Could Tether (USDT) Go the Way of Terra USD (UST)?

Holding a lion's share of total stablecoin market for years, USDT began to lose ground to its competitors. According to The Block statistics, currently, USDT accounts for 47.99% of total stablecoin supply. As of January 2021, 1st, USDT accounted for as much as 74.17% of the stablecoin market.

The process of losing ground was intensified after UST, an algorithmic stablecoin powered by the Terra protocol, lost its peg to the U.S. dollar and crashed together with its governance counterpart LUNA.

Panic-struck investors rushed to pull out their money from USDT, forcing USDT to temporarily lose its parity with the US dollar. USDT slumped to as low as 96 cents on May, 5th, later returning, however, its peg to the U.S. dollar. By May 23d, USDT circulating supply plunged from $84 billion to around $73 billion, drained by approximately $10 billion. USDT is still trading a little bit lower than $1 USD, signaling that investors are not that confident about the future of this stablecoin. Many of them doubt if USDT could suffer the same fate as UST.

Trying to calm down investors and traders, Tether Holdings Limited published its quarterly assurance opinion on its website reaffirming that the stablecoin is fully backed.

“Today, Tether Holdings Limited made available its latest quarterly assurance opinion demonstrating the strength of its reserves revealing significant reductions in commercial paper investments and an overall increase in U.S. treasury bills. It also demonstrates that the group’s consolidated assets exceed its consolidated liabilities,” the company said. Paolo Ardoino, Chief Technical Officer at Tether, added on Twitter that the composition of Tether's reserves is "strong, conservative, and liquid."

Tether's approach to reserves speaks in USDT's favor, contrasting with Terra's approach to UST design. UST is an algorithmic stablecoin. That means that this kind of stablecoin uses an algorithm to maintain a consistent value.

Algorithmic stablecoins can be divided into three categories:

Rebase

The algorithm mints or burns coin supply in accordance with its current demand and price. If the coin price > $1, the protocol mints coins. the coin price < $1, the protocol burns coins from circulation. Very simple, eh?

Seigniorage

The algorithm involves another coin, not designed to be a stable one, and links stablecoin supply to its not stable counterpart. In the case of Terra, it's LUNA, whose price was set by the market. In order to get UST, a user had to buy a LUNA token and burn it. If the price of UST went down losing its peg to $1, then its holder could swap it back and receive a guaranteed $1 of LUNA. That was the initial idea.

Fractional-algorithmic

These ones are partly collateralized, meaning that they are backed by real-world assets but not fully backed.

As it is seen by the explanations mentioned above, TerraUSD was a seigniorage algorithmic stablecoin without collateral. However, in order to fortify UST stability, Singapore-based Luna Foundation Guard (LFG), a non-profit organization dedicated to developing the Terra ecosystem, accumulated almost $3 billion in BTC serving as reserves for UST.

However, this approach failed to resist capital exodus during UST crises. According to Nansen research, on May 7th, several huge whale wallets started to pull out liquidity in IST from Anchor Protocol (ANC) that offered up to 19.5% APY on UST deposits. Whales transferred their funds from the Terra blockchain to Ethereum using the Wormhole bridging protocol. After that, enormous sums of UST were exchanged for a variety of stablecoins held in Curve’s liquidity pools. In sum, Terra failed to maintain UST's peg to the U.S. dollar and crashed.

If UST was fully backed by real-world assets, it could avoid the crash. And that’s the main reason for USDT supporters who underpin this difference in USDT.

However, investors’ worries about USDT cannot be called groundless. Last year, the U.S. Commodity Futures Trading Commission fined Tether $41 million for “making untrue or misleading statements” that its USDT token was backed 100% by corresponding fiat currencies. On request of the New York Attorney General over a separate case, Tether provided certain data on the assets backing its stablecoin. But it did not disclose exactly which companies it held commercial papers from, revealing only the quality ratings of the debt it owned. Currently, it is still unknown if Tether's reserves actually back 100% of USDT supply in circulation.

Investors' concerns are also fueled by the fact that Tether requested permission from the New York Supreme Court to block the detailed disclosure of its reserves over the past few years. The New York Attorney General’s Office (NYAG) owns the detailed information about Tether's reserves. And Coindesk, a cryptocurrency news outlet, asked NYAG to make this information public according to the Freedom of Information Law (FOIL). On May 16, the New York State Supreme Court rejected Tether's petition over the disclosure of its reserves.

Now investors are looking forward for the detailed information on Tether’s reserves being published. And these expectations enriched with concerns and fears may provoke further migration from USDT to USDC. Still, USDT does not seem to be able to suffer the same fate as UST.

This, of course, caught the attention of various crypto exchange platforms, one of which is Alfacash Store. Along with this, many of them have responded to the market shift within their business operations. 

Alfacash Store has seen that the demand for USDT after the UST crash notably decreased while the demand for its main competitor, USDC, significantly grew.

On Alfacash Store, users can buy and sell over 19 cryptocurrencies with EUR. This is the fastest and safest way to trade digital currencies in the European Union, and they are constantly improving our services. The platform offers SEPA transfers for incoming and outgoing payments with cryptocurrencies in a fully non-custodial, regulated, and automatic process. And while the platform might not be as popular as Binance and the likes, it supports most of the popular cryptocurrencies like Bitcoin, Ethereum, Ripple, USDC, USDT, DOGE, etc. Alfacash Store has set out to become the most convenient way for providing financial services to everyone regardless of their location.