Had You Know Your Stablecoin Exposed to Certain Risk ?
Why now market discussing with stablecoin and what to do with it.
Why Stablecoin seems to take much more attention now ?
In the past weeks, the hottest issue in crypto ecosystem was UST-LUNA Crash. It was the biggest crypto crash so far with 32–33bio USD TVL at the peak.
The reason why Terra chain getting so much TVL was its promotion of Anchor protocol contributin 2/3 of Terra TVL amounting to 20bio USD :
The reason anchor protocol getting that much TVL was its promised to deliver 20% yield on its stablecoin. The marketing angle was “drop your saving account, saves 20% more with anchor protocol”. User/investor seems to take for granted the idea for stablecoin which is :
Stablecoin : Any cryptocurrency designed to have a relatively stable price, typically through being pegged to a commodity or currency or having its supply regulated by an algorithm. Source : Investopedia
For most of its time, UST price had pegged its price to 1 USD. There was three instances of depegging which the last one was the one that broke camel’s back.
The question need to be answered from chart above was “what and how the mechanism in place to ensure UST price stay at 1.0 USD ?” and “Why the last breakout different with the past two breakout ?”
Question 1 : what and how the mechanism in place to ensure UST price stay at 1.0 USD ?
To put simply below are the table of arbitrage strategy that push and pull UST to 1 :
If there’s mechanism in place to incetize user to peg UST to 1 USD, This is also why some user call UST as algorithmic stablecoin.
Question 2 : Why the last breakout different with the past two breakout ?
UST pegged was based on its counterpart LUNA which was volatile assets. As you can see in Picture 5. If the assets (UST or LUNA) down with significant amount in the short-period. It could cause death spiral effect. It happen in during 10–12 May 2022.
For whatever reason investor selling LUNA and UST was irrelevant. If a stablecoin that promise stability didn’t had any contigency plan/mechanism for a tail risk. Then those stablecoin wasn’t robust enough to be used for massive scale. These times makes you wonder the quality of your stablecoin.
Type of Stablecoin
- Off-chain collateralization (Fiat-Based) : Stablecoin was backed 1:1by off-chain asset reserve on pair currency (i.e : USD, EUR, GBP, etc). Its Reserve mostly managed by some central authority which defeated decentralization purposes. Example : USDT, BUSD, USDC
- Off-chain collateralization (Commodity-Based) : Same product yet reserve by precious metal such as Silver, Gold. Example : PAXG, XAUT.
- On-chain collateralization : Stablecoin was backed using overcollateralization using single or several on-chain digital assets. Example : LUSD and DAI
- Algorithmic Stablecoin : Stablecoin that was managed by some form of algorithmic that push and pull its supply to match with current demand.
Is there need for all of stablecoin or winner takes all ?
Like blockhain trillema, there’s pro and cons for each stablecoin. Below are the stablecoin trillema :
Algorithmic stablecoin would still exist as give much more capital effiency with higher risk capital allocation such to DeFi. One thing for sure, UST-LUNA experiment conclude within cryptocurrency ecosystem algorithmic stablecoin cannot be scaled one of top ten or top twenty marketcap. Because, During market crash supply management won’t catch-up with demand drop on its on-chain assets.
Then what should investor assessed in Stablecoin ?
Off-chain collateralization
- What is the asset backing it?
- How stable is the asset backing it?
- Are there any controls in place to ensure that the stablecoin has enough of the assets in reserve through independent security/reserve audits?
Off-chain and On-chain collateralization :
- Do Platform give system monitoring to maintain healthy colleteralization ratio ?
Off-chain, On-chain collateralization and Algorithmic Stablecoin :
- Does the whitepaper make sense? Is it clear how the stablecoin is being backed?
Additional assessment to be including :
- Project sponsor and how is the relationship between project and the sponsor ?
- information on the team behind the project ? Is background of the team behind the project relatively match such as (few banking and IT background).
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Thanks for reading, I hope you found this article useful. Always DYOR (do your own research) because conviction always come through understanding not just following.
Disclaimer
This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by me or any third-party service provider to buy or sell any securities or other financial instruments.
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Appendix :
https://medium.com/@altcoinfantasy/dummys-guide-to-stablecoins-62b2cbdd2abe
This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by me or any third-party service provider to buy or sell any securities or other financial instruments.
