Can stablecoins ever be stable ?
Yes , but not by any crypto-native issuers to date
Author : Stephan Roth
If this year has taught the crypto industry anything , it is that stablecoins are far from living up to their name . Considered a flight-to-safety asset , stablecoins are cryptos designed to maintain their value by being pegged to an external asset class , however , if they cannot maintain their peg , what is the point ?
Although ‘ crypto winter ’ might be the epithet applied to the crypto industry ’ s poor performance in 2022 , a more appropriate one may be the ‘ great decoupling ’. On 10 May , algorithmic stablecoin terra ( TUSD ) broke from its $ 1 parity , sank to a 2 ¢ low and incurred $ 40bn in losses over a fortnight .
As contagion hit , stablecoins decoupled . Market leader tether broke from its peg between 11 May and 12 May , tumbling to a low of $ 0.956 . During the same period , tether ’ s fully collateralised stablecoin peers such as US Dollar Coin ( USDC ), BinanceUSD ( BUSD ) traded at 1-2 % premiums , appreciating above their designated $ 1 pegs .
Terra ’ s collapse wiped an estimated $ 83bn from DeFi protocols , the greatest loss incurred across the space . CoinDesk ’ s Nathaniel Whittermore said terra marked the “ first time a big mainstream audience was exposed to risks of DeFi ” and US Treasury secretary Janet Yellen called the collapse a “ real threat to financial stability ”.
When asked why terra collapsed , Jeremy Fox-Geen , chief financial officer of Circle and USDC , told ETF Stream : “ Terra was fundamentally backed by nothing and so you cannot maintain something with nothing .”
Despite terra ’ s collapse hitting crypto hard , algorithmic stablecoins and on-chain collateralised ( ONC ) stablecoins do not pose a systemic risk to the ecosystem due to their tiny market cap . However , offchain collateralised ( OFC ) like tether and USDC do – making their depegging a big concern for the financial system .
Fool ’ s gold
OFC stablecoins are fiatbacked and can be converted instantly into a fiat-denominated currency . They are considered ‘ off-chain ’ since they rely on a centralised third-party custodian to manage their reserves and ensure redeemability .
Regarded as the ‘ gold standard ’ among stablecoins , OFCs experience significantly less price volatility than their ONC and algo stablecoin peers . Henri Arslanian ,
Chapter 1 : Market outlook
the author of the Book of Crypto , attributes OFC stability to their fiat-collateralised reserves and redeemability , offering investors “ comfort ”, “ trust ” and a degree of regulatory transparency . “ However , fiat-backed stablecoins have their pitfalls . What assets are backing it up ? Are the assets independently audited ?”, Hector McNeil , co-CEO of HANetf said to ETF Stream .
These questions are as valid as any , even with OFCs . tether and USDC ’ s decoupling in May is a testament to the lack of transparency for the composition of their reserve backings .
Since launching in 2014 , tether has been in a sleugh with regulators and critics regarding its reserve backing – not least since its terms of service state that its reserves are under “ the sole and absolute discretion of tether ”. So , in an attempt to clear its name , tether started publishing attestations of its holdings in 2021 .
The most recent report published in May , amid terra ’ s liquidation , shows that highquality and liquid US Treasury Bills holdings doubled to 47 % from 2021 . However , a third of tether ’ s reserves remain in non-disclosed commercial paper and 5 % are made of crypto tokens . This means tether is not fully fiat-collateralised . Nor is it over-collateralised .