After a Slow Start, Tether Sees Increasing Usage in DeFi

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Tether usage is picking up pace in DeFi as Aave reports over 10% of its assets locked are in USDT, after a slow start that saw its competitor USDC gain adoption.

Tether (USDT) usage in decentralized finance (DeFi) appears to be growing, as lending protocol Aave reports over $7.2 million in USDT locked, out of a reported $60 million in total assets.

This result comes two months after the initial launch of Tether on the platform, which offers a wide range of other stablecoins including Dai (DAI), USD Coin (USDC), sUSD and TrueUSD (TUSD).

Tether says that a notable portion of that usage is made of flash loans, a loan that does not require collateral as long as it’s returned in the same block.

The interest rate on depositing Tether is one of the highest among competitors, with a 30-day average of 6.2% annual interest. This is significantly higher than DAI’s average of 3.2%, but falls behind sUSD’s 8.9% average APY. Nevertheless, as of press time all stablecoins show instantaneous interest rates of around 3.5%.

Tether sees increased usage

Aave has quickly risen through the ranks of DeFi protocols, now positioned fourth by value locked according to DefiPulse, just behind its main competitor Compound.

Compound itself has also added USDT through a community governance poll, enacted on May 1. However, Compound does not let the stablecoin be used as collateral, similar to Aave.

Tether is currently by far the most used and most issued stablecoin, recently surpassing XRP to reach the third position in the rankings by market capitalization.

In the DeFi ecosystem, however, USDT has been trailing behind its other centralized competitor, USDC. The DeFi-native Dai stablecoin has also chosen USDC as an additional collateral type.

Why was Tether left behind?

It appears that Tether’s reputation among some users is preventing its wider adoption in decentralized finance.

The MakerDAO community, in its discussions to supplement USDC with stablecoins from other providers, is consciously ignoring USDT. Several members came out saying that USDT “seems to have both financial and reputation as risk,” and “they [Tether] are neither transparent nor compliant.”

While not all users appear to have issues with it, its “contentious nature” is enough to prevent further discussions on the matter.

Stani Kulechov, the CEO of Aave, told Cointelegraph that USDC’s initial success is attributable to Coinbase’s Bootstrap Fund, launched in September 2019, which injected USDC liquidity in the system. Kulechov added: 

“Now that we see more traction for DeFi from Asia, USDT is picking up. Also the fact that DeFi usage is expanding to non-DeFi cryptocurrency users is strengthening the USDT liquidity.”

When asked if USDT will eventually take the top spot in DeFi, Kulechov answered that “it’s difficult to see who will win overall stablecoin demand at Aave.” His hope, he added, is to have a diverse market of stablecoins on the platform.