Since the meltdown of TerraUSD (USTC -1.36%), a stablecoin on the Terra blockchain, the crypto market has been in more than just a lull.
UST was unlike other stablecoins. Instead of using a reserve of assets to back the distribution of the stablecoin, UST used a set of algorithms through smart contracts to ensure the coin would always be worth $1. When some turbulence hit with a broad market sell-off, UST quickly lost the $1 mark. Once it slipped a little, it plunged to depths as low as $0.25 and now trades for about $0.02. The one thing stablecoins should not do.
UST was one of the first cryptocurrencies to attempt pegging without cash equivalents backing it. Other notable stablecoins, like Tether (USDT -0.03%) and USD Coin (USDC -0.01%), possess an equal number of cash-like assets proportionate to the number of stablecoins issued -- or at least, so the thinking goes.
Tether has consistently found itself in the spotlight for not being transparent about its reserves, even denying requests from critics to conduct a third-party audit. The company's inability to present information about its holdings led to a fine of $41 million back in 2021.
Between UST and Tether, the world of stablecoins remains, candidly, not so stable.
Image source: Getty Images.
Stablecoins come full circle
However, through the tangled mess of stablecoins, one does stand out. Distributed by the cryptocurrency company Circle, USD Coin has been one of few stablecoins to promote transparency and offer investors a glimpse into their operations.
Among the recent turmoil, the head of Circle, Jeremy Allaire, advocated for more regulation of stablecoins. Something That idea did not get a warm reception from competitors like Tether.
To take it a step further, Circle has begun to publish monthly reports on their website from a third-party accountant proving that their reserves are equal to the number of stablecoins issued.
The stablecoin standard
This is precisely how a stablecoin should operate. And investors have taken notice. Since the dismantling of UST, data from blockchains show that more and more people prefer finding safety in USDC instead of Tether.
Tether has been the most popular stablecoin and, technically, still is, but it looks as though investors might be looking for a safer stablecoin. Around May 10, when UST began to freefall, Tether's market cap slipped more than 13% over the course of just a couple of weeks. It seems the money that exited Tether found a new home in USDC. In the same span, USDC recently hit an all-time-high market cap of nearly $54 billion. An increase of just shy of 13%.
Stablecoins serve a unique but necessary purpose in crypto. A stablecoin with high risk defeats the purpose of a stablecoin. Investors should appreciate USDC's attempts to increase transparency. There are more opportunities for stablecoins than just serving as replacements for the dollar. There are ways to earn interest on staked USDC through exchanges like BlockFi, Crypto.com, and Voyager.
In volatile times, a stablecoin can be your best friend. Instead of taking on more risk with a stablecoin shrouded in mystery, finding a safe haven like USDC can be attractive to mitigate risk in the market while earning a steady income through interest.
