Tether and UST, what is the difference between these two stablecoins?
The collapse of Terra USD has damaged the reputation of stablecoins and the broader crypto industry. But in an effort to distance itself from the fallout, Tether says it’s different. With investors still hurting from the UST disaster, USDT attempts to reassure them that it is different.
Tether notes in a recent blog post that, as a collateralized stablecoin, it “has nothing in common” with UST, which relies on an algorithm to keep its dollar peg. In the instance of USDT, collateralized means that the token is backed by assets such as dollars and cash equivalents.
“While UST is referred to as a stablecoin, it has nothing in common with collateralized stablecoins like Tether USD₮. UST is an algorithmic stablecoin.”
According to the blog post, despite the years of instability in Bitcoin (BTC), USDT has remained the ‘primary form of dollar-based liquidity.’
It goes on to say that, being a collateral-based stablecoin, USDT holders can exchange their tokens for dollars 1:1. And the corporation has always been able to pay its redemption commitments since its beginning.
“Since 2015, Tether has never failed to process a redemption request for USD₮ at a value of $1 per USD₮ token.”
While USDT exchange rates may fluctuate from time to time, there is no risk of de-pegging as long as Tether may redeem tokens at face value.
The post went on to criticize algorithmic stablecoins, claiming they had a terrible track record and several examples of failure. It also quoted a University of Calgary research that characterized them as naturally frail and vulnerable.
USDT deviated significantly below its $1 peg price on May 12. The USDT price fell as low as $0.9409 on that day, sparking fear in markets already hurting from the UST crash.
Nonetheless, in a Twitter Spaces chat later that evening, Bitfinex CTO Paolo Ardoino addressed the issue by reiterating the technical differences between collateralized and algorithmic stablecoins.
Ardoino went on to say that even amid the panic selling, Tether has enough liquidity to honor redemptions at $1. As a result, notwithstanding the variations in currency rates, there was never a difficulty.
Soon after the public address, USDT was restored to its peg price.
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