While stable coins only had a combined market capitalization of $3.3 billion in January 2019, they have since become integral parts of the cryptocurrency space. 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 stable coin volume has surged from $8.81 billion to $464 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, as a decentralized alternative, Terra‘s algorithmic UST cryptocurrency has been in very high demand lately, allowing the digital asset to recently become the third-largest stable coin. But what is the difference between UST, USDT, and USDC? Let’s find out together by exploring these three stable coins and how they compare with each other. But first, 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:
- 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).
- 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.
- Algorithmic stablecoins: 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. The Ultimate Battle of Stablecoins: USDT vs. USDC vs. UST 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 Unlike the other two solutions, TerraUSD (UST) is a decentralized algorithmic stablecoin on the Terra Protocol governed by the project’s community. For these reasons, it is not backed by anything tangible, and it is the responsibility of Terra’s algorithm to provide price stability for the cryptocurrency. Interestingly, since its September 2020 launch, UST has excelled in this field. Except for one extreme case in December 2020, when the coin’s price dropped to $0.85 for a little less than a day, TerraUSD’s price stability has been at the same or at a very similar level as USDT’s or USDC’s. To maintain this price stability, Terra’s algorithms utilize a dual-token model. Here, the project’s native LUNA token is utilized and burned to mint UST and other stable assets via the protocol. As part of the process, the algos automatically incentivize users to either buy or sell the token by offering them higher rates than the market price. For example, when UST goes above $1, the protocol issues more UST to increase the supply and drive its price down to $1. To achieve this, the algorithm has to burn more LUNA, which it can acquire from holders by incentivizing them to sell $1 worth of LUNA for over $1 of UST, providing arbitrageurs an excellent opportunity to make a profit on the difference. In the opposite scenario, when UST’s price falls below $1, the protocol buys $1 worth of LUNA from arbitrageurs for less than $1 worth of UST. The algo then burns UST and creates LUNA to reduce the prior’s supply and increase the coin’s price back to $1. So far, Terra’s price stability mechanism has efficiently kept UST very near the $1 mark. At the same time, this process, along with the project’s business model for maintaining the peg with the USD, has also been found sustainable in the long run. Due to its decentralized architecture and lack of physical reserves, UST doesn’t face any counterparty risks like USDT or USDC. Furthermore, as it is not managed by a company or a single entity, the stablecoin will likely not be in the spotlight in terms of regulation – at least for the time being. However, despite its interoperability with a variety of blockchains and being recognized as the third-largest stablecoin with an over $18 billion market cap and an $800 million daily volume, UST is not nearly as available across exchanges and DeFi protocols as USDC or USDT. Interestingly, Terra has been following a hybrid strategy in terms of UST price stability. In addition to the algorithm’s arbitrage-based mechanism, the project’s non-profit Luna Foundation Guard (LFG) has started accumulating huge amounts of BTC that would be placed in a reserve to maintain the stablecoin’s value peg. With a goal to hold $10 billion worth of Bitcoin by the end of Q3 2022, the LFG has so far acquired $3.5 billion of the world’s top cryptocurrency. Leading the Stablecoin Market While fiat-backed stablecoins like the USDT and USDC are widely available, their centralized management increases counterparty risks and often operate 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 the other two coins. 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.