status

Let's Be Careful With The USDC

Published 22.2.2024

Circle has made the immediate decision to cease the minting of USDC on the Tron platform. Current USDC holders have the option to transfer their USDC to a different platform or exchange it for fiat currency. Circle has not revealed specific reasons for their departure from Tron, leading to speculation about potential regulatory pressures. Despite this, we continue to support initiatives to introduce USD-backed stablecoins on the Cardano platform. We appreciate and encourage the efforts of all community members working towards this objective. However, it’s important to remain cautious and understand the risks associated with USD-backed stablecoins.

Stables Help Blockchain Adoption

Approximately 70% of all transactions within the cryptocurrency sector are associated with stablecoins, with USDC and USDT being the most prevalent. This has proven to be a lucrative venture for both Circle and Tether.

Tron is known for its comparatively low fees and quick settlement times. It is home to a booming stablecoin business.

In terms of stablecoin market capitalization, Tron, with a 37% share, is the second largest platform for stablecoin usage, following Ethereum which holds 52%.

Tron surpasses Ethereum in terms of the amount of USDT minted. It is a favored platform for transferring funds between exchanges. Additionally, Tron’s usage is on the rise in developing countries, where it is commonly used for making purchases with USDT.

On Tron, users prefer USDT, accounting for 96% of the stablecoin market capitalization on this platform. Therefore, Circle’s decision to leave this platform will not result in a significant loss.

But there is a catch. It must not happen that Tether makes the same decision as Circle. This would be a huge blow to Tron.

Who controls DeFi?

What factors contribute to Tron’s success? Largely, it hinges on Tether’s continued loyalty and its ongoing minting of USDT on the platform. Circle, Tether, and other similar entities are regulated companies. Therefore, decisions to depart from a platform or potentially all platforms, could be influenced by regulatory authorities.

Authorities may impose requirements on Tether and Circle-like companies to enforce KYC/AML on users or to possess the ability to freeze an account or halt transactions on demand, mirroring traditional banking systems.

Relying on the decisions of a third party introduces a degree of centralization, irrespective of the blockchain’s decentralization. Given that DeFi is reliant on stablecoins, it’s crucial to consider strategies for risk mitigation.

At present, the cryptocurrency industry is primarily governed by two USD-backed stablecoins, namely USDT and USDC. On certain platforms, these two stablecoins are represented equally. However, on some platforms, one of them holds a dominant position. This poses a risk.

On the Tron platform, USDT dominates with a 96% share, while on Base, USDC holds a commanding 91% presence. BSC and Arbitrum users primarily use USDT, accounting for about 75% of its usage, and on Avalanche, USDT prevails with a 68% share.

We can assume that if a stablecoin with a dominant position were to leave the platform, the other one with the largest presence would prevail. But this is a loss from the point of view of decentralization.

USDT can be found on 62 platforms, boasting a total market capitalization of 97 billion USD. USDC is available on 61 platforms, with a total capitalization of 27 billion USD. The third place is occupied by the algorithmic stablecoin DAI, which is present on 33 platforms and has a total market capitalization of 4.8 billion USD.

People strongly prefer USD-backed stablecoins over algorithmic ones.

Diversity And Algorithmic Stablecoins

Circle’s decision to abandon Tron should be a cautionary note for the Cardano community.

The influence of Circle and Tether within the crypto community is progressively expanding, more than what is generally perceived. If these entities mutually decide to abandon a platform or are compelled to do so by regulatory bodies, it could essentially devastate the respective DeFi ecosystem.

In the event of a hard fork of the Ethereum blockchain, these companies would essentially determine the ‘right’ Ethereum.

To prevent such a scenario, I envision two potential solutions: fostering diversity and promoting the use of algorithmic stablecoins.

There are ongoing discussions about the possibility of Circle deploying USDC on Cardano. Technological solutions, such as ERC-20-like tokens, have been proposed by community members to facilitate this. However, according to Charles Hoskinson, Circle’s lack of interest in Cardano is not due to financial or technological reasons. Let's wait for the outcome of the negotiations.

The Cardano community should also consider efforts to incorporate USDT on its platform, which would involve discussions with Tether.

Having three USD-backed stablecoins, namely Mehen USDM, USDT, and USDC, would create a more balanced environment compared to a platform like Tron, which will soon be solely dependent on USDT.

Greater autonomy from third-party entities, and thus, a move towards decentralization, is achievable through the use of algorithmic stablecoins. Despite not being the current preference among DeFi users, it’s essential to advocate for this shift.

Cryptocurrencies, by their nature, are decentralized and do not adhere to any specific jurisdiction. This makes them an advantageous choice as collateral for stablecoins, which similarly, would not be subject to any particular jurisdiction.

Within the Cardano ecosystem, we have DJED, an algorithmic stablecoin that has demonstrated its robustness amidst a bear market. It’s certainly worthwhile to consider enhancing the algorithm and exploring ways to improve economic efficiency.

Conclusion

At this stage, it does not make sense to do without a USD-backed stablecoin and go exclusively down the path of algorithmic stablecoins. The market isn’t prepared for such a shift. Cardano needs USDT and USDC as soon as possible. We can progressively aim for a future where algorithmic stablecoins prevail. However, this transition will likely be a lengthy and challenging process. USD-backed stablecoins are expected to perform well, at least until circumstances change. DeFi ecosystems must maintain independence from regulated financial corporations. We can hope for the best but we must be prepared for the worst.

Featured:

Related articles

Did you enjoy this article? Other great articles by the same author