Until a few months ago, many argued that among the major stablecoins pegged to the U.S. dollar Tether (i.e., USDT) was the most problematic.
Instead, the last few weeks have shown the exact opposite. In this early 2023 virtually every other major stablecoin has had problems except USDT.
The problems of stablecoins
Until last year, there were five major stablecoins, all pegged to the U.S. dollar: USDT, USDC, BUSD, DAI and UST.
In May 2022 UST imploded, because it was not collateralized in dollars or equivalent, but was an algorithmic stablecoin collateralized in Luna. With the collapse of Luna, the UST stablecoin and the entire Earth ecosystem collapsed as well.
There were four left, but in February BUSD also began to have problems.
BUSD, or Binance USD, is fully collateralized in dollars or dollar equivalents, but the U.S. authorities got in the way and put its issuer under investigation. It should be mentioned that Binance USD is not issued by Binance, but by Paxos, which has been forced to stop issuing new BUSD tokens.
And so, in the absence of new issuances, as of February 13, BUSD’s market capitalization has halved from $16 billion to $8 billion. Since BUSD redemptions are continuing, with related token burns, while no new tokens are issued, it is extremely likely that this contraction will continue.
At that point three major stablecoins remained: USDT, USDC and DAI.
Over the weekend, however, the bankruptcy of Silicon Valley Bank, where the USD Coin issuer (Circle) held some of its reserves, sent USDC’s value plunging to $0.84, although it has since recovered some of its peg to the dollar to $0.99.
A similar dynamic has befallen DAI, whose market value trend has followed that of USDC.
The Triumph of Tether (USDT)
So in the end only USDT had no problems, among the major stablecoins.
On the contrary, during these early months of 2023 its market capitalization rose from $66 billion to yesterday’s annual peak of $74 billion. It is now down slightly to 72.4 billion, due to USDC‘s partial recovery.
It also never in fact lost its peg to the dollar, except for very brief moments, and with minimal deviations occurring only on a few exchanges with low liquidity.
However, it should be remembered that last year, before the UST implosion, it came in at 83.2 billion, so it has not yet recovered what it has lost since then in terms of market capitalization.
However given the contraction of crypto markets over the past twelve months, rather than the absolute value of its market cap it is worthwhile to analyze the trend of its dominance within the stablecoin market.
In fact, as of May 2020, when it reached its peak in market capitalization, it had a dominance of just under 52 percent.
With the almost complete disappearance of UST, its dominance could have increased, but a sharp loss of capitalization due to fears about its resilience caused dominance to plummet to 44 percent within the next two months.
Beginning in September, however, Tether’s dominance went back up to 48 percent in October, although with the collapse of FTX in November it returned to 46 percent.
It boomed from the end of January 2023, when it first returned to 50 percent, and then exceeded 52 percent shortly after mid-February.
In other words, although it has less market capitalization than at the beginning of May 2022, its dominance is greater, due to the contraction that has taken place in the past twelve months in the crypto markets, and particularly in the stablecoin market.
Right now almost 56 percent of the internal market cap of all stablecoins is USDT.
Comparison with other stablecoins, Tether has the upper hand
In the past thirty days BUSD has halved its market capitalization. USDC has gone from 41.3 to 40.2, DAI from 5 to 6.1, and Tether from 68.4 to 72.4.
In other words, while overall the market cap of stablecoins has shrunk, that of USDT, on the other hand, has increased significantly. Mainly due to the shift of funds from other stablecoins.
It should also be added that TUSD (True USD) is being added to this list. Partly because Binance seems to have chosen it as an alternative to BUSD.
In fact, in the past thirty days its market capitalization has risen from less than one billion to more than two, more than doubling.
In other words, at the beginning of the year there were only four stablecoins with more than $1 billion in capitalization, while now there are back to five, thanks to TUSD, although BUSD may sooner or later come off this list.
There is not the slightest doubt, however, that in this early 2023 stablecoin market has been characterized by a real triumph of Tether over all others.
Many argue that stablecoins could suffer greatly from competition from central bank digital currencies (CBDCs) when these are brought to market.
Indeed, at least in theory, CBDCs could compete with stablecoins, especially since they are issued directly by central banks.
But there are a couple of observations to be made about this that might disprove these assumptions.
The first, very trivial, is that some CBDCs are already in circulation, because some central banks, such as China’s, are already field-testing them. The fact is that the results do not seem particularly interesting.
That is, CBDCs work, but they are not liked very much. For example, in Nigeria there is a kind of revolt against the replacement of cash with e-Naira.
The main reason behind this apparent failure is also the protagonist of the second observation that makes it difficult to imagine that CBDCs can replace stablecoins.
In fact, stablecoins that run on anonymous, or pseudoanonymous blockchains such as Ethereum‘s, are also often preferred precisely because of the ability to use them without having to do KYC, or identity recognition.
CBDC and Stablecoin: Differences
CBDCs moreover are not only not anonymous at all, but in fact allow the central bank to know all the money movements of all the people who use them.
In other words, CBDCs are not, and cannot be, an alternative to banknotes, but only an alternative to the digital money already in use. Instead, stablecoins turn out to be in this respect a real alternative to paper money. They can be moved without the identities of the sender and the receiver being known to the central banks.
In addition, stablecoins can be incensurable, that is, it may be impossible for any authority to decide to prohibit, restrict, or block transactions. CBDCs, on the other hand, cannot have such a feature.
So the stablecoin market is set to continue, and within it Tether looks set to dominate.