2018 Was the Year of Stablecoins; How Does Paxos (PAX) and Gemini (GUSD) Match Up
2018 has seen a lot of new trends, with one of the most noticeable ones being the rise of stablecoins. However, while the fact that the bearish market and high volatility did force investors to turn to more stable solutions is true, it is not the only driving force that impacted the stablecoins' growth of popularity.
Another just as important reason is an exclusive discount war reported by CoinDesk which has affected fiat-pegged coins, especially when it comes to Paxos' PAX and Gemini's GUSD.
As many are already aware of, fiat-backed cryptocurrencies — known as stablecoins — provide greater levels of stability than regular cryptos. This is because each of their coins is backed by $1, which prevents volatility problems, although it does make the coins partially centralized.
After the bear market affected the crypto space in 2018, many have turned to stablecoins, which inspired the creation of even more stablecoins. GUSD and PAX are only two of many, and they continued to gain popularity ever since they appeared. According to sources, both projects offered private OTC trading desks which provided 1% discount to those who used their stablecoins before exchanging the money into US dollars.
These offers — dedicated to making the coins stand out from the rest — allegedly appeared in December 2018. Coincidentally, this was right at the time when both coins experienced a large surge in activity, which does support the claims. Their market caps increased as well, and Gemini coin's cap increased by nearly $20 million in a single day. This occurred on December 17th, and many likely remember that this was the same day when Bitcoin itself started growing again, distancing itself from the low value of $3,200 per coin.
Now, traders familiar with the matter claim that all arbitrage opportunities regarding the stablecoins were manufactured. Meanwhile, Paxos' VP, Dorothy Chang, stated that the deal was offered to a small number of partners and that it started in September 2018. Chang also stated that the offer was active for less than two months.
It is also important to mention that in October 2018, a large controversy centered around Tether (USDT) came to light, and many started selling their USDT coins in fear of them being proven worthless. With Tether refusing to prove that it can back all of its circulating coins, the most popular stablecoin was predicted to die out. This has inspired many to start competing for USDT's place in the crypto market,
While Paxos may claim that the offer only lasted for a month or two back when the coin first appeared on the market, the effects of the artificial increase in trading activity are still visible today. For example, PAX has seen around $100 million in daily transaction volume for several days in a row, now.
A similar situation is happening to Gemini's coin, GUSD, which experienced a surge in trading activity in the past few weeks.
The Arbitrage Game
These two stablecoins have entered an arbitrage game through their actions, and the discount wars have started as soon as their coins' price went above or below $1. One consequence of the move is a number of fake accounts that Huobi users have opened, trying to make use of the stablecoins' discount while bypassing the daily redemption limit. Paxos had to start reviewing accounts in order to find the fake ones, which led to the closure of at least 10 accounts so far.
Huobi got involved because most of this trading happened in its HUSD, a stablecoin pool that allows traders to quickly exchange one stablecoin for another. Another fact that indicates that HUSD might have been used revolves around a large PAX market cap surge of nearly $40 million, which occurred just after HUSD was launched.
However, despite all the effort, games, and recent activity revolving around PAX and GUSD, both coins are still far behind Tether when it comes to market cap. Tether is still among the top 10 largest coins by market cap, currently having around $2.03 billion. There are several reasons for Tether still being so far ahead even with the controversies behind it, including the fact that it was among the first stablecoins to appear, and that it is in a legal gray area, which is a preferable option for some traders.
While PAX was willing to provide some reasoning behind their decision to offer a discount, Gemini did not.
The Campaigns Appeared Due To A Lack Of Demand
According to sources, it is believed that these stablecoins started their campaigns due to the natural lack of demand when it comes to such assets. Many prefer to collaborate with banks than to have to work with coins that do not offer interest and may have hidden agendas.
One potential issue with the campaigns is that it is possible that participating OTC desks may have had some data leakage in their hurry to join the trend. Supposedly, it is possible that they have revealed some of their competitive data regarding their own partners and trading volumes to Paxos and Gemini. The sources claim that smaller desks are often willing to give up a bit of their privacy in order to get access to places where USD can be instantly transferred.
Because of all the success that GUSD and PAX have experienced due to these discounts, it is possible that even more stablecoins will emerge in 2019 and try to do the same. For now, it appears that these projects have truly stopped their discount campaigns. Meanwhile, Huobi confirmed that there is now a daily withdrawal limit, originally added in the time of the incident.
Unverified users who wish to trade PAX can now only withdraw $1,000 per day, while verified ones have a $20,000 limit. Meanwhile, Huobi also announced plans to improve HUST in 2019 and to make the user experience even better by preventing others from misusing the system.