"USDT vs USDC":: Which Stablecoin should you use?
I'm not sure whether to use USDT or USDC. This guide compares both stablecoins in terms of safety, use cases, fees, and where to use them.
Stablecoins have been around for nearly a decade.
They have brought some stability to the volatile cryptocurrency market and have become an alternative way to send money across countries, especially within Africa, without the pressures of dealing with traditional payment methods.
Tether (USDT)° and USD Coin (USDC) are among the most popular stablecoins in the cryptocurrency market. This article explains their differences and helps you understand what might be best for your trading needs.
What is a Stablecoin?
"Stablecoin" :: is a type of cryptocurrency linked to an asset like cash or gold so that it does not fluctuate in value as much as other cryptocurrencies like BTC, ETH, PEPE, DOGE, XRP, etc. This helps keep it predictable and stable as it is pegged (attached) to the same value of a fiat stable currency like the US dollar or a commodity like gold.
Types of Stablecoins
There are different types of stablecoins based on the type of collateral used to back them, and here are the most common:
Fiat-backed stablecoins
For fiat-backed stablecoins, the creator or the institution managing it will create a reserve where a certain amount of asset collateral for the stablecoin is stored.
In traditional banking and finance, reserves are funds set aside by companies, banks, or governments to be ready for unexpected expenses or losses. They are like a savings account providing financial stability during tough times.
In the context of crypto stablecoins, reserves mean that for every stablecoin a trader holds, an equal dollar supports it in those reserves. Essentially, for every fiat-backed stablecoin like USDT and USDC in the wallet, there is 1 dollar in reserve.
Trustees and independent auditors maintain these reserves and check them regularly to ensure compliance with legal and financial regulations.
USDT and USDC are typically traded fiat-backed stablecoins. Their value is equivalent to 1 US dollar; meaning 1 USDT ≈ 1 $ and 1 USDC ≈ 1 $.
Commodity-backed stablecoins
These are commodity-backed stablecoins such as real estate or precious metals like gold or silver to help them maintain their value. An example of a gold-backed stablecoin is Digix.
Crypto-backed stablecoins
These stablecoins are backed by other cryptocurrencies. Since the cryptocurrency used as reserves is often volatile, crypto-backed stablecoins usually have more collateral. This means a larger amount of cryptocurrency tokens is stored in reserve to distribute a smaller amount of these stablecoins. An example of a crypto-backed stablecoin is DAI. It operates on the Ethereum blockchain, and its value is pegged to the US dollar.
Algorithmic stablecoins
These stablecoins use a computer algorithm to stabilize their value. For example, if the price of the algorithmic stablecoin is pegged at $1, but the stablecoin rises in price, the algorithm automatically issues more tokens into the supply to lower the price. Similarly, if the price drops below $1, the algorithm reduces supply to raise the price back up.
An example of this is Frax.