Welcome to this post, where we are going to see the main differences between USDT and FRAX, and which is the best option.
To do this, we will highlight the most important information of each cryptocurrency separately, such as their risks and advantages. The most important thing in a stablecoin, as it is in these two cases, is that it maintains its price equivalent to $1 and there are guarantees that it will maintain this value.
The last thing you want when using a stablecoin is that it does not maintain its value and does not have enough cash to maintain this value. Since, each stablecoin must be backed by 1$ or some liquid financial asset, to give security to users to use that stablecoin instead of another. Therefore, let’s go over those aspects to look at, and to take into account in each one of them.
USDT or Tether is the top stablecoin with ranking 3 in market capitalization and most used at the moment. It is only recently, that strong competitors have started to appear in the top 10 being a stablecoin like USDC, but a year ago, USDT had a great dominance over the other stablecoins out there.
The company behind USDT is Tether Limited and that was long linked to Bitfinex, one of the leading cryptocurrency exchanges. The company is based in Hong Kong, and therefore does not have so many regulatory requirements as it is not in a country like the United States or European countries. We will discuss the aspects related to USDT and Bitfinex later on.
USDT’s treasury can be found on their website, at transparency. Here you can find all the information, and external audits on their balance sheets, the amount of USDT circulating and the amount of reserves they have. 84.25% is cash and cash equivalents and other short-term deposits and commercial paper, 5.22% in corporate bonds, funds and precious metals, 4.99% in secured loans and 5.54% in other investments.
Regarding the 84.25% of cash and cash equivalents, we have 52.51% in commercial paper, 33.35% in treasury bills, 12.42% in cash and bank deposits and 1.72% in money market funds.
You can find the balance in each network of its stablecoins, in addition to USDT, EURT, CNHT and XAUT. The % that have been commented is at the time of writing this article and may vary, so I recommend you also consult that section to learn more in detail the treasury that backs USDT.
Another relevant aspect is the growth of the USDT supply, where we can see the market capitalization to know how many USDT are in circulation. If there are 78 billion (American), it means that there must be support for those 78 billion USDT in circulation. What is interesting is to see the market capitalization and its evolution, to see if it has a very fast growth and there is a large supply of USDT, to see if there is backing or they have just created more USDT without a real backing. So seeing if there is an increase in their supply is also a factor to look at.
Let’s take a look at the main advantages it can present and the risks USDT has as stablecoins if we can compare it with others, so you can get a better idea of its strengths and weaknesses. Starting with the good.
One of its main advantages is that it has been around since 2014, and is still the leader in the stablecoins market. Being used in all centralized exchanges to buy other cryptocurrencies. So it has a great importance in the entire cryptocurrency market, both in liquidity and in its use in different functions, either centrally in exchanges or decentralized.
Another positive aspect is the great liquidity that you find in many different networks, being the stablecoin that is available in more networks and you will be able to use.
For the time being, despite having many news and doubts that we will now comment, it has not failed and has continued to grow its USDT offer and use throughout the world of cryptocurrencies, despite raising many doubts. So, historically, it has more run than any other stablecoin, and with a volume of daily and total use, much higher. Which is also an advantage, knowing how to keep its price linked to the dollar with so much market capitalization, and so much liquidity of the token spread across different networks and platforms.
Let’s go with the aspects that pose a risk to USDT and that may create certain doubts in using this stablecoin with respect to others.
The first is the controversial case of bitfinex and USDT, where there are many accusations that USDT was created out of nothing to cover a hole in the Bitfinex Exchange, and that USDT was used to inflate the price of Bitcoin. We won’t go into too much detail, but if you have more interest, I recommend watching news regarding this topic.
The other negative aspect is the lack of transparency. Despite being audited, being a company in a country with few regulatory requirements, there are many doubts about the company that has audited tether and if they really have the support they claim to have. Since they have not authorized U.S. government entities to review it or use another auditing company, and this creates several doubts as to whether the support is real.
Regarding the backing, a large part is in promissory notes or commercial papers, and this creates doubts because it is unknown which companies have the promissory notes or commercial papers backing USDT as part of the treasury. And IOUs or commercial paper account for 44.5% of the total reserves held by tether.
Another disadvantage that we have been able to see in some of the sharp falls, is that it does not hold the peg or its equivalent value to the dollar as perhaps other stablecoins. Seeing USDT with a price of 0.95 at the lowest moments, although later with a great fast recovery. Although it is at times of high volume and very large declines, the fact that it falls as much as 4-5% and other stablecoins hold up better is also a risk to consider if there are again sharp declines and if USDT will be able to maintain its peg to the dollar.
FRAX is a stablecoin that has been gaining popularity over time, and was created in early 2021, late 2020. FRAX is a fractional algorithmic stablecoin. That’s where its name FRAX comes from, from fractional. Although the name may sound complex, basically what it means is that FRAX has one part backed by collateral and another part that is stabilized algorithmically.
A fairly new concept and one that brings together the two most opposite types of stablecoins we can see, as could be USDC or USDT which are fully backed by reserves, and, on the other hand, UST which is a fully algorithmic stablecoin.
FRAX does not have a company behind it, it is a platform and a community that works as a DAO that seeks to be as decentralized as possible, like Bitcoin. In order to create a stablecoin without the influence of any person or company, as in the case of USDC or USDT with a company behind the stablecoin.
One of the main reasons, and that we will see later of making a stablecoin with partial collateral, is the efficiency of the capital, where in this case it does not require having 100% of the supply in a bank account or in very liquid and not very volatile assets as collateral. And it allows to take advantage of that % that is not collateralized.
As we have mentioned, FRAX has a somewhat complex system that you can find on their website for more details. But basically it has about 85% of collateral, and a system of market supply and demand to adjust its price. It is the users themselves who adjust the price of FRAX to 1$ through arbitrage. Since the platform allows you to exchange 1 FRAX for 1$, so if its price drops, people will buy to take advantage of this arbitrage opportunity and this will bring the value of FRAX back to 1$. In addition to mechanisms with their other platform token, FXS to regulate and maintain the price of FRAX at 1$.
If you go to their official website, in trading app, the first thing you will find is all the information of the stablecoin. Very useful information such as the % of existing collateral of the stablecoin, and even the % of decentralization that FRAX has. You can see the evolution of the collateral %, which started with 100%, and at this moment is around 84% collateral.
In addition, you can see what type of collateral there is, and how it is distributed. Between USDC, lending and liquidity pools in Curve among others. If you go to AMOs you can see the breakdown of the different ones, between investors, Curve, lending and graphs. It’s also interesting to look at buyback and recollateralize, to see the occasions when the platform leverages the profits it makes from commissions to increase FRAX collateral.
Another relevant aspect is the growth of the FRAX supply, where we can look at the market capitalization to see how many FRAX are outstanding. If there are 2.7 billion (American), it means that there must be backing for those 2.7 billion MIMs in circulation. What is interesting is to see the market capitalization and its evolution, to see if it has a very fast growth and there is a large supply of FRAX, to see if there is backing or they have just created more FRAX without a real backing. This you will be able to consult if there has been a percentage decrease of their collateral or just their supply has increased because there is also more collateral behind FRAX.
Let’s take a look at the main advantages it can present and the risks FRAX has as stablecoins, so you can get a better idea of its strengths and weaknesses. Starting with the good.
The main advantages that FRAX brings and seeks to achieve with respect to other stablecoins are capital efficiency, by not needing 100% reserves for each stablecoin in circulation as it happens with other stablecoins. No custody risk, as it is as decentralized as possible and seeks to be increasingly decentralized, which mitigates the risk that a company or person can access the reserves. Monetary policy decided by a community, and in the future they want to implement a way to mine FRAX anonymously.
As you can see, FRAX seeks to be a stablecoin as efficient as possible and decentralized, which is very much in line with the values of bitcoin and the crypto world. For the moment, we have been able to see how the partial backing system, although still quite high at 84% has worked and we have not seen price drops in FRAX beyond 0.98 at specific times. Regarding decentralization, although it is not perfect, it is one of the most decentralized stablecoins and with less risk of being controlled by one person or group.
Let’s go with the aspects that pose a risk to FRAX and that may create certain doubts in using this stablecoin compared to others.
The main risk is to see if its partial collateral system and algorithmic stability can be maintained at large volumes and having a supply or market capitalization as could be USDT or USDC. Since from 2.7 billion to 70 billion there is a big difference, and it is very different how certain market crashes can affect depending on the supply that the stablecoin has. At the moment it seems to be working, but it remains to be seen if it will remain stable as it grows and how it behaves in big market drops, because it is something that every so often happens.
There is also the risk of hacking of FRAX smart contracts or the wallet that holds the funds and could suffer a hack. Although unlikely, all platforms in DEFI have this risk.
To conclude, let’s summarize the strengths and weaknesses of each one so that you can choose. Keep in mind that, in a stablecoin, what is most important and relevant is that it maintains its price at $1, and that it has treasury in case something happens, to be able to recover your USDT or FRAX in dollars.
USDT and FRAX are two completely opposite stablecoins, while one focuses on reserves fully backed and controlled by a single company, FRAX seeks a stablecoin with a large part backed and another regulated algorithmically and without control by any company or group of people. Looking for a stablecoin as decentralized as possible.
I hope it has helped you to know in more detail how USDT and FRAX work and all the backing and information behind each one. Remember that if you don’t have an account with binance, you can create one just below.