The Trouble With Tether and the Epic Battle of the Stablecoins
With new, regulated stablecoins from Gemini and Circle seemingly to take over the troubled Tether, we examine whether stablecoins are the future, or a disaster in the making.
The stormclouds around Tether — the Bitfinex backed ‘stablecoin’ — have darkened this month.
Tether is supposed to be a safe haven from crypto volatility, each one backed by a US dollar each to ensure the value of the coin remains 1-to-1 no matter what.
But the stablecoin has been anything but stable lately, falling to 85 cents in mid-October.
Doubts have swirled around the coin’s legitimacy ever since it was introduced as ‘RealCoin’ back in 2014.
Opaque accounting practices and a lack of independent auditing mean a significant proportion of the market believes at least some USDT is being created out of thin air.
While this isn’t entirely fair — Tether having demonstrated holdings up to $2 billion in a Puerto Rican bank in the past — the doubts persist.
Following it’s wild price fluctuations, Tether this week destroyed half a billion USDT (though there’s another half billion in its Treasury).
Tether’s problems are a big deal: it’s the second most traded coin after BTC and accounted for 98% of the stablecoin market earlier this year.
2018 — The Year of the Stablecoin?
With all the doubts about Tether, the race is on to take its place as the stablecoin leader. There are 23 stablecoins in the market with 57 more in development.
In the past month or so, Gemini, owned by the Winklevoss twins, released the Gemini Dollar (GUSD), the Goldman Sachs backed Circle released the USD Coin (USDC) and another New York regulated company Paxos put out the Paxos Standard.
The big exchanges have jumped on board with Huobi adding support for GUSD, PAX, USDC and True USD (TUSD), Binance has added PAX and TUSD and this week Coinbase added USDC.
Why All the Interest?
The same reason crypto is attractive to investors — the potential for wild price increases — is the same reason they’re useless as actual currencies. Why buy something with a crypto if the coin will be worth twice as much tomorrow? And why would a retailer accept payment in crypto if it could be worth half as much tomorrow?
Stablecoins offer a dependable price and also give crypto traders a ‘safe’ currency to put their funds into during wild market swings (particularly on exchanges that don’t offer fiat).
Do They Work?
Kinda. Stablecoins attempt to maintain value either via backing them with assets (cash, gold, other cryptocurrencies) or using complicated algorithms that increase or decrease supply (if you want to fry your brain, read how Maker Dao works).
Neither method works perfectly, and as the famed stablecoin critic Preston Byrne explains: “All that is required for these systems to fail is for people not to buy the product.”
It’s hard to design a stablecoin that can survive the psychology of falling market and a loss of confidence.
History also suggests it’s a tough feat to manage. Plenty of countries from Argentina to Zimbabwe have attempted to peg their fiat currency to other currencies and failed miserably.
Stablecoins also face liquidity problems as they attempt to scale up — with millions, billions or even trillions needed to be invested to ensure they can be as widely used as intended.
Which Stablecoin Will Dominate?
Given Tether remains the ninth largest coin by market cap, it has a pretty solid position in the market.
However, it suffers from waning confidence and its possible that well regulated stablecoins with institutional backing and proper audit procedures could take its crown.
The Wall Street backed cryptos seem the most likely contenders, and a lot of money flowed into Circle and Gemini during Tether’s recent troubles. Ironically this saw them both break their ‘pegs’ and trade over $1 USD — thus demonstrating they’re not as stable as they claim.
Transparent and Regulated
Regulation is likely to be the key to survival as many experts believe central banks are more likely to act on stablecoins given they closely resemble fiat and could have effects on monetary policy.
Transparency is good policy in any case, if you’re designing a coin that will maintain a steady value.
Gemini’s GUSD attempts to satisfy both: incorporating themselves as a New York trust company, which imposes regulation and responsibilities. They also implement multiple third party audits of their currency reserves, which are held in FDIC insured account.
As the GUSD white paper states: “building a viable stablecoin is as much of a trust problem as it is a computer science one.”
