What you need to know about securing stablecoins?

The collapse of the algorithmic stablecoin UST in early May caused increased volatility in the cryptocurrency market. The token lost its peg to the US dollar, which was provided by a certain burning and emission algorithm, as well as the LUNA support token. The market suffered multibillion-dollar losses, and investors and government regulators began to pay increased attention to the reserve funds of crypto companies issuing stablecoins.

The most popular stablecoins in terms of volume and advanced in terms of infrastructure are USDT, USDC, BUSD, says a senior analyst at BestChange. He explained that these coins are centralized, they are issued by large international companies Tether, Circle, Coinbase, Binance and others.

“Stablecoin issuers regularly audit their reserves to confirm that each of their tokens is backed by at least one US dollar. And their price is usually smoothed out by exchange participants who are confident in the possibility of converting a stablecoin 1:1 into fiat currency at any time.”


According to the expert

This has led to the fact that the sphere of stablecoins has not fundamentally changed. They exist and will continue to exist for a long time, although their users have gained some “sobriety” when choosing a particular token. “But, for example, the trading volume of only one of the tokens – USDT, exceeds the trading volume of bitcoin by about two times. This confirms the high liquidity and urgent market need for this asset class,” the analyst is sure.

According to him, price decoupling for centralized tokens can only be of a short-term image nature, but under no manipulation, provided that the security has not been compromised, the price will not be decoupled from the US dollar. “Decentralized stablecoins are experiencing a crisis of confidence, but not everything is clear there either.”

The binding of algorithmic stablecoins is indeed very fragile, although it is done with a certain margin, the expert explained. He pointed out that arbitrage, which is designed to stabilize the price at the moments of divergence, is not able to quickly smooth out very large volumes, which happened with UST. “In addition, such tokens are strongly tied to another, completely unstable token, which indirectly creates risks of depreciation of the collateral,” Zuborev warned.

Another risk for algorithmic stablecoins, a senior analyst at BestChange, called a mechanism designed to maintain the capitalization of collateral at the expense of the tokens themselves. In other words, staking stablecoins indirectly increases risk due to the possibility of returning these tokens to circulation at any time, thereby reducing their security. “Most likely, in the future, such projects will cease to exist, or will undergo significant changes. In general, developers will now take into account new risks when designing smart contracts, thereby making the DeFi segment even more reliable,” the specialist said.

Zuborev noted that among decentralized projects there are more sustainable ones. For example, one of the most liquid non-centralized stablecoins is a token from MakerDAO called DAI. “It is backed by a variety of asset classes, including centralized USDC stablecoins, which provide greater liquidity while still enjoying the full benefits of decentralization.”

He noted that the decoupling of the price of such tokens can only occur against the backdrop of a global collapse of the entire cryptocurrency segment. Although this cannot be ruled out, it must be understood that in such a scenario, the liquidity of centralized tokens will also suffer.

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