How Safe Are Stablecoins Part 1 — Fiat-Collateralized Coins
The questions we aim to answer in this series on stablecoins are how safe and how stable are stablecoins? In this episode, we’ll take a look at several examples of fiat-backed collateralized stablecoins like USDT, TUSD, BUSD, USDC, and more.
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There are essentially 5 categories of stablecoins and due to the massive amount of research and time needed to go through all of this, I will be doing this in several parts to create a series. This part will cover fiat-collateralized coins like USDT and USDC. The next part in the series will cover algorithmic stablecoins like HBD while taking a look at past failed coins like UST or IRON. In the third part of the series, I will cover crypto-collateralized stablecoins like DAI and commodity-collateralized coins like gold backed stablecoins. In the fourth part of the series, I will get into the future of stablecoins, the concerns around them, what Central Bank Digital Currencies or CBDCs are, and how they could impact crypto. In the fifth and final part of the series, I will do a comparison of all of them and share my thoughts on what I believe to be the best stablecoins.
This provides a great explanation — https://coinmarketcap.com/alexandria/glossary/stablecoin
Tether — USDT
The bulk of this will focus on Tether as it has the most scrutiny and is the largest stablecoin in existence with a market cap of 75 billion dollars placing it 3rd well below BTC & ETH.
Collateralized fiat stablecoins like USDT or USDC are supposed to backed by real money and represent a 1-to-1 peg to US dollars. The founders of Bitfinex who started Tether Ltd have been under constant scrutiny for how accurate their attestations are and if we can even trust their auditors.
One of the most important things to understand about stablecoins that are heavily centralized like USDT aka Tether, is that they have 100% control over all of the funds with way more overreach than any bank of the Federal Reserve could have. In fact, during the PolyNetwork hack, Tether was able to simply freeze the 33 million USDT that was stolen with ease.
Even if you didn’t care about any of that, this should scare you. Tether is so centralized that they can freeze transactions and even reverse transactions using USDT on Tron or Ethereum.
This covers the many addresses they’ve banned — https://dune.com/phabc/usdt---banned-addresses
This is Tether’s own self-report for transparency: https://wallet.tether.to/transparency
As of May 14, 2022 — Their reserves breakdown shows 83.74% Cash and cash equivalents & other short-term deposits & commercial paper. The breakdown of this shows 52.41% as treasury bills meaning that only around 40% of Tether is actually backed by normal fiat cash.
Their last official report was on December 31st, 2021. — https://assets.ctfassets.net/vyse88cgwfbl/4hiNJsZ98LlZqCJHKzrLpV/2b6338482ef0093382885f80ba6f1083/Tether_Assurance-12-31-21.pdf
https://tether.to/legal/ — This is worth reading since they literally claim you can’t use it if you live in the US and that violating these terms can have grave consequences. You automatically agree to them by using it.
Their site used to say, “Every tether is always backed 1-to-1, by traditional currency held in our reserves.” While after enough controversy, it was changed to “pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves”
Coinbase & Circle — USDC
USDC is less controversial than Tether, but it is run by Circle and Coinbase while being backed by Citadel and Blackrock which have been accused of causing Terra’s UST depeg and eventual crash as well as plenty of other market manipulations. While that around UST hasn’t been proven, it would make sense that a competing stablecoin would want to be eliminated to prevent competition outside of collateralized stablecoins. Given USDC is the 4th largest cryptocurrency based on market cap, just below Tether, it’s worth looking into as well.
This site aims to provide monthly attestation reports from the firm Grant Thornton LLP — https://www.centre.io/usdc-transparency
I think these short reports that don’t really say much don’t lend them much more legitimacy either.
These reports claim that USDC is perfectly backed 1 to 1, though they only classify that as the “Total fair value of US Dollar denominated assets held on behalf of USDC holders is at least equal to:” which could mean a lot of different things. At least Tether gives you some sort of breakdown.
Never be misled to believe that because it’s a cryptocurrency that it’s decentralized. In their whitepaper, they state “This approach is distributed, though it does not purport to be — or aim to be — entirely decentralized.” Which you can find here -https://f.hubspotusercontent30.net/hubfs/9304636/PDF/centre-whitepaper.pdf
Here’s the list of banned addresses on USDC — https://dune.com/phabc/usdc-banned-addresses.
TrueToken — TUSD
TrustToken is one of the better options out there as they specifically aimed to compete against Tether even using an opposing ticker symbol. Their main focus was to solve the issues around attestations and trust in the backing of stablecoins. Their way to tackle this was to provide real-time attestations on all their stablecoins.
TUSD is ranked 50th with a market cap just over 1.2 billion. They also have other coins for other fiat cryptocurrencies, but it’s safe to say they are the small fish in the stablecoin world.
You can find their real-time attestations here for their various cryptocurrencies — https://real-time-attest.trustexplorer.io/truecurrencies
Gemini Dollar — GUSD
This is a fairly small coin but was backed by the Winklevoss twins who also invested in Coinbase. Their attestations are just as concerning as the rest, and they are just as centralized, except likely much easier to manipulate given their small market cap in comparison to other stablecoins
Gemini dollar is one of the smallest stablecoins ranked 141st by market cap with just under 206 million.
Apparently, they cleared an audit from Deloitte, but given their small size, I think that’s believable and not really that novel — https://www.coindesk.com/business/2020/04/22/gemini-clears-new-deloitte-audit-in-bid-to-appeal-to-wall-street/. However, like anything else, we don’t really know and still have to rely on trust.
All of their attestation reports can be found here: https://www.gemini.com/dollar
Security audit that barely says anything — https://www.gemini.com/static/dollar/gemini-dollar-trailofbits-audit.pdf
Binance & Paxos — BUSD, USDP
Their attestations are again just like the others with little to no proof of anything aside from the numbers they report.
BUSD is ranked 9th based on market cap with just under 18 billion while USDP is 59th with a market cap just under 1 billion.
The attestation reports for Pax Dollar and Binance USD can be found here: https://paxos.com/attestations/
There are many other fiat-backed stablecoins, but they all generally have the same issues and concerns around things like how centralized they are or how we know that the audits are accurate and that we can trust these entities. It’s not decentralized, and it’s not trustless. My main gripe is that stablecoins are meant to offer us better solutions to get in and out of crypto without having to rely on the flawed traditional banking system, but instead may actually just amplify those flaws offering these institutions more control and power over the crypto ecosystem than banks could ever have. I don’t believe fiat collateralized stablecoins are safe or truly stable. However, I do think they are a necessary evil. We will explore other types of stablecoins in the future.
With other failed cryptocurrency stablecoins like Facebook’s Libra being prevented over anti-trust concerns, one has to wonder when the SEC will come after these institutions and how it will impact the crypto market. USDT & USDC sit 3rd and 4th and thus represent a large chunk of the cryptocurrency market. We will get into this in a future episode in the series. Next up will be “algorithmic stablecoins” or non-collateralized stablecoins. In that, we will look at coins like UST/LUNA, TITAN/IRON, and more.
Do you hold any stablecoins? Do you trust that any stablecoins are backed to the degree they claim to be? Do you trust Tether as an entity? Let me know what you think about this in the comments below and don’t forget to subscribe!
*Disclaimer: This is not financial advice and is purely for entertainment purposes. What you see, hear, or read is my personal opinion, and any statements made are based on my views and should not be misconstrued as fact. My crypto portfolio may or may not be simulated*
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