[LongHash Column] Besides network effects, what other advantages does Tether have?

Currently, Tether (USDT) does not have a true competitor in the stablecoin market. According to data from LongHash, there is nearly $8 billion USDT in circulation, while the second-largest stablecoin, USDC, has a supply of only about $750 million.

Tether has always been at the center of controversy. Some question whether the company behind Tether truly has enough reserves to back the stablecoin, some scholars believe it could be used to manipulate the entire BTC market, while others cast doubt on this. The reality is, when people try to escape the volatility of cryptocurrencies, what they need most is still Tether—other stablecoins have always struggled in terms of demand.

People tend to attribute Tether's market dominance to its network effect. As Paolo Ardoino, the CTO of Bitfinex, expressed on the recent Messari Unqualified Opinions, Tether's success is largely due to the fact that it was the first stablecoin in the market. Just like Bitcoin in the cryptocurrency field, Tether gained a significant advantage by establishing its stablecoin network ahead of others. Tether was launched in 2014, and it was not until 2018 that a stablecoin craze emerged.

Therefore, while the network effect is clearly a factor in Tether's success, the stablecoin also has another key advantage. Compared to other stablecoins in the market, USDT seems less likely to be accepted by regulatory authorities and legislators. When other stablecoins leave backdoors for law enforcement, or even obtain additional regulatory approvals from the New York State Department of Financial Services (NYDFS), Tether faces subpoenas from regulatory agencies and lawsuits.

USDC, GUSD, and other new stablecoin issuers' willingness to compromise with regulatory authorities may be misguided. After all, if you choose to comply with regulatory rules, how do you differentiate yourself from products like PayPal? As I have written before, what is the purpose of issuing a stablecoin on a public chain at present? If the digital assets behind the issuer are still centralized, the application of public chains may only incur unnecessary expenses, as decentralized systems usually come with higher costs.

In fact, another point that benefits Tether significantly is the belief that if people hold USDT instead of stablecoins like USDC, the likelihood of their funds being seized is lower. A digital asset that is less likely to be seized is more useful than digital assets with convenient law enforcement backdoors. This is also the original intention behind the creation of Bitcoin.

According to Nic Carter, partner at Castle Island Ventures, an example of the aforementioned market advantage of USDT is that some Chinese traders prefer USDT because they believe there is less risk of funds being frozen when held in this stablecoin.

Tether may disagree with the idea of unwillingness to cooperate with regulatory authorities, but in reality, the company behind the stablecoin also has the ability to freeze funds. In 2017, after the Tether Treasury on Omni was hacked, Tether added this functionality. However, Tether operates on a series of different crypto networks, and it is unclear whether there are backdoors in these cases. At the end of last year, the Human Rights Foundation (HRF) found 16 instances of Tether funds being frozen. According to Eric Wall, privacy tech partner at HRF, the reasons for these fund freezes point to issues with exchanges. Ardoino confirmed this in a recent tweet.

Nevertheless, many still believe that USDT is less likely to be frozen compared to its competitors. However, it is important to remember that when people choose USDT, their withdrawals are also subject to certain restrictions. Do not expect any darknet markets to immediately add stablecoins as payment options.

Another point to note is that, as BitMEX Research and I have summarized in the past, Tether itself has made some trade-offs, and its system could be shut down by law enforcement actions in a relatively short period of time, similar to the Liberty Reserve event in 2013.

As time goes on, all stablecoins may be subject to greater regulation, as they are not actually more decentralized or resistant to regulation at a technical level than traditional, centralized payment solutions. By then, solutions like Dai, a crypto-collateralized stablecoin, may become more popular.

This article is from our partner LONGHASH

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