Analysis of the risk of 7 major stablecoins becoming unpegged.

2022-12-13 16:44

Read this article in 56 Minutes

This article analyzes the risk of stablecoin de-pegging and provides a usage guide to help users better protect their assets.

Original Title: "Comprehensive Analysis of 7 Major Stablecoin De-pegging Risks"

Original Source: Biteye

During the first half of the year, the anchor of the stablecoin UST caused the cryptocurrency market to enter a bear market, and its domino effect also caused a series of star projects to collapse. So, are other stablecoins stable? If there is another anchor, the cryptocurrency industry will be in chaos!

This article comprehensively analyzes the de-anchoring risks of the seven popular stablecoins and provides a usage guide to help everyone better protect their assets.

01 Introduction to Stablecoins

Stablecoins usually refer to cryptocurrencies that are anchored to fiat currencies such as the US dollar or other value-stable assets. Commonly used anchor assets include the US dollar (USDT, DAI, etc.), the euro (EURT, etc.), gold (PAXG, etc.), and other assets.

The most common anchored asset currently is the US dollar, so this article will focus on introducing stablecoins pegged to the US dollar, and all stablecoins mentioned without further explanation refer to stablecoins pegged to the US dollar.

Why do we need stablecoins?

Value Scale:

People are accustomed to measuring the prices of goods or assets in fiat currency, including cryptocurrencies. Although many NFTs issued on Ethereum are priced in ETH, buyers still estimate the fiat value of NFTs by combining stablecoin prices. Measuring the value of cryptocurrency assets in US dollars is commonly referred to as "USD standard", while measuring the value of cryptocurrency assets in other cryptocurrencies is commonly referred to as "coin standard".

Storage Method:

For stable assets such as the US dollar, they have a strong government credit endorsement and have broad purchasing power in reality, and will not "zero out" like crypto assets. Therefore, when Web3 users want to keep on-chain assets stable as much as possible, they can choose to exchange risk assets in their accounts for stablecoins anchored to stable assets to preserve value.

Means of circulation:

In the world of encryption, people have a demand for holding stablecoin assets to store value and measure asset value in fiat currency units. Therefore, fiat stablecoins have also become the main means of circulation in the encryption world. Stablecoins issued based on blockchain can allow users to directly purchase goods, services, or assets based on blockchain, enjoy the good characteristics of blockchain ledger, and do not need to frequently exchange fiat currency for stablecoins and then transfer them to the on-chain wallet for purchase.

Classification of Stablecoins

The most important property of stablecoins is their anchoring to the US dollar, which can be achieved through various mechanisms. Different mechanisms also bring corresponding risks. Generally, we can roughly classify stablecoins according to the "issuer" and "anchoring mechanism".

It can be divided into two categories based on the issuer: "centralized" and "decentralized":

1. Centralized stablecoins are typically issued by an off-chain entity in the industry.

2. Decentralized stablecoins are typically generated by on-chain decentralized stablecoin protocols.

According to the anchoring mechanism, stablecoins can be divided into two categories: "collateralized stablecoins" and "algorithmic stablecoins".

1. Mortgage stablecoins usually have sufficient or excess assets for collateral.

2. Stablecoins based on algorithms maintain their peg to the US dollar through a certain algorithmic combination and arbitrage mechanism.

Typical Risks of Stablecoins

The most essential characteristic of stablecoins is their anchoring to the US dollar price. Based on this anchoring, stablecoins can serve as a measure of value, a store of value, and a means of circulation in the world of cryptocurrency, becoming an asset class that users cannot ignore.

Therefore, the biggest risk for stablecoins lies in the detachment from the US dollar price, and this detachment risk usually comes from different stablecoin issuers.

From the risk of the native issuer

1. Mortgage stablecoin: Insufficient collateral reserves

Regardless of whether the mortgage stablecoin is issued by a centralized or decentralized organization, its price is anchored to the US dollar depending on whether the issuer has reserved sufficient assets to support the stablecoin, ensuring that users can exchange it at a 1:1 price at any time.

Decentralized collateralized stablecoins are typically minted and issued by on-chain smart contracts, with the value of the collateralized assets being transparent and visible. The main risk comes from the smart contract layer.

Centralized stablecoin issuers store reserve assets in their accounts, while decentralized stablecoin issuers are transparent and have the risk of being misused. Therefore, centralized stablecoin issuers usually need to disclose collateral to gain user trust.

2. Algorithmic stablecoin: Risks such as unrestricted issuance caused by algorithmic vulnerabilities and decoupling caused by shaken confidence.

From the risk of derivative issuers

The initial issuers of stablecoins found it difficult to issue native stablecoins on all chains. Therefore, when users need to use a certain stablecoin on an unofficially issued chain, they can only cross-chain the required stablecoin to the target chain through a cross-chain bridge or a centralized exchange.

The corresponding stablecoins on the target chain are usually issued by derivative issuers such as cross-chain bridges and centralized exchanges on the corresponding chain, and their security also depends on the corresponding derivative issuers, which will result in the following two corresponding risks.

Cross-chain bridge risk: When users use cross-chain bridges to transfer assets between chains, the bridge usually locks the user's stablecoin on the original chain and sends the corresponding stablecoin to the user on the target chain. If the stablecoin on the target chain is issued by the cross-chain bridge and the bridge is attacked, the user's stablecoin on the target chain may lose its support, resulting in the risk of being unanchored.

Centralized Exchange Risk: When users use centralized exchanges for depositing, withdrawing, and cross-chain transactions, the exchange will accept the user's stablecoin off-chain and send the corresponding stablecoin to the user on the target chain. When the corresponding stablecoin on the target chain is issued by the centralized exchange, the exchange has the risk of over-issuance, which leads to insufficient collateral and anchor risk.

02 Analysis and Comparison of Seven Major Stablecoins

Stablecoins have different types, mechanisms, and market positions. When exchanging stablecoins, users should consider the advantages and disadvantages of stablecoins before exchanging and using them. The following are the top seven stablecoins by market capitalization for comprehensive comparison, for users' reference. (The following stablecoins are sorted by market capitalization.)

USDT (Centralized Collateralized Stablecoin)

Introduction

Tether USD, abbreviated as USDT, is issued by Tether and is currently the highest market value stablecoin with a total market value of approximately 65.7 billion US dollars.

Public Chain Distribution

- USDT is circulating on 61 public chains such as Tron, Ethereum, BSC, Solana, etc. The circulation market share on Tron and Ethereum is the largest, accounting for 51.22% and 38.34% respectively.

- The USDT issued by the native issuer Tether is available on a total of 14 public chains, including Tron, Ethereum, Solana, Omni, Avalanche, Tezos, Algorand, EOS, Liquid, Statemint, SLP, Near, Statemine, and Polygon.

- The USDT on other public chains are all issued by derivative issuers.

Anchor Mechanism

The issuer conducts sufficient fund reserves, allowing users to exchange USDT and USD at a 1:1 ratio at any time.

Potential Risk Analysis

1. Insufficient collateral risk for native issuers

The assets supporting USDT in Tether's reserves are not completely transparent, and there is a risk of misappropriation by the company as well as corresponding investment risks.

USDT holders can use Chaineye to view Tether's asset-liability situation and the distribution of its reserves, in order to assess its potential risks.

Currently, the reserve asset value of Tether for USDT is approximately $68.06 billion, exceeding the issuance amount of $65.7 billion. About 90% of its reserve assets are highly liquid cash and cash equivalents, and 9.02% of the shares (approximately $6.14 billion) are used for investments including cryptocurrencies, which carry certain risks.

Tether has been publishing audit reports irregularly since 2017, and the latest audit report was released on September 30, 2022. The auditing company is BDO, the fifth largest accounting firm in the world, headquartered in Brussels. Tether uses BDO in Italy. Tether's previous audits came from an auditing company in the Cayman Islands called MHA Cayman, formerly known as Moore Cayman. Its parent company is MHA MacIntyre Hudson, a leading registered accounting firm in the UK, which was investigated by the UK Financial Regulatory Authority in January 2022 due to audit issues.

2. Risks of derivative issuers

Cross-chain bridge: The security of USDT transferred through cross-chain bridges is affected by the security of the bridges. Specific information related to cross-chain bridges can be found on DefiLlama.

https://defillama.com/stablecoin/tether

Centralized exchanges: Depending on the specific exchange and the specific currency issued on the target chain, you can check the asset reserve situation on the corresponding official website.

USDC (Centralized Collateralized Stablecoin)

Introduction

Issued by Circle, a blockchain payment company jointly formed by companies such as Coinbase, USDC is currently the second largest stablecoin in terms of market capitalization, with a total market value of approximately 42.36 billion US dollars.

Public Chain Distribution

USDC is circulating on 59 public chains including Ethereum, Solana, Avalanche, and Tron. Its share on Ethereum alone reaches 83.7%.

The USDC issued by Circle, the native issuer, is available on a total of 14 public chains including Ethereum, Algorand, Avalanche, Flow, Hedera, Solana, Stellar, TRON, Arbitrum, COSMOS, NEAR, and Optimism.

Anchor Mechanism:

The issuer conducts sufficient fund reserves, allowing users to exchange USDT and USD at a 1:1 ratio at any time.

Audit and Compliance:

USDC Reserve

Potential Risk Analysis

1. Insufficient collateral risk for native issuers

USDC holders can use Chaineye to view Circle's asset and liability situation as well as the distribution of reserves to assess its potential risks.

https://chaineye.tools/stablecoins/stats/USDC

Circle updates its reserve and issuance information weekly. As of December 10, 2022, the reserve asset value of USDC held by Circle is approximately $43.7 billion, exceeding the issuance amount of $42.36 billion at that time. The reserve funds only include cash and short-term US Treasury bills, accounting for 22.12% and 77.88% respectively, with low risk.

Circle has been releasing audit reports every month since October 2018. The audit reports are provided by Grant Thorton, the sixth largest accounting firm in the United States. Circle's reserves are held by major financial institutions in the United States, including BNY Mellon and New York Mellon Bank. In addition, on August 9, 2021, Circle announced that it will become a national digital currency bank and operate under the supervision and risk management requirements of the Federal Reserve, the US Department of the Treasury, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). Circle's stablecoin reserve assets are held in a series of FDIC-supported banks, including New York Mellon, and each account has a maximum insurance coverage of $250,000, which can reduce the risk of a run to some extent.

2. Risk of derivative issuers

Cross-chain bridge: Specific information related to cross-chain bridges can be found on DefiLlama. https://defillama.com/stablecoin/usd-coin

Other derivative issuers: specific issues require specific analysis.

BUSD (Centralized Collateralized Stablecoin)

Introduction

BUSD is a stablecoin issued by Binance in collaboration with Paxos (which is also a stablecoin USDP issuing company). It is approved and regulated by the New York State Department of Financial Services (NYDFS). BUSD is currently the third largest stablecoin by market capitalization, with a total market capitalization of approximately 22.07 billion US dollars.

Public Chain Distribution

BUSD circulates on 33 public chains such as Ethereum and BNB, with a share of 77.96% on Ethereum.

The native BUSD is only issued on Ethereum.

In order to expand the liquidity of BUSD to other chains, Binance has fully collateralized a portion of the native BUSD on Ethereum and issued Binance-Peg BUSD on BNB, BSC, Avalanche, and Polygon.

All other BUSD on the chain are issued by other derivative issuers.

Anchor Mechanism

The issuer conducts sufficient fund reserves, allowing users to exchange USDT and USD at a 1:1 ratio at any time.

Potential Risk Analysis

1. Native issuer risk

BUSD holders can use Chaineye to view the asset-liability situation and reserve distribution of BUSD, and assess its potential risks.

https://chaineye.tools/stablecoins/stats/BUSD

Paxos releases a reserve asset report at the end of each month. The collateral data disclosed in the last report has a time difference with the latest circulation. Currently, the total circulation of BUSD is 22.07 billion US dollars (as of December 10, 2022), and the corresponding report has not yet been released.

The latest report was released on November 30, 2022, with a reserve net asset market value of $22.65 billion, exceeding the daily circulation of $22.38 billion. The reserve funds include cash, US Treasury bills, and US Treasury bond repurchase agreements, with low risk.

The latest monthly reserve fund information can be found on Paxos (note: Paxos' latest report has not been audited by a third-party auditing company. Reports audited by third-party companies will be about a month behind Paxos' release time. The data in Chaineye is from the latest report audited by a third-party). https://paxos.com/busd-transparency/

The BUSD reserve is held in custody by banks such as BMO Harris Bank. Paxos' audit report is conducted by the third-party auditing firm WithumSmith+Brown, which is ranked among the top 25 accounting firms globally.

2. Derivative Issuer Risk

Cross-chain bridge: Specific information related to cross-chain bridges can be found on DefiLlama. https://defillama.com/stablecoin/binance-usd

Centralized exchange: Binance has fully collateralized some native BUSD on Ethereum, and has issued Binance-Peg BUSD on BNB, BSC, Avalanche, and Polygon. The reserves that Binance has made for Binance-Peg BUSD on the corresponding chains can be queried through Chaineye. The collateralization rate of BUSD locked by Binance is 100%, which is relatively low-risk.

https://chaineye.tools/stablecoins/stats/pegBUSD

Other derivative issuers: specific issues require specific analysis.

DAI (Decentralized Stablecoin)

Introduction

DAI is a stablecoin minted by the decentralized lending protocol Maker DAO. It currently ranks fourth in terms of market capitalization among all stablecoins, with a total market capitalization of approximately 5.42 billion US dollars.

Public Chain Distribution

DAI circulates on 40 public chains such as Ethereum, Polygon, and BSC, with a share of 88.33% on Ethereum.

MakerDAO is only deployed on Ethereum, so all native DAI is on Ethereum.

All other DAI on the chain are issued by other derivative issuers.

Issuance Mechanism

DAI is minted by users through the Maker protocol by over-collateralizing assets. The amount of DAI that can be minted cannot exceed a certain ratio of the collateralized asset value, similar to traditional financial practices of using collateralized assets such as real estate to obtain cash loans. Users can redeem their collateralized assets and destroy DAI at any time, but a stability fee must be paid upon redemption.

When the value of the assets mortgaged by the user drops, causing the collateral ratio to decrease, liquidation will be triggered. The user's collateral will be forcibly sold at a premium and a penalty of 13% will be required. After the collateral is liquidated, the user does not need to repay DAI.

Maker Protocol supports over 20 types of collateral, including ETH and WBTC. The collateralization ratio and stability fee for each asset are determined by the asset's own risk index and the governance decisions of MKR holders.

Stability Mechanism

When the price of DAI is below $1: The amount of DAI minted is determined by the value of the collateral in US dollars, and when redeeming collateral from the Maker protocol with DAI, the value of DAI is recognized as $1 by the protocol. Therefore, users can choose to redeem their collateral with a certain amount of DAI and destroy it, reducing the supply of DAI.

When the price of DAI is higher than $1: Users are motivated to continue minting more DAI and sell for profit; at the same time, MakerDAO provides a DAI deposit mechanism, and the community will increase DAI deposits to encourage holders to lock up DAI and reduce circulation. The interest on DAI is paid by MakerDAO's stability fee revenue. If the stability fee revenue cannot cover the total expenditure of DAI deposit interest rates, Maker will issue more MKR to make up the difference.

A proposal to decouple DAI from the US dollar: On August 28, 2022, Rune Christensen, co-founder of MakerDAO, published an article titled "The Road to Compliance and Decentralization: Why Maker Has No Choice but to Prepare for Free-Floating DAI". He pointed out that currently over 50% of DAI is collateralized by USDC, and regulatory crackdowns on cryptocurrencies could happen without prior notice, leaving even legitimate and innocent users with no possibility of recovery.

Therefore, Rune Christensen suggests gradually increasing the decentralized asset collateralization of DAI through a plan called the "Endgame Plan" to enhance its resistance to censorship. Rune pointed out that this process may lead to a 50% loss of users, but Maker will prioritize decentralization and allow DAI to be partially decoupled from the US dollar to maintain decentralization.

1. Main Content of "Endgame Plan"

a. Split the complex MakerDAO governance into multiple MetaDAOs responsible for specific governance duties, increasing the decentralization of governance: each MetaDAO can focus on its own tasks, achieving multi-center governance and allowing MetaDAOs to execute in parallel, speeding up the governance process. MetaDAOs are independent of each other, with their own governance tokens and governance processes, and need to earn their own profits.

b. Introducing more decentralized assets: reducing the stability fee for collateral assets such as ETH and wBTC, and reducing the demand for USDC to mint DAI; introducing ETHD, allowing users to mint ETHD through stETH and then mint DAI, to increase the share of ETH in collateral assets and thus increase the proportion of decentralized assets.

c. Three progressive collateral strategies for gradual decentralization: The three strategies are pigeon, hawk, and phoenix, which gradually progress forward along the timeline and advance step by step according to the threat of regulation.

Pigeon strategy: Increase collateral assets as much as possible and maintain high-speed asset growth; hawk strategy: If DAI is subjected to authoritative attacks, limit the risk exposure of real-world assets (RWA) that can be controlled by authoritative institutions to 25% in order to seek a balance between performance growth and resilience.

Phoenix Strategy: If there is evidence that an authoritative attack is imminent or all collateral for RWA has been confiscated, the Phoenix Strategy will transition to eliminate all RWA risk exposure, and only RWA that cannot be controlled by authoritative institutions can be used as collateral.

d. When under authority attack, DAI will be allowed to decouple from the US dollar: Rune assumes that in the initial stage of activating DAI's free float, up to 50% of protocol users will leave in a short period of time.

At this stage, Maker allows DAI to freely float from a 1:1 USD ratio and gradually change its price based on the target interest rate. A positive target interest rate increases demand for DAI and reduces its supply, while a negative target interest rate has the opposite effect.

By adjusting the interest rate, DAI can achieve relative stability without being pegged to the US dollar at a 1:1 ratio. Rune also indicates that DAI will remain anchored to the US dollar for at least three years, and this time frame may be extended if there is no direct threat.

If the decentralization level of collateral can be increased to 75%, it will indefinitely maintain its anchoring with the US dollar.

2. Progress of "Endgame Plan"

"Endgame Plan" proposal was launched on October 10, 2022, and has been approved by the community vote. The roadmap of the Endgame Plan is divided into 4 main phases.

The beta version will be launched within 12 months, building ETHD, launching 6 MetaDAOs, and initiating liquidity mining for the MetaDAO's native token system. However, the full version will not be launched until 2030 or later.

Potential Risk Analysis

1. Native issuer risk

MakerDAO protocol has a vulnerability that was exploited by attackers to maliciously increase issuance. MakerDAO has been running stably for 5 years since its mainnet launch in 2017, and its code has been well-verified. At the same time, MakerDAO has restricted the types of collateral assets it supports, mostly consisting of well-qualified tokens.

Clearing risk: When the market encounters extreme black swan events, causing the overall rapid decline in the price of collateral assets, or when compliant assets such as USDC are frozen for some reason, Maker will lose the value of collateral that cannot be liquidated in time, resulting in anchor risk.

2. Risk of derivative issuers

Cross-chain bridge: Specific information related to cross-chain bridges can be queried on DefiLlama.

Other derivative issuers: Specific issues require specific analysis https://defillama.com/stablecoin/dai

FRAX (Decentralized Algorithm & Collateralized Hybrid Stablecoin)

Introduction

Frax is a decentralized stablecoin protocol that uses a combination of collateral and algorithm. FRAX is the stablecoin issued by the protocol. Currently, the market capitalization of FRAX is approximately 1.18 billion US dollars, ranking it as the fifth largest stablecoin by market capitalization.

Public Chain Distribution

FRAX is circulating on 33 public chains such as Ethereum and Arbitrum, with a share of 92.89% on Ethereum. The native FRAX issued by Frax only circulates on Ethereum, while Frax on other chains is cross-chain issued by derivative issuers.

Issuance and Redemption Mechanism

When a user injects $1 worth of collateral into the Frax system, Frax will mint 1 FRAX to the user. The injected collateral is a combination of stablecoins and FXS. At the same time, the user can also return 1 FRAX to the protocol and receive a combination of $1 worth of FXS and U.

During the process of minting and redeeming FRAX, the involved FXS will be burned and minted, which changes the supply of FXS in the market.

During the minting and redemption process, the mixed ratio of stablecoins and FXS (Frax's governance token) is equal to the target collateralization ratio of the Frax protocol (FRAX amount / stablecoin collateral amount). For example, when the collateralization ratio is 80%, users need 0.8U and 0.2U worth of FXS to mint one FRAX. The target collateralization ratio is adjusted every hour by the community holding FXS.

Anchor Mechanism

When the FRAX price is above $1, arbitrageurs can inject $1 worth of value to mint FRAX in the system and sell it on the market for profit.

When the FRAX price is below $1, arbitrageurs can buy FRAX at a low price on the public market and exchange it for the value of $1 in the system.

When the market conditions are good and users have confidence in Frax, Frax tends to lower the target collateralization ratio, so that the same amount of stablecoin collateral can mint more FRAX into circulation in the market, with a minimum collateralization ratio of 0%.

When the market conditions are poor and user confidence in Frax decreases, Frax tends to increase the target collateralization ratio to prevent excessive FRAX issuance, while also increasing the reserve of stablecoin collateral, with a maximum collateralization ratio of 100%.

Currently, the mortgage rate of FRAX is 93.25%, the lowest historical mortgage rate is 82%, and the highest mortgage rate is 100%.

Potential Risk Analysis

1. Native issuer risk

Frax Protocol has a vulnerability that was exploited by attackers to maliciously increase issuance. Frax was launched at the end of 2020 and has not yet experienced any protocol vulnerability issues.

Mechanism risk.

When the FRAX price falls, it relies on arbitrageurs to buy FRAX and deposit it into Frax, minting FXS at the target collateralization ratio and redeeming some U to push the FRAX price back to $1. If FXS is over-issued, it will undermine market confidence and cause the Frax community to lose control.

Frax uses the U+FXS mixed collateral and adjustable target collateral rate stable mechanism, which can reduce arbitrage space in extreme unilateral market conditions and to some extent maintain the stability of FRAX price.

When FRAX is below $1, arbitrageurs will buy large amounts of low-priced FRAX, mint $1 worth of U and FXS combination, and sell for profit. The selling pressure of U will not cause a drop in the price of U, but the selling pressure of FXS will cause a drop in the price of FXS, triggering a chain reaction. Over-minting of FXS will cause the protocol governed by FXS to lose control, causing the FXS price to "zero out".

The existence of U reduces the selling pressure formed by excessive casting of FXS, while supporting the bottom price of FRAX: when the mortgage rate is x, arbitrageurs need x proportion of U and (1-x) proportion of FXS. The higher the mortgage rate x, the smaller the proportion of FXS (1-x), and the smaller the selling pressure of FXS formed, thus reducing the degree of chain reaction. At the same time, x proportion of U as the support asset of FRAX forms the bottom price of FRAX, making FRAX always have the recognized value of xU, and will not directly "zero out".

The minting and redemption of FRAX are not always open, which increases the cost of malicious attacks on Frax: arbitrageurs only have the incentive to issue more FXS when FRAX is sold in large quantities, causing it to become unanchored.

When the market price of FRAX is in a stable range ($1.0033 FRAX $0.9933), the FRAX protocol will not open the minting and redemption of FRAX. Therefore, malicious attackers of Frax need to sell a large amount of FRAX first in order to push the price below 0.9933 and launch an arbitrage attack. Therefore, the design of the arbitrage range greatly increases the cost of attack.

At the same time, a slight deviation from the anchor will not immediately trigger a large increase in the issuance of FXS, which has brought Frax a self-rescue window, allowing it enough time to adjust the collateral ratio or supplement collateral assets. Overall, the FRAX-FXS mechanism is more stable compared to the UST-LUNA combination.

2. Risk of derivative issuers

Cross-chain bridge: Specific information related to cross-chain bridges can be queried on DefiLlama.

Other derivative issuers: Specific issues require specific analysis https://defillama.com/stablecoin/frax

USDP (Centralized Collateralized Stablecoin)

Introduction

USDP is a collateralized stablecoin issued by Paxos, approved and regulated by the New York State Department of Financial Services (NYDFS). Its current market capitalization is approximately $768 million, ranking it as the sixth largest stablecoin by market capitalization.

Public Chain Distribution

USDP is currently only circulating on Ethereum and BSC, with Ethereum accounting for 99.68% of the share and the remaining portion being cross-chain to BSC through the BSC Bridge.

Anchor Mechanism

The issuer conducts sufficient fund reserves, allowing users to exchange USDT and USD at a 1:1 ratio at any time.

Potential Risk Analysis

1. Native issuer risk

USDP holders can use Chaineye to view the asset-liability situation of BUSD and the distribution of reserves, and assess their potential risks.

https://chaineye.tools/stablecoins/stats/BUSD

Paxos releases a reserve asset report at the end of each month. The collateral data disclosed in the last report has a time difference with the latest circulation. Currently, the total circulation of BUSD is 770 million US dollars (as of December 11, 2022), and the corresponding report has not yet been released.

The latest report was released on November 30, 2022, with a reserve net asset market value of 77.49 million US dollars, which is less than the circulating USDP of 790 million US dollars on that day. However, its circulation on December 1 decreased to 76.7 million US dollars, which may indicate a timing issue.

USDP reserve assets consist of US Treasury bills and cash, with relatively low risk. The latest reserve fund information can be found on the Paxos official website. (Note: The latest report released by Paxos has not been audited by a third-party auditing company. The report audited by a third-party will be about a month behind Paxos' release date. The data in Chaineye is the latest report audited by a third-party.) https://paxos.com/busd-transparency/

Like BUSD, the reserve of USDP is held in custody by Paxos and is subject to comprehensive supervision by the New York State Department of Financial Services (NYDFS). The audit report is provided by the third-party auditing firm WithumSmith+Brown.

2. Derivative Issuance Risk: Risk of BSC Bridge

TUSD (Centralized Collateralized Stablecoin)

Introduction

TUSD is a collateralized stablecoin issued by TrustToken, supported by the Stanford Entrepreneurship Fund. TUSD currently has a market capitalization of approximately $756 million, ranking seventh among stablecoins by market capitalization.

Public Chain Distribution

TUSD circulates on 10 public chains including Tron, Ethereum, and BSC, with shares of 49.8% and 33.57% on Tron and Ethereum, respectively.

TrustToken has issued its native TUSD on four chains: Ethereum, BSC, Tron, and Avalanche.

The remaining TUSD on other chains will be transferred across chains by the derivative issuer.

Anchor Mechanism

The issuer conducts sufficient fund reserves, allowing users to exchange USDT and USD at a 1:1 ratio at any time.

Potential Risk Analysis

1. Native issuer risk

Users can use Chaineye to check the reserve status of TUSD.

Currently, the reserve asset value of TUSD is 810 million US dollars, which exceeds the circulating supply of 756 million US dollars and is held in multiple bank accounts. However, the specific asset allocation within the banks cannot be viewed.

TrustToken's audit report is issued by the third-party accounting firm Cohen & Company, which is a firm specializing in digital asset solutions.

Meanwhile, TrustToken has partnered with top US accounting firm Armanino to develop a reserve data reading software. Armanino's web browser has been reading the custody balance and total circulating supply on the TUSD chain, and displaying both in real-time to prove the TrueUSD balance. https://real-time-attest.trustexplorer.io/truecurrencies

2. Risk of derivative issuers

Cross-chain bridge: You can check specific information related to cross-chain bridges on DefiLlama: https://defillama.com/stablecoin/trueusd.

Other derivative issuers: analyze specific issues specifically.

Supplement

Both BUSD and TUSD custodial banks have Silvergate, a US-based bank that primarily serves cryptocurrency companies, as their client. Silvergate's clients include well-known cryptocurrency companies such as FTX, Coinbase, Circle, and Paxos.

FTX has approximately $1 billion in deposits at Silvergate. On the day FTX filed for bankruptcy, Silvergate issued a statement stating that its bank did not have any risk on FTX, and FTX's deposits at Silvergate accounted for less than 10% of the bank's total deposits. This deposit will be returned to FTX's creditors through the bankruptcy process.

Meanwhile, Silvergate also supports FDIC (Federal Deposit Insurance Corporation) insurance. Each account at Silvergate is insured up to a maximum of $250,000, which can reduce the risk of a run on the bank to some extent. Overall, the likelihood of Silvergate going bankrupt due to a run on the bank is relatively low.

03 Summary

The use of stablecoins needs to consider two indicators: safety and usability.

Safety:

Can you guarantee a 1:1 redemption with the US dollar in any situation?

- Decentralized stablecoins require a focus on the credibility of the native issuer, the collateralization ratio and risk of reserve assets, as well as the credibility of third-party regulatory and auditing agencies, to ensure that the issuer has sufficient reserves to cope with runs.

- Decentralized stablecoins need to examine their minting and burning mechanisms, whether there is an unlimited issuance mechanism, and the triggering conditions.

Usability:

The key focus is on the circulation volume and the scenarios where the currency is accepted for payment. It is recommended to choose stablecoins with large circulation volume and wide acceptance.