Thread by @daolectic

STABLEcoins, stablecoins everywhere..

They (should) combine the stability of USD with the volatility of crypto.

Today we will deep dive into them:

🔍Uses cases
🔍Adotpion level
🔍Risks outcome

1/ They have always told you to leave your liquidity in stablecoins.

Until #lunaterra was recently exploited.

That's why we think it is necessary to give some insights into how they are organized.

2/ #Stablecoins aim to reduce the volatility present in #crypto, anchoring their value to another asset.

Their specific use includes payments, transfers, and settlements.

Users exchange fiat money for a #stablecoin before trading #cryptocurrencies.

3/ @Deloitte research pointed out that digital currency is the main application for the #blockchain sector.

#Stablecoins, with a total market cap of $173B, play a huge role in the long-term sustainability of the ecosystem.

MC credit @TheBlockRes

4/ There are different types of #stables that you can find.

Let's start with the two macro-areas:

Centralized VS Decentralized.

also debated as

Custodial VS Non-Custodial

5/ Centralized or custodial #stablecoins store assets off-chain.

The collateral is kept by an external authority that provides digital supply based on the treasury:

The assets can include currency, bonds, or commodities.

$USDT & $USDC are the main examples.

6/ $USDT is today's king of stables with a market cap of $76B.

It is issued by Tether, the same company that operates @BitFinex.

Users are skeptical about @Tether_to:

they have been very vague in the past about how it backs $USDT with a lack of multiple audits.

7/ $USDT seems to be backed by commercial papers, for which there are no details.

Despite it, users are willing to use it as the daily volumes show ($74B w/ MC of $76B).

Adoption-wise, it is strongly present in $ETH and $TRON chains.

8/ $USDC has been issued by @Circlepay and @Coinbase.

Lately, @BlackRock announced to manage it, which gives more security to the users.

The reserve of $USDC is all in cash or cash equivalent.

The closeness of the issuers to the US government inspires confidence, even tough..

..we can find some drawbacks to custodial #stables:

- They introduce centralization into a decentralized environment
- They require trust that users won't be blacklisted or banned by central governments.
- Possible counterparty risk in case of fraud

9/ @jerallaire, the CEO of @circlepay posted a great 🧵 about $USDC that is worth your attention.

https://twitter.com/jerallaire/status/1525228141974806529

10/ Decentralized #stablecoins include:

➤crypto-collateralized, w/ smart contracts to define monetary policy, arbitrage, & over-collateralization.

➤algorithmic, which doesn't utilize explicit collateral to maintain the price.

11/ $DAI is the most important crypto-backed stablecoin.

It is issued by @MakerDAO and they use $ETH-based smart contracts with over-collateralization (w/ a 150% factor).

However, for the 41% it is collateralized by $USDC, showing to mainly rely on a custodial stablecoin!

12/ In algo stables, a mechanism may strive to preserve the peg even if complete collateralization is not available.

An example is the seignorage shares:

stable trades over $1 ➡️ minting of new tokens

stable below $1 ➡️ burned the additional token in exchange for shares tokens

13/ $FRAX is a #stablecoin that is partially collateralized and partially algorithmic.

@barryfried1 made an interesting 🧵 about it!

https://twitter.com/BarryFried1/status/1524340587067060224

14/ What about #stablecoin variability and inherent risks?

The volatility of the reserve assets influences how much reserves are required to sustain the peg:

Fiat-backed #stablecoins require appropriate capital buffers to protect against credit, market, and liquidity risks.

15/ For crypto-backed, while over-collateralization may reduce risks, it is costly and does not fully protect coin holders from severe occurrences.

Algo stables, due to their nature, if backed by investment tokens, have proven to be prone to the death spiral.

16/ @StablecoinsW resume all the main stables on one page.

From there, it is possible to see the volatility level of each one!

17/ #Stablecoin's reserve is required to sustain the peg at any given moment.

The low volatility of fiat-backed ones needs sufficient capital buffers to protect against credit, market, & liquidity risk.

However, full support today does not guarantee complete support tomorrow.

18/ Without a trustworthy third party, decentralized stables are either vulnerable to death spirals (see the #lunaterra drama) or inefficiently capitalized.

#Stablecoins backed by fiat seem to be the safest solution.

19/ Recently, @binance founder @cz_binance emphasized the role of backing stables with fiat reserves.

The exchange issued and backed its own centralized stable, $BUSD, which is mostly used with $11B only yesterday!

https://twitter.com/cz_binance/status/1524448933266739201

20/ To restore credibility in the ecosystem, strict rules are necessary.

Proper solutions will arise from the ashes of the latest drama, bringing decentralization to the center.

The SEC secretary @SecYellen express her opinion regarding this topic.

21/ We hope you've found this thread helpful!

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