Dollar-Pegged Stablecoins Attack USDT Dominance

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Cryptocurrency trading is undergoing a slow shift, as more dollar-pegged stablecoins continue to challenge the dominance of Tether (USDT). The shift signifies demand for more transparent and regulated dollar-based coins. In addition to centrally-controlled stablecoins, there is an inflow of new assets specifically engineered for DeFi trading and staking, with new minting mechanisms and specific risks.

The doubts about the quality of the reserves that support USDT is pushing traders to other stablecoins, which are linked to more transparent and liquid exchanges. Trading on Binance relies on Binance USD (BUSD), which now has more than 10B tokens issued. BUSD trading volumes make up 6% of all crypto activity. 

The other top digital stablecoin is USDC, issued by the Centre startup. The coin has a higher circulating supply of 25B tokens, but a lower velocity of money. USDC makes up about 3% of crypto trading activity. 

Tether Getting Phased Out

The USDT stablecoin, which until recently took over the bulk of trading, has fallen to unprecedented activity lows. USDT now makes up just 89% of all crypto trades, down from a peak share above 99%.

USDT issuance has also slowed down in July, peaking at around $62B after almost vertical growth in the past year. 

Despite the high supply, USDT velocity is falling, and only 92% of the supply changes hands every day. During periods of lower supply and higher trading activity, each USDT was traded up to 10 times in a 24 hour period. 

Other Stablecoins Offer Passive Income

The advantage of BUSD is that it can be used for passive income across the Binance ecosystem. The token is compatible with Binance Chain and Binance Smart Chain, and can be staked or locked in liquidity pools. 

Stablecoins are also important in DeFi pairs, as they offer small opportunities for arbitrage based on minor fluctuations around the $1 level. 

For USDC, Coinbase is preparing a passive income program with an annualized percentage rate of up to 4%. The deposits will be secured by Coinbase, and will rely on the actual dollar backing of Centre and other USDC issuers. 

Is USDT Really Backed by Dollars

One of the biggest sources of risk for cryptocurrency trading and price discovery are the fears that USDT issuance has happened without backing from transparent, liquid reserves. 

Over the years, Tether, Inc. has failed to produce independently audited evidence of its actual reserves, sparking fears that some USDT coins may have been minted without backing. 

Currently, USDT remains one of the most influential assets, as it moves through nine different blockchains, including Ethereum, TRON, Algorand, and EOS. Newer stablecoins such as USDC only rely on the Ethereum network. 

Not All Stablecoins are Created Equal

The leading stablecoins are currently the ones that have some form of asset backing. In the case of BUSD and USDC, the backing is supposedly in fiat, as the coins are redeemable. 

But there is a riskier type of stablecoin, which is kept in check solely by algorithms. For now, DAI remains the most successful crypto-backed stablecoin. But other attempts are not as safe. 

Recently, Safedollar was exploited and sank to zero in a dramatic warning of the potential for market crashes. 

Safedollar (SDO) got attacked through a smart contract loop exploit, which allowed infinite minting. This led to SDO dumping on decentralized markets, where the attacker ended up with safer dollar-pegged coins. 

SafeDollar was exploited today and dumped on the open market for ~$250k. It was an infinite mint exploit. The market cap of $SDO was ~$248mm but there was just $250k in exit liquidity,. The attack happened because SafeDollar incentivized a token that has a fee on transfer. 🧵👇 pic.twitter.com/7oW020zEQ4

— Mudit Gupta (@Mudit__Gupta) June 28, 2021

SDO was a pioneer in being one of the first stablecoins based on the Polygon (MATIC) network, boasting speed and safety for decentralized finance. However, the asset could not keep its peg as its supply was expanded maliciously.

DeFi has allowed multiple reward schemes where dollar-pegged assets are generated through token staking. For now, there is no way to predict if other protocols are open to similar exploits. However, decentralized stablecoins remain riskier in comparison to the older type of asset. 

For some traders, USDC is viewed as riskier since it can be monitored and frozen, and its ownership is not anonymous, only possible after a KYC procedure. But decentralized, user-generated stablecoins with a crypto collateral are harder to trace and open to exploits and attacks.

BTC Starts Un-Tethering

BTC trading on Binance was traditionally linked to USDT liquidity. Currently, the share of USDT/BTC pairing is down to 53% of all activity, while in the past USDT was responsible for more than 70% of BTC trades. 

The share of BUSD has expanded to above 7% thanks to the Binance spot and futures market. USDC still has a 1.73% share of BTC trades. 

In the past, BTC market prices have been linked to USDT supply, as some analysts suggested the stablecoin was deliberately minted to boost the position of BTC. Those statements remain unproven, and BTC has continued to attract new investors coming in through both fiat buying and stablecoin trades. 

On Thursday, BTC reached $33,518.38, sliding down after touching $36,000 and meeting resistance during the mid-week high.

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