Introduce

Stablecoins are often hailed as the “killer app” of cryptocurrencies, playing a crucial role in bridging traditional finance with the digital asset ecosystem. In this realm, USD-backed stablecoins have seen remarkable adoption in recent years. They enable round-the-clock value exchange, act as a store of value, a medium of exchange, and offer a significant value proposition for dollar-starved economies, particularly in emerging markets where individuals encounter high inflation, currency devaluation, or limited access to basic financial services. Tether (USDT) has emerged as a leading force, continually expanding with new issuers, collateral types, and utilities.

As a stablecoin mainly collateralized by legal currency, Tether accounts for more than 75% of the stablecoin market value of more than 120 billion US dollars. However, this dominance comes with a fair amount of skepticism, particularly around the transparency and nature of its reserves. Howard Lutnick, CEO of Cantor Fitzgerald, the company that manages the Tether fund, recently spoke out about the legality of its backing. The comments may have allayed some concerns. However, the sheer scale of USDT’s influence deserves a closer look.

In this article, we take an in-depth look at the rise of Tether, exploring its main growth paths, adoption, nature of usage and reserve holdings, to gain a comprehensive understanding of this stablecoin giant through on-chain data.

USDT Supply: Hitting New Highs

The interest surrounding spot Bitcoin ETFs may have inadvertently distracted from Tether’s significant growth recently. Tether recently achieved a new milestone, surpassing its highest ever supply, reaching over $95 billion, a 35% year-over-year increase. Analyzing the distribution of this total, 46% of the supply, or $44 billion, is minted on the Ethereum blockchain. Instead, 53% of the supply, or $50.8 billion, was issued on Tron. Meanwhile, in January 2020, Omni’s issuance accounted for almost 33% of the total, which has dropped to 1% due to Tether’s decision to stop supporting the network. As the digital asset ecosystem continues to evolve, Tether issuance is expanding onto alternative Layer 1 networks such as Solana and Avalanche. This expansion enhances USDT’s utility in various on-chain ecosystems.

Shift in Adoption Trends

Recent turmoil, particularly the collapse of Silicon Valley Bank (SVB) and the aftermath of Operation Choke Point 2.0 may have acted as a catalyst for the surge in offshore stablecoins. A deeper look into the makeup of this growth reveals the key growth drivers. One trend of particular note is the growing importance of USDT (ETH) in smart contracts, an area that has been dominated by Circle’s USDC since its inception. The aftermath of the SVB crisis appears to have shaken market confidence in USDC, inadvertently increasing USDT’s participation in smart contracts. Since March 2023, USDT’s presence in this space has grown from $4 billion to nearly $6.9 billion. This shift highlights USDT’s growing popularity in decentralized finance (DeFi) applications, a trend we see in other market reports reflected in. Notably, USDT has surpassed USDC in leading markets such as Aave v2 and Compound, further consolidating its position in the DeFi space.

USDT’s growing influence in DeFi, evident on lending platforms and exchanges, highlights its key role in trustless transactions related to the U.S. dollar, ultimately enabling wider and more efficient access to financial services .

Although Tether’s use in smart contracts has expanded, it is primarily held by externally -owned accounts (EOA) or accounts controlled by private keys, similar to accounts owned by individual users. On Ethereum, the supply of Tether (ETH) has risen to $37 billion, accounting for 84% of the total Ethereum supply. These trends reflect the continued growth of the digital dollar not only as a store of value or a tool to hedge against volatility, but also as a tool for transactional activities, such as trading or payments.

Explore usage patterns

As the largest and most widely adopted stablecoin, Tether is widely used. This month, the value of adjusted on-chain transfers involving different USDT addresses on the Ethereum network exceeded $5 billion. At the same time, the value of transfers on the Tron network exceeded $11 billion. Since its launch in 2014, Tether has facilitated more than $13 trillion in transfers, underscoring its growing usage. This widespread adoption is particularly notable in emerging markets in Africa, Latin America, South Asia and other regions. In these areas, Tether often acts as an alternative to the US dollar. It provides the means to protect savings, seek economic stability, and provides access to banking infrastructure, thereby enabling peer-to-peer transactions for various purposes.

To better understand usage patterns and who Tether serves, it is insightful to examine the nature of a “typical” Tether transaction. Data shows that the average transfer amount of USDT is generally smaller than the average transfer amount of USDC, which currently averages about $75,000 per transaction. This higher average indicates that USDC is generally used for larger transactions, consistent with its status as a major domestic stablecoin and its widespread use in DeFi applications.

In comparison, USDT on the Ethereum network shows an average transfer amount of $35,000, indicating its participation in large-scale financial activity in the DeFi ecosystem, which may be affected by Ethereum’s higher transaction fees. In contrast, USDT on the Tron network presents a different picture. Since Tron’s transaction fees are low,the average USDT transfer amount is approximately $7,000, allowing for more frequent, low-value transactions. This makes it a practical option for everyday payments and remittances.

More broadly, these patterns not only reflect different user demographics and preferences, but also highlight the influence of the underlying networks on which these stablecoins operate.

USDT, like other stablecoins, also plays a vital role as a quoted asset, facilitating liquid trading of digital assets on exchanges. With the recent boom in digital asset markets and the launch of Bitcoin spot ETFs,USDT has facilitated over $25 billion in trusted spot trading volume, exceeding the peaks in November 2022 and March 2023. Tether also plays a dominant role in this space, accounting for over 85% of stablecoin-denominated trading volume.

Nature of Tether Reserves

The composition and transparency of Tether’s reserves have been controversial topics, often fueling speculation about the adequacy of its financial backing. However, Howard Lutnick’s confident statement at the World Economic Forum in Davos, confirming that “they have the money,” helped to allay some of those concerns, adding some credibility to discussions about Tether reserves, The only current way to verify this is through independent auditors’ reports, which provide a detailed breakdown of assets in reserves on a quarterly basis.

Tether’s reserve composition has changed several times over the years. While forms of debt like commercial paper accounted for the most of reserves in 2021, their latest certification shows that reserves are primarily composed of U.S. Treasuries, reflecting the rising interest rate environment. In May 2023, Tether announced that they would allocate up to 15% of realized profits to purchasing Bitcoin to increase USDT’s excess reserves. This has been achieved at 57.5K BTC, equivalent to $1.6 billion worth of Bitcoin holdings, in line with their most recent attestation in Q3 2023. However, if it can be determined that this Bitcoin account is explicitly linked to Tether, then this would mean that Tether recently purchased an additional 8.9K BTC, bringing its current total to 66.4K BTC. This inference is reinforced by the fact that credits to this account appear to be linked to Bitfinex, an exchange closely associated with Tether.

While quarterly attestations can provide insight into Tether holdings, official, more frequent audits that provide detailed transparency would be a welcome development for users and skeptics alike.

Conclusion

Tether’s impressive rise is a testament to its real utility, especially in developing economies where economic instability and the lack of stable, reliable monetary systems are a testament to its practicality.

While there are valid concerns about centralization and transparency, the diverse benefits Tether offers should not be overlooked. As one of the gateways to wider digital asset adoption, Tether has moved the entire stablecoin market forward. Although it is the largest stablecoin today, it will be interesting to see whether it will continue to dominate in the changing environment. Circle plans to go public, and the rise of crypto-staking and interest-bearing stablecoins has made the dynamics of the stablecoin market compelling.

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