Yesterday Kaiko released a report on stablecoins in which it states verbatim that there is a non-zero possibility that Binance will phase out USDT.
The report, edited by Riyad Carey, specifically analyzes 2022 of the three main stablecoins, namely Tether Dollar (USDT), USD Coin (USDC) and Binance USD (BUSD).
The analysis concludes with the statement that the three stablecoins have slightly different niches of use, and that Binance’s decision to phase out USDC has created a huge change in the structure of this market.
Carey adds that those who participate in this market should be aware of Binance’s immense market share, and should consider the non-zero possibility that the exchange will phase out USDT, creating the biggest shock ever to the stablecoin market.
Tether and the other major stablecoins
The report published by Kaiko begins with an analysis of the trading volumes of stablecoins in recent years.
From 2012 to 2022, the dominance of stablecoins over fiat currencies in the crypto markets has skyrocketed from 1% to 87%, making it very clear that participants in this market now much prefer stablecoins to fiat currencies. Up until 2017 it was not the other way around.
Truth be told, however, the dominance chart shows that in 2017 stablecoins had an initial boom, but this was followed by a very sharp decline just as the big speculative bubble inflated.
This downturn was perhaps related to the numerous cash-outs that were made at that time, or the entry of huge amounts of new capital into the crypto market.
However, the following year, in the midst of the bear market, not only did the dominance of stablecoins return, but it continued to do so until it reached very high levels as early as early 2020.
With the collapse of the financial markets in March 2020 due to the onset of the pandemic there was again a sharp decline, which ended only in early 2021, which was when the new bubble began to inflate. Curious, however, is the fact that during the 2021 bubble there was no decline in the dominance of stablecoins, as there was during the 2017 bubble.
Moreover, as of 2020 there was a real explosion in the combined market capitalization of Tether, USD Coin, and Binance, rising from $10 billion in May to $30 billion in January 2021, and then rising to as much as $150 billion in the spring of 2022, before the implosion of Terra.
Since then, however, it has been on a steady decline.
According to Carey, the three stablecoins interact with each other, but in a chaotic interaction that does not follow predictable patterns.
The differences between Tether, USD Coin and BUSD
One of the most significant differences between the three stablecoins is in the redemption procedures.
In fact, while USDC and BUSD can be redeemed by almost anyone, directly at source and at no additional cost, Tether has a different policy.
Actual redemptions, namely those made by returning USDT to the issuer, can be made only from 100,000 USDT, and with a fee of 0.1% starting from $1,000 upwards.
However, it is worth mentioning that Tether uses the Bitfinex exchange to put USDT on the market, so on that exchange USDT can be sold without large volume limits, and with low fees.
Despite this, USDT is still by far the most widely used stablecoin for crypto trading, while USDC is mainly used on DeFi protocols on Ethereum, while BUSD is mainly used on Binance and BSC.
Carey notes that the relative difficulty of redeeming USDT means that retail users during times of stress actually prefer to trade it for other stablecoins instead of redeeming it.
For example, during the days when the Terra ecosystem imploded, or when Celsius, in June, and FTX, in November, failed, almost all stablecoin trading volume was in USDT, with only 0.27% market share for BUSD-USDC.
The problem is that most of the trading volume both between USDT and BUSD and between USDT and USDC occurs on Binance, and Binance some time ago decided to remove USDC.
In other words, it is on Binance that the largest Tether trades in the other major stablecoins are concentrated.
This way, the world’s leading exchange dominates this niche of the crypto market, and since it obviously wants to favor its BUSD it leaves the suspicion that in the future it may oppose USDT as it has already done with USDC.
Moreover, since USDC has been obstructed on Binance, the largest trading volumes between USDC and BUSD have shifted to Uniswap, which is a DEX that is not widely used by the mass of retail users.
Therefore, it does not appear that there can be a major alternative to Binance in terms of large trading volumes between stablecoins, thus effectively putting the exchange in a strong position.
It all comes down to how much Binance is willing to favor BUSD by disadvantaging other stablecoins, and how much it is willing to lose by disadvantaging Tether in particular. It is possible that the reason why it has not yet decided to do so is precisely not to lose the opportunity to offer its customers USDT trading as well.
It is worth mentioning that while overall trading volumes in BUSD are now at the level of those in USDC, if not higher, USDT, on the other hand, is still on another planet.
In fact, the total trading volumes in Tether across all crypto markets and for any pair are still well over twice the sum of those in BUSD and USDC.
So eliminating USDT right now for Binance would most likely mean causing itself serious harm, while eliminating USDC to promote BUSD may have brought more benefits than problems.
However, if BUSD trading volumes, especially on Binance, were to increase significantly in the future, it cannot be ruled out a priori that the exchange might decide to delist Tether.