Centralized stablecoins are problematic. Is a decentralized alternative on the way?

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Stablecoins have become an indispensable part of the cryptocurrency ecosystem, accounting for 80% of centralized exchanges (CEX) and playing a crucial role in the rapidly expanding world of decentralized finance (DeFi). Providing a stable store of value and enabling transparent transactions in a volatile market, stablecoins act as a vital link between fiat and crypto, their importance cannot be overstated.

Riyad Carey is a research analyst at Kaiko.

However, recent developments reveal a troubling trend: the most transparent stablecoins are shrinking, while their opaque counterparts are thriving. This not only undermines the trust that the industry desperately needs, but also poses a significant threat to the future of the crypto market.

Just a month ago, USDC, the second-largest stablecoin by market capitalization, pulled out of the US dollar and fell to 80 cents after asset issuer Circle confirmed that it was exposed to the failing Silicon Valley Bank. This price collapse can be illustrated with on-chain data; Below is a chart showing how the popular stablecoin exchange pool on Curve (3pool) saw the balance of tether (USDT), the largest stablecoin, plummet as rumors of a banking crisis swirled. Users were selling USDC and DAI for USDT, causing the USDT balance to drop.

In a more general sense, this chart also shows a flight from two stablecoins that are transparent about their backing, USDC and MakerDAO’s closely related DAI token, to the perceived security of a stablecoin that has not released an independent reserve report. this year, USDT . Last year, USDT issuer Tether was fined by the Commodities and Futures Trading Commission (CFTC) for lying about its reserve assets to back USDT.

The USDC has since returned to its peg and the 3pool has moved closer to equilibrium. However, USDC’s market cap has continued to decline as USDT approaches all-time highs.

Earlier this year, Paxos was forced to stop issuing BUSD after the New York Department of Financial Services (NYDFS) said the issuer failed to meet its obligation to conduct risk assessments. and due diligence to prevent bad actors from using the platform. Despite some confusion over the difference between the BUSD issued by Paxos and the wrapped versions that live on multiple chains called Binance-Peg BUSD, the former was one of the most transparent centralized stablecoins. Paxos was regulated by the NYDFS and published independent monthly certificates.

Prior to this regulatory action, the Binance exchange was promoting BUSD as its stablecoin of choice, and I thought there was a decent possibility that Binance might end up removing USDT (the exchange, the world’s largest by volume of transactions, withdrew the USDC last year).

With BUSD on the way out, Binance turned to trueUSD instead, making BTC-TUSD its only fee-free BTC trading pair. In February, TUSD had a market capitalization of less than $1 billion. Today, as a direct result of Binances’ support, its market capitalization is over $2.5 billion and accounts for more than a third of BTC’s trading volumes on the exchange.

A cursory scan of the TUSD website is not comforting. It states that TUSD is the first regulated stablecoin fully backed by the US dollar. The question is: Regulated by whom? The TUSD white paper states that TrueCoin, LLC (doing business as TrustToken) is a Money Services Business registered by the Financial Crimes Enforcement Network (FinCEN). That’s all well and good, but after some research it seems that TrustToken is not the issuer of TUSD, Archblock is.

I wonder why Binance, which is currently being sued by the CFTC, is promoting a stablecoin with which it has no public connection. The lack of transparency makes it difficult to say how much we can trust TUSD, and therein lies the problem.

It is not entirely surprising that two of the most regulated and transparent stablecoins have been punished this year. This reflects an age-old business problem in which companies have an incentive to expand at all costs. This trend was supercharged in the age of Web2, when tech companies sought to move fast and smash things and deal with the fallout later. But a big part of the appeal of crypto or Web3 is its potential to write the wrongs of an internet that has grown rapidly without direction or cohesion.

An obvious, but so far unsolvable, solution to this problem would be a decentralized stablecoin. Or ideally stablecoins. Unfortunately, most major native DeFi stablecoins have been taken down along with USDC, a centralized and censorable asset that accounts for a significant portion of supposedly decentralized assets. LUSD, for example, tied to the Liquity protocol, has been the most successful truly decentralized stablecoin, unfortunately it’s not that stable (it was trading above $1.01 at the time of writing).

Luckily, there’s an exciting innovation on the way. The obvious competitor is crvUSD, created by Curve Finance, which can rightfully be considered a stablecoin maker. This stablecoin will apparently be backed by decentralized collateral like ether (ETH) and is expected to enjoy extremely deep liquidity. There are others too, like Redacted Cartel’s dinero, which will be primarily backed by ETH. Although we have not yet solved the problem of decentralized stablecoins, I am convinced that the manufacturers are taking steps to bring us closer together.

In the meantime, centralized stablecoins will maintain their dominance. Exchanges should bear the brunt of responsibility by listing only trustworthy and transparent stablecoins. Similarly, institutions should carefully consider the stablecoins they use.

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