Top 4 Tether Alternatives: Best Stablecoins to Hodl Crypto Gains

Top Tether Alternatives

Stablecoins are one of the most effective ways for a trader to lock in his crypto gains and ride out that volatility.

This has been the case for a number of years as traders have used the Tether stablecoin. However, this has been viewed with a great deal of suspicion more recently.

Now, there are an array of newer stablecoins that have hit the market. They are all vying to win a piece of of the stablecoin pie.

In this post, I will take a look at some of the most attractive alternatives to Tether – In search of the “most stable” stablecoin.

Coinbase & Circle USDC

The USD Coin was developed by the Centre Consortium which is a collaberation between Coinbase and Circle Internet financial. The latter is a Goldman Sachs backed Fintech company that owns the Poloniex Exchange whereas the former is self explanatory.

Like Tether supposedly is, the USDC is backed by actual US dollars that are kept in a bank account. Each USDC that is issued is backed 1 to 1 with a US dollar. These U.S. dollars are held in reserve accounts and are regularly audited to unsure the reserve match the issuance of USDC.

Technologically, the USDC is an ERC20 token that has been developed on the Ethereum blockchain. This was done in order to support the rapid transfers of the coins on the network. Moreover, there is the added benefit security provided by a robust and established network.

Of course, it also helps a great deal that this is backed by the likes of Coinbase and Circle. This makes the coin that much more reputable than the likes of Tether. It also means easy redemption on Coinbase and conversion into Fiat.

Exchanges to buy USDC
List of exchanges to buy USDC

Moreover, USDC is listed on a number of different exchanges for trading. It has strong liquidity and is currently sitting at 23 in Marketcap rankings. This places it at the top of the list among the other stablecoins.

You can also create a USDC account and convert the coins into Fiat right from the issuer. This will cut out the middleman and reduce your fees.

So, is there a catch?

Well, this is still a centrally controlled stablecoin. It is not really “trustless” as you have to place your trust in Coinbase and Circle.

Paxos Standard

Another interesting Fiat backed stablecoin is that of Paxos Standard (PAX). This is issued by the Paxos Trust Company. They have described themselves as the “first regulated Trust company with blockchain expertise”.

This is also an ERC20 token that was built on top of the Ethereum blockchain. Every dollar that they hold in their bank account  corresponds to the total supply of PAX. When there is a redemption of the PAX then the corresponding coin is burned.

What is interesting about them is that they are regulated and approved by the New York State Department of Financial Services.

Paxos DFS
Image via Paxos Standard and NY DFS

Paxos standard also owns their own exchange (itbit.com). This means that when trading on this exchange users will be able to withdraw other digital assets to PAX instantaneously and without fees. PAX is also listed on a number of different exchanges so you can trade out of your altcoins there.

Finally, as is the case with the USDC, you can create an account at Paxos standard and get an instant conversion into Fiat. This is actually something that a number of traders have been doing recently.

However, it has not been plain sailing for all.

There have been reports that the company has been making it difficult for legitimate traders to cash out their PAX. Some traders have reported that even after completing numerous requests for information, their accounts have still been shut down.

So if you are going to be using PAX for large scale fiat conversion then you will have to consider this possible risk. In the end, redemption is in the hands of the compliance team at the trust.

Gemini Dollar (GUSD)

The third fiat backed stablecoin on our list is the offering from the Gemini exchange. This is the Gemini dollar (GUSD) that was launched at about the same time as the Paxos Standard token.

An ERC20 based token, GUSD will be backed by fiat that is held at State Street bank. They have also retained a pass-through insurance product to provide FDIC insurance within specific limits. Gemini stablecoin will also be regularly audited by BPM Accounting and Consulting.

GUSD is also listed on a number of exchanges which makes trading into and out of it quite easy. Sitting at a market cap ranking of 123, it has a much lower cap than the other centralized stablecoins I have mentioned above.

If you are looking for an easy off-road into fiat then you can always use the Gemini exchange. However, much like the case with PAX, your redemption is completely in the hands of Gemini.

There have also been reports that the exchange is making it difficult for their traders and clients to redeem their tokens. In fact, there are many OTC dealers which have large accounts at Gemini that are concerned about converting their tokens as they do not want to risk their accounts being shut down.

While there may have been unique cases around the PAX and GUSD closure, it is always disconcerting to hear stories like this.

Up till now all of the Stablecoins that I have mentioned have been centrally issued and backed by US dollars. The only reason that they have been able to keep their peg to the USD is because of certain “trust” in the redemption of these tokens.

Of course, as we saw with Tether in July of 2017, loss of confidence in a the central issuing authority can lead to a breaking of the peg.

Tether breaking peg
Tether (USDT) breaking the peg in 2017. Source: Coingecko

If the authority is not able to keep up with the pace of the redemption then this could lead to a “run on redemptions”. This is a self perpetuating crisis that can feed on itself and lead to a full blown crisis.

However, are there alternative stablecoins that are “trustless” and do not rely on a centralized authority?

MakerDAO DAI Stablecoin

The MakerDAO stablecoin is an interesting alternative as it is one of the few coins that does not have a centralised structure with fiat that backs the coins in a bank account. DAI is backed by collateralized cryptocurrency debt.

More specifically, DAI is created when you lock up a certain amount of Etheruem in a Collateralized Debt Position (CDP). This is the collateral that you are staking for the DAI and can be unlocked again with DAI.

The method by which it is able to maintain its peg is really quite ingenious. It uses economic incentives which encourages users in the ecosystem to stabilise the price through their actions.

More specifically, when the price of DAI is above the $1 peg then they can issue DAI at $1 and sell it for an instant profit. However, if the price is below the peg then they can easily unlock their ETH in the CDP at a discount.

Given that DAI was created by the MakerDAO team, there is also a unique relationship with the MKR token. Those who hold the CDP are able to earn an annual interest rate of 0.5% on the loan. This interest is only payable in MKR. This encourages an increase in the value of MKR since the supply of MKR is always falling, but demand should be increasing as more CDPs (and DAI) are created.

DAI Holding Peg
DAI holding 1:1 Parity while ETH Collapses. Source: Tradingview

This decentralized stabilization mechanism has worked quite well so far. Despite the price of the collateral (ETH) falling by over 80% last year, it was still able to hold the peg. This was all through a protocol defined mechanism that required no “trust” whatsoever.

What is more, the DAI mechanism can be used to peg a stablecoin to any other asset value (cryptocurrency included). The Maker team plans to eventually peg the DAI to Digix (DAO) which is a token that is backed by physical gold.

So, are there any drawbacks?

Well, given that the loans are denominated in crypto, there isn’t a simple Fiat conversion mechanism. If you want to convert your DAI into a Fiat currency then you will have to send them to a centralized exchange and withdraw the fiat.

There is currently quite a bit of liquidity across a range of exchanges and DAI is ranked at 55 in market cap. Of course, this means that you may have to incur trading fees on the exchange.

Other than that, it could be a really attractive option.

Conclusion

So, which stablecoin should you use then?

Well, this will really comes down to your own personal preferences and risk tolerance. There is no “one size fits all” approach when it comes to stablecoin selection.

All of the coins on the list meet the most fundamental requirement of a stablecoin in that they are able to maintain the peg. This is beneficial to those traders that are looking for a crypto method to lock in their dollar gains.

Indeed, there may be challenges that come with a withdrawal into fiat. This is especially true if it is a large amount of money and it is through one of the coin issuers that traders have had troubles with before.

The USDC appears to the the most prominent Dollar backed stablecoin on the market at the moment. However, if you are concerned about the prospect of a centralized issuer then you can always opt for the much more sophisticated DAI stablecoin.

Of course, it goes without saying that no stablecoin is as stable as the USD. Stablecoins are still a relatively new phenomenon and do not come risk free.

Do Your Own Research (DYOR).

Featured Image via Fotolia

Author:
Nic is an ex Investment Banker and current crypto enthusiast. When he is not sitting behind six screens trading Bitcoin, he is maintaining his numerous mining rigs. Twitter: @nicrypto