated payments company in the US and is a recognized electronic money institution in the UK and the EEA. Furthermore, while the stablecoin now features a 1:1 peg with the USD with real-world asset backing, the company's reserves are regularly audited by third-party firms.

Among stable assets, USDC ranks as the second-largest stablecoin on the market, with a nearly $49 billion market capitalization and a $4.8 billion volume in the last 24 hours. Like USDT, USDC has maintained near-perfect price stability since its launch (except for periods of extreme market volatility).

UST

Before we delve deeper into the subject of UST, it's important to note that the TerraUSD stablecoin is no longer offered on the crypto market as a result of its great plunge. Unlike the other two solutions, TerraUSD (UST) is a decentralized algorithmic stablecoin on the Terra Protocol governed by the project's community that is now obsolete.

Because it was algorithmic in nature, TerraUST was not backed by anything tangible, and it was the responsibility of Terra's algorithm to provide price stability for the cryptocurrency.

Interestingly, since its September 2020 launch, UST excelled in this field. TerraUSD's price stability had been at the same or at a very similar level as USDT's or USDC's, up until one day in May 2022, when UST crashed along with its sister coin Luna, both plunging in price and resulting in Terra's great downfall.

To maintain its price stability, Terra's algorithms utilized a dual-token model. Terra's native LUNA token was burned to mint UST and other stable assets via the protocol. As part of the process, the algos automatically incentivized users to either buy or sell the token by offering them higher rates than the market price.

For example, when UST rose above $1, the protocol issued more UST to increase the supply, driving its price down to $1. To achieve this, the algorithm had to burn more LUNA, which it acquired from holders by incentivizing them to sell $1 worth of LUNA for over $1 of UST, providing arbitrageurs with an excellent opportunity to make a profit on the difference.

Terra had been following a hybrid strategy in terms of UST price stability. But despite many's hopes, UST failed to restore its peg, gradually plunging to a value of zero. Its CEO Do Kwon is currently being pursued as South Korean regulators are investigating whether there was price manipulation that was involved during the establishment of LUNA and UST. This story continued to develop.

BUSD

Created by Binance exchange and issued in partnership with Paxos, Binance USD (BUSD) is a stablecoin that is pegged on a 1:1 ratio to the US dollar that was launched on September 2019. It has been approved by the New York State Department of Financial Services (NYDFS).

BUSD has grown exponentially since its inception, reaching a market cap of $22.5 billion. It is now considered the third-largest stablecoin by market cap, after USDT and USDC. BUSD also figures among the top ten biggest cryptocurrencies by market cap. Currently, Binance USD's maximum supply is not available, but it has a circulating supply of 22.9 billion coins.

As a result of TerraUSD's downfall, Paxos has taken extra measures to ensure that there is transparency in regard to what assets are backing BUSD. The assets backing BUSD include:

  • cash and cash equivalents(96%)
  • U.S. Treasury bills (4%)

BUSD's adoption rate continues to increase as its availability spans across wallets, platforms, decentralized, and centralized exchanges. To buy BUSD, head over to AAX today.

Enjoy an APY of up to 80% on Stablecoins via AAX

While stablecoins are designed to provide stability within the digital assets industry, they can also be leveraged to earn a passive income. To begin saving with stablecoins, head over to AAX, where you can earn an APY of up to 80% on selected stablecoins for a limited time. Users can either opt for fixed or flexible savings on AAX.

  • Fixed savings: Users can lock up their stablecoins for a period of 7,14,30,60,90,180, or 360 days. Depending on the stablecoin, the maximum amount of stablecoins they can subscribe to this savings plan varies.
  • Flexible savings: Users are allowed to withdraw anytime and the estimated APY percentage varies from 2.5%-6.35%.

Leading the Stablecoin Market

While fiat-backed stablecoins like the USDT and USDC are widely available, their centralized management increases counterparty risks and often operates less transparently than their decentralized equivalents.

At the same time, they also face increased pressure from regulators, especially in the United States, where the government seeks to regulate stablecoins issued by corporate players.

On the other hand, UST provides a decentralized alternative to USDC and USDT with an excellent track record for maintaining price stability via Terra's algorithms and dual-token model. Furthermore, the project's new BTC reserves could serve as a safety mechanism in case there is an issue with the algo.

However, UST is not yet as widely available as USDT and USDC. Furthermore, while UST doesn't have to face the same level of regulatory pressure as its centralized competitors, some investors are reluctant to hold algorithmic stablecoins due to the lack of (direct) fiat or crypto collateral usage in the price stability mechanism.

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