Tether Losing Dominance in the Stablecoin Space

2022-02-15, 06:02

【TR; DR】

Tether has long retained a strong monopoly over the stablecoin space， contended only by USD Coin （USDC） in recent years. Yet, as whales have grown in prominence and other stablecoins have risen through the ranks with their use cases and white papers converting more investors towards their project - Tether has been slipping beneath the surface.

As Tether has endured regulatory scrutiny in light of various scandals and regulatory quarms， other stablecoins； particularly USDC， have gained traction and are clawing their way to the top and dismantling the dominance of Tether.

Tether’s Controversies

For several years， Tether has been in the spotlight due to raised concerns over their regulatory ambiguity， collateralisation， and the management strategy surrounding their reserved funds. Many investors and critics alike have questioned what is truly backing the stability of Tether as a stablecoin， particularly in light of the recently released unclear commercial paper that disclosed over $30.8 billion in holdings， amongst various other assets that are backing Tether.

Despite releasing an attestation about its reserves， it lacked effectiveness， particularly in terms of silencing critics who believe that Tether’s primary purpose is to continue bolstering the value of Bitcoin. Similarly， the attestation did little to suppress an investigation by the New York attorney general in regards to their backing， which was ultimately settled with an outcome that prohibited their activity within New York， the financial capital of the United States of America.

Whilst Tether’s controversies are not the only concerns surrounding the stablecoin space， several chairs within the US Securities and Exchange Commisions， including Gary Gensler, have continuously pushed for the development of a structured cryptocurrency regulatory body. In doing so， this authority would provide more regulatory clarity on the future of cryptocurrency， as well as enabling investors to be better protected against ‘fraud’, as suggested by the Treasury Secretary, Janet Yellen.

However， as there is no standardised protocol that requires stablecoin developers to publicly disclose what backs their cryptocurrency， regulatory issues may continue to plague the space for the foreseeable future.

How Smaller Stablecoins Are Stealing the Spotlight

Despite Tether’s frequent controversies， it’s superstardom failed to wane for many years， positioning it as an inevitable first choice for those with limited access to other stablecoins. Yet in recent years， stablecoins backed by alternative fiat currencies or even cryptocurrencies， have risen in popularity as they enable investors a broader range of access to alternative stablecoins.

USDC is certainly not a smaller stablecoin， at least by today's standards， yet it was formerly dwarfed significantly by Tether within the marketspace. USDC boasts a significant 45.7 billion tokens， backed entirely by the US dollar， that operates across 21 different chains and L2 solutions. USDC is predominantly offered by two primary issuers， both Circle and Coinbase； with Circle backed by China Everbright Bank， Bitmain, as well as eight other companies， thus furthering the significant impact of USDC.

If this was not enough to signify the strength of USDC as a stablecoin， Circle has demonstrated a high level of transparency on its reserves and the President of Coinbase， Emile Choi， announced a full shift to cash and US Treasury Bonds in Summer of 2021. Ultimately， USDC is demonstrating a level of clarity unrivalled by very few.

However， the likes of Tether， USDC， and BUSD are all centralised stablecoins， which can detract the attention of some investors - yet decentralised stablecoins have seen a significant rise in proliferance across recent years. The likes of DAI have demonstrated the capability of stablecoins to surpass fiat currency， as the asset is collateralised solely by Ethereum. Similar assets include the likes of LUSD， UST， and FEI.

Yet， various companies and developers have been testing algorithmic stable coins across the past year， which would essentially revolutionise the stablecoin space and enable a more sophisticated and consistent approach to generating stability. Algorithmic stable coins are stablecoins backed by software algorithms and without collateral， yet they are still amidst stages of development and speculation. In continuous efforts towards creating algorithmic stablecoins lies the issue of infinite scaling - something that is yet to be solved, yet the precipice may be near.

Tether’s Influence On The Market

Tether has consistently maintained a dominance across the stablecoin market， yet it has also played a vital role within the remainder of the market. The value of Tether has often coincided with that of Bitcoin， as data from 2019-20 demonstrates the significant incline of Tether’s market cap in line with that of Bitcoin - increasing from $4.6 billion in late 2019 to just under $8 billion in Q2 of 2020.

Furthering speculations in regards to the relationship between Tether and Bitcoin， there has been various depictions of the inverse correlation between the two， which suggests that the volume of Tether held on exchanges has a significant influence on the valuation of Bitcoin. As the percentage of Tether has been reported to decline on exchanges， the valuation of Bitcoin has often surged - thus furthering speculation in regards to Tether’s omniscient presence within the market.

The controversy surrounding Tether’s involvement with Bitcoin has long been speculated， particularly as Tether has been reportedly involved with various stages of bullish and bearish market landscapes. Particularly in 2017， Tether was insinuated to have an influence on the immense surge in value during the significant bull run - yet Tether vehemently denied this, instead referring to the instance as being coordinated by ‘one lone whale’.

Whilst Tether may always be shrouded in regulatory scrutiny and criticisms， it appears that it can no longer cling onto it’s dominance in the way previously anticipated - yet only time will tell.

Author：Matthew W-D, Gate.io Researcher
*This article represents only the views of the researcher and does not constitute any investment suggestions.
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