Some sober thoughts on stablecoins

Author | Hashipai - Adeline

Article word count: about 2100 words

Reading time: about 3 minutes

The market has been on a roller coaster ride, and we have once again witnessed history.

In this black swan event, the cryptocurrency market fell sharply, and various media outlets said that "the myth of Bitcoin as a safe haven has been broken." When all kinds of assets seemed to be in a bit of a mess, stablecoins became the green spot among the myriad of colors.

Some crypto market conditions on March 12

According to data on Skew, during the period of sharp market fluctuations, the stablecoin USDT accounted for 60%-75% of BTC transactions, and the market value of Tether, the issuer of USDT, once soared to US$4.8 billion. At the same time, USDC also experienced the same market value increase. In this regard, Circle CEO Jeremy Allaire said that although the price of the currency has plummeted, there is still good news - the demand for the stablecoin market has surged, which shows that the blockchain-based monetary infrastructure has begun to play a role.

In addition, after the sharp drop entered a temporary stable period, USDT maintained a high premium for many consecutive days , and the over-the-counter premium once exceeded 6%, which also became a hot topic among the public. Many people began to speculate on the reasons. One said that legal currency funds entered the market to buy at the bottom, another said that too many people sold for USDT but did not cash out, and some believed that the contract increased the margin to resist sudden risks.

Regardless of the reasons, the demand for stablecoins has increased significantly after the crash. Stablecoins have become a hedging tool for crypto investors to deal with sudden market crashes. Or conversely, driven by extremely high positive premiums, stablecoins have become a temporary residence for mainstream currency sellers to transfer their assets.

For a while, discussions about the safe-haven properties of stablecoins flooded all kinds of media.

Stablecoins seem to be regarded as the last bastion in the cryptocurrency market . When a war breaks out, everyone hides in the bastion. But then again, have you ever thought about whether this bastion is really safe?

Stablecoins in Fluctuation

First of all, it should be noted that not all stablecoins can maintain price stability during a sharp drop . Stablecoins that use cryptocurrencies as collateral , such as DAI created by MakerDAO, BitCNY with BTS as collateral, BitUSD, and nUSD created by Havven, will evaporate synchronously due to liquidation, repurchase and destruction when the price of the digital currency they are anchored to falls, which will only cause further shortage of market funds and aggravate the risk of decline.

In the tide of redemption, no egg can remain intact

Under the risk-averse sentiment, funds are flowing wildly in stablecoins pegged to fiat currencies, led by USDT . But it is easy to enter the market, but difficult to exit. Redemption is becoming difficult. Xu Kun, Chief Strategy Officer of OKex, said at the event that we should be wary of the risk of a run on USDT. During this big drop (March 12), the OTC market of some platforms could not be transferred. Many people were transferring USDT through ERCRO. At the same time, Ethereum was also congested.

Similar plots have been staged more than once before: As early as the beginning of 2018, the "hacking incident" directly led to users being unable to redeem US dollars from Tether and Bitfinex. Bitfinex raised the trading threshold after resuming new user registration: depositing $10,000 or equivalent in cryptocurrency to trade, and some users who did not meet the standards were unable to withdraw fiat currency; at the end of October 2018, due to the bankruptcy of the USDT custodian bank, USDT accounts were panic-sold and USDT plummeted. However, Bitfinex locked these accounts, making it difficult to redeem, and the trading platform KuCoin also immediately suspended the recharge and withdrawal functions of USDT...

Questions raised by netizens on the Reddit forum in November 2018 about the delay in Bitfinex withdrawals

The consequences of additional issuance are terrifying

More importantly, the topic of "stablecoin instability" has long been a commonplace. Gemini accidentally closed an OTC account that attempted to redeem the stablecoin GUSD, a code that could freeze wallets and destroy related tokens at will was found in PAX, and USDT worth $30.95 million was stolen from Tether's wallet by attackers...Since its birth, there have been many reports on the credit crisis of stablecoins.

For the legal currency-collateralized stablecoins led by USDT, due to their issuance and collateral methods, most of them have the problem of highly centralized management and opaque operation, that is, "managing a centralized platform under the banner of decentralization". Compliant stablecoins that are 1:1 anchored to the US dollar may be more secure in terms of security issues, but at present, the unsecured, unbacked non-compliant stablecoin USDT firmly occupies nearly 80% of the market. Credit cannot be fully guaranteed, and issues such as false over-issuance, price manipulation, and whether the US dollar can be exchanged 1:1 have been repeatedly questioned.

Putting aside the issue of fake over-issuance, the possible consequences of additional issuance are more worthy of discussion. According to the data from DAppTotal.com in the figure below, during this market crash, stablecoins led by USDT frequently issued additional coins to increase liquidity on the market and alleviate further market declines.

Data source: DAppTotal.com

This kind of "quantitative easing" method seems to be the same as the regulatory mechanism of the traditional financial market, but it is not. In the traditional financial market, the central bank needs to consider multiple factors when releasing liquidity, and regulate the economy through a variety of monetary tools, rather than simply printing money. In the currency market, the issuance of such stablecoins, led by USDT, seems a bit arbitrary . An anonymous report titled The Tether Report sparked heated discussions earlier. The report pointed out that Tether did not rely on organic business development, but issued its own currency based on market conditions . John Griffin, a professor at the University of Texas at Austin, also mentioned this in a paper published on SSRN. When the price of Bitcoin fell, USDT was issued and used to buy Bitcoin, but when the price of Bitcoin rose, there was no redemption data.

Based on this, the crypto analysis media Ourea has written a script about the USDT crash.

Image collection from: Crypto Analysis Media Ourea article

In other words, such additional issuance may stimulate the price of the currency to recover in the short term , but since it does not need to consider any economic issues when releasing liquidity, over time, this wanton printing of money will only lead to price bubbles. The Federal Reserve described a worst-case scenario in its Financial Stability Report last November: In such a situation, once a stablecoin runs, the holders of the stablecoin will be panicked and will ask the issuer of the stablecoin to return the collateralized fiat currency. And because there is no transparent and reliable US dollar reserve, stablecoins led by USDT have become grenades that can explode at any time.

The latest data shows that ( as of this writing) , USDT's market value has reached 4.693 billion , making it the fourth largest cryptocurrency asset by market value. Despite the trust crisis of issuer Tether and its dispute with Bitfinex, USDT still maintains its position as the unshakable leader in the stablecoin market.

Data source: DAppTotal.com

Behind the cold data is a huge amount of capital - once the building collapses, do investors really have anywhere to hide?

It’s terrifying when you think about it.