{"id":11610,"date":"2022-10-27T15:05:00","date_gmt":"2022-10-27T12:05:00","guid":{"rendered":"https:\/\/alfacash.blog\/?p=11610"},"modified":"2024-02-19T21:50:15","modified_gmt":"2024-02-19T18:50:15","slug":"failed-stablecoins-can-happen-now-tether-usdcoin","status":"publish","type":"post","link":"https:\/\/alfacash.blog\/cs\/2022\/10\/27\/failed-stablecoins-can-happen-now-tether-usdcoin\/","title":{"rendered":"Failed stablecoins: can this happen now to Tether or USD Coin?"},"content":{"rendered":"

The name seems to say everything about it: stablecoins. They\u2019re crypto coins with a stable price all the time\u2026 or, at least, that\u2019s the intention. Sadly, it doesn\u2019t always work. There are around numerous failed stablecoins so far, <\/strong>and, likely, there will be even more in the upcoming years. Tether (USDT) and USD Coin (USDC) are the leading stablecoins now, with billions invested in them. What\u2019s their future?<\/p>\n\n\n\n

We can\u2019t know for sure, but we can make some good guesses with the data we already have. They both have pros and cons, and history has shown us bad and good examples of stablecoiny<\/a>. Let\u2019s explore that a bit.<\/p>\n\n\n\n

The Terra (LUNA) case<\/strong><\/h2>\n\n\n\n

We can\u2019t avoid the infamous Terra (LUNA) and TerraUSD (UST) case, since it\u2019s been the most awful crash in the stablecoin world.<\/strong> If you\u2019re new to crypto or have been living under a rock, you must know that the blockchain Terra held the third biggest stablecoin (UST) available until April this year.<\/p>\n\n\n\n

\"Stablecoins-Terra-LUNA-chart\"<\/figure><\/div>\n\n\n\n

By that moment, the market cap of UST was above $17.9 billion [CMC]. LUNA, its governance counterpart, enjoyed a price<\/a> of $96 per token and a market cap of over $33.8 billion. It was the eighth cryptocurrency by market capitalization. UST used LUNA coins to keep its 1 USD peg, instead of reserves.<\/p>\n\n\n\n

As they explained<\/a>, \u201cTerraUSD is an algorithmic stablecoin, where the cost of minting is equal to the face value of the stablecoins minted \u2014 to mint 1 TerraUSD, only $1 worth of the reserve asset ($LUNA) must be burned.\u201d In other words, UST kept its 1 USD value by issuing and burning LUNA coins. Until May 8, 2022. They were big, so, the fall was deadly.<\/p>\n\n\n\n

\"Terra-USD-UST-logo\"
TerraUSD (UST) logo.<\/figcaption><\/figure><\/div>\n\n\n\n

After a day full of short positions and the market panicking, UST lost its peg. By May 14, UST was at $0.1 (90% less) and now it doesn’t exist anymore<\/strong>. LUNA was dragged into the deadly spiral, losing almost all of its value. Bottom line: UST and LUNA had more sales pressure than they could handle. The investors lost trust in a system that previously worked, and UST quickly joined the list of failed stablecoins.<\/p>\n\n\n\n

The team behind Terra tried to revive the chain with a hardfork<\/a>, resulting in Terra Classic (LUNC) \u2014not a stablecoin. However, this coin is barely at $0.00024, and its market cap is $1.6 billion. Numerous retail investors lost their life savings<\/a> to this, so, the trust hasn\u2019t been recovered.<\/p>\n\n\n\n

More failed stablecoins<\/strong><\/h2>\n\n\n\n

TerraUSD hasn\u2019t been the only failed stablecoin, and it\u2019s not even the first one. The first stablecoins popped into existence around 2014, trying to achieve a much-needed source of price stability inside the cryptocurrency world. Most of them didn\u2019t apply the backup reserves to keep their prices, though. Instead, they were just like UST, of the algorithmic type \u2014which means they relied on their code and supply<\/a> to be \u201cstable\u201d.<\/p>\n\n\n\n

Podle CryptoSec<\/a>, there\u2019s been at least 23 failed stablecoins so far.<\/strong> We can add up those to the current +134 alive stablecoins available on the markets [CMC]. In comparison, the failures seem to be a small percentage. But the market must learn from past mistakes if we want to grow further.  <\/p>\n\n\n\n

\"List-failed-stablecoins-CryptoSec\"
List of Failed Stablecoins (CryptoSec)<\/figcaption><\/figure><\/div>\n\n\n\n

Among the most (previously) popular failed stablecoins, we can mention NuBits (2014), bitUSD (2014), Basis Cash (2018), Iron Finance (2021), BeanStalk (2021), and, more recently, Acala USD<\/a> (2022). The reasons behind their failures include big hacks<\/a>, regulatory issues, or simply a lack of trust by their users. They didn\u2019t seem to have enough monetary reserves, legal compliance, or community support to survive the hits of the crypto market.<\/p>\n\n\n\n

Tether issues<\/strong><\/h2>\n\n\n\n
\"Failed-stablecoins-BTC-USDT\"
BTC volume by currency. Chart by CryptoCompare<\/figcaption><\/figure><\/div>\n\n\n\n

Currently, Tether (USDT) is the queen of stablecoins. It has a market cap of over $68.5 billion and is the third coin by this factor [CMC], only behind Ethereum<\/a> (ETH), and Bitcoin (BTC). As indicated by CryptoCompare<\/a>, USDT is the most traded coin against BTC, even more than USD.<\/strong> Therefore, it\u2019s understandable that any issue around this coin cause concern.<\/p>\n\n\n\n

The New York Times even dubbed it<\/a> \u201cThe Coin That Could Wreck Crypto\u201d \u2014and with reasons. Back in May, when Terra (LUNA) crashed, the whole crypto market crashed as well (temporarily, though). And it wasn\u2019t as big as USDT. The truth is that the hypothetical Tether fall could cause a pretty bad domino effect<\/a> on the crypto market and beyond. You can\u2019t erase $68 billion from markets and expect no consequences.<\/p>\n\n\n\n

\"Popul\u00e1rn\u00ed-stabiln\u00ed
Tether logo<\/figcaption><\/figure><\/div>\n\n\n\n

A least, we can say that USDT has been very strong in two points: legal compliance and community support. Tether Limited, the company behind this stablecoin, has collaborated with authorities even when accused of wrongdoing. They\u2019ve paid almost $60 million in fines to US authorities<\/strong>, which are constantly worried about their reserves.<\/p>\n\n\n\n

That\u2019s probably the main problem with USDT. At first, its creators claimed that it was \u201cfully backed\u201d by USD cash on bank accounts owned by the company. However, this isn\u2019t the case now. If we check their Reserves Breakdown<\/a>, we\u2019ll notice right away that most of their assets aren\u2019t liquid enough.<\/p>\n\n\n\n

Only 10.25% are cash and bank deposits.<\/strong> The remaining percentage is formed by cash equivalents and other short-term deposits, commercial paper, secured loans, corporate bonds, funds, precious metals, and other investments \u2014including other not-specified digital currencies.<\/p>\n\n\n\n

\"Failed-stablecoins-Tether-reserves\"
USDT Reserves. Official website.<\/figcaption><\/figure><\/div>\n\n\n\n

USDC issues<\/strong><\/h2>\n\n\n\n
\"logo
USDC logo<\/figcaption><\/figure><\/div>\n\n\n\n

USD Coin (USDC) is barely behind Tether in market cap, with over $43.8 billion. It was launched in 2018 by the US company Circle, which claims to be fully regulated. A factor to prefer this coin over USDT could be their reserves and transparency. As it reads on their ofici\u00e1ln\u00ed webov\u00e9 str\u00e1nky<\/a>:<\/p>\n\n\n\n

\u201cKnown as a fully-reserved stablecoin, every digital dollar of USDC on the internet is 100% backed by cash and short-dated U.S. treasuries, so that it\u2019s always redeemable 1:1 for U.S. dollars (…) Circle is regulated as a licensed money transmitter under U.S. state law (…) Circle\u2019s financial statements are audited annually and subject to review by the SEC.\u201d<\/p><\/blockquote>\n\n\n\n

Not everybody believes this, though. The trader Geralt Davidson revealed a popular theory against USDC in June<\/strong>, claiming that it would crash sooner or later. According to his theory, Circle has been hiding billionaire losses and diminishing its reserves. Thus, they wouldn’t be able to handle a massive sell-off like the one suffered by Terra.<\/p>\n\n\n\n

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Circle's USDC scheme is on the brink of collapse. If you read their SPAC IPO filings its clear they have been losing money constantly but theres something dirtier happening underneath. They're at major risk on defaulting on USDC reserves. A deep dive \ud83e\uddf5 on USDC. \ud83d\udc47 pic.twitter.com\/GgN5oeD7gO<\/a><\/p>— Geralt Davidson \ud83d\udc3a (@CryptoInsider23) June 29, 2022<\/a><\/blockquote>