14th October 2023 > > Depeg.

tl;dr

Another stablecoin depeg for reasons that are not hard to fathom. An unfortunate side-effect of this depeg provides insight into some of the issues around adoption of DeFi.

Market Snap

Market Wrap

The SEC has not appealed the judge’s decision in the Grayscale case (see yesterday’s CCC). In response to this news, analysts at Bloomberg have raised the probability of approval for BTC ETFs to 90% by January 10th, 2024 (the next yay or nay deadline for the SEC).

Markets are unimpressed with this news, meaning it is either priced in (unlikely given the pent-up demand a spot BTC ETF will likely release) or that markets believe the SEC will continue acting in an “arbitrary and capricious” manner.

Curious Cryptos’ Commentary – Stablecoins

We saw another depeg in the last couple of days as USDR (Real USD) suffered a precipitous drop from par to 54c or so. One of the calamitous events during the last crypto winter was the collapse of UST (TerraUSD) which led to hyper-inflationary printing of LUNA (Luna) and the collapse of the whole Terra ecosystem.

UST was an algorithmic stablecoin, whose algorithm proved ineffective in the face of market turmoil. There are those who seek their own version of the holy grail in algorithms, but they are all destined to fail.

A well-designed stablecoin is backed at greater than 1:1 in cash, or cash-like-equivalents of a highly liquid nature. For a dollar stablecoin short-term treasuries are an ideal form of collateral. But that is not all. There must be total transparency of all assets and liabilities daily, with constant monitoring and affirmation by a highly respected accountancy firm, which has no other connections to the issuer of the stablecoin.

No stablecoin yet fulfils those requirements, and so there will always be nervousness around the news of a depeg.

…

Now I know about USDR I am frankly shocked that anyone could have any faith in its ability to stay pegged to USD.

The collateral consists of two assets, both of which are entirely inappropriate for that purpose.

15% of these assets were TNGBL, the native token of Tangible DAO, who just happen to be the issuer of USDR. I know little of this DAO, but one of its core concepts is a large red-flag for me. Holders are encouraged to stake coins for up to four years in exchange for greater rewards. The Terra fiasco highlighted the dangers of lock-in periods, but that was for just seven days. Anyone locking-in for four years is essentially just throwing investment dollars away.

In any case, holding crypto assets as collateral for a stablecoin is just foolish, and unacceptable.

The second collateral is real-estate assets, ownership of which has been minted using ERC-721, a protocol that does not allow for tokenisation. Real-estate is an inherently illiquid asset unless tokenised, and again is completely unacceptable as backing for a stablecoin.

The depeg happened due to a good old-fashioned bank run. Redemptions were requested, collateral could not be sold to match those redemptions, leading to more selling pressure.

USDR is going to trade a lot lower than the theoretical value of backing collateral.

Curious Cryptos’ Commentary – But it didn’t end just there for one unlucky fella

@lookonchain has identified one wallet which exchanged 131,000 wUSDR (Wrapped USDR) for a negligible amount of USDC:

https://twitter.com/lookonchain/status/1712446623362760763

How is this even possible?

The mistake was to not set a slippage tolerance. At times of panic (and presumably this was a panic sell in reaction to the depeg) setting a tight slippage may mean a significant delay to trade execution. Not setting one at all opens the real possibility of 100% slippage.

It seems that perhaps an MEV (Maximum Extractable Value) BOT made off with 107,000 USDC. Full details are in the link above.

Incidents like this do not bode well for the wholesale adoption of DeFi.