Stablecoin Watch: Who Falls Next?
- By Bilal Hafeez and Dalvir Mandara
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- 3 min read
- We monitor whether the TerraUSD (UST) collapse is impacting other stablecoins.
- We find Tether (USDT) has shown some vulnerability by briefly de-pegging, but the algorithmic stablecoin, FEI, is showing the most volatility.
- Both Binance USD (BUSD) and USD Coin (USDC) appear most stable, with low volatility and increasing market capitalisation.
- We also find the yields on stablecoins are falling in contrast to rising yields in fiat.
The de-pegging and collapse of the TerraUSD (UST) stablecoin has brought the spotlight to all stablecoins in crypto. To help navigate this volatility, we introduce this new weekly report to analyse the latest developments in stablecoins. We focus on the biggest stablecoins by market cap, which range from asset-backed, to algorithmic, to hybrids:
- Fiat-backed stablecoins. These aim to be fully collateralised with fiat currency or other assets. The typical collateral includes dollar cash, treasuries and commercial paper. Notable fiat-backed stablecoins include Tether (USDT) and USD Coin (USDC).
- Crypto-backed stablecoins. These are also collateralised, but this time with cryptocurrencies such as ethereum. Given the volatility in crypto assets, these stablecoins are over-collateralised. Notable crypto-backed stablecoins include DAI.
- Algorithmic stablecoins. These aim to maintain a price peg using an algorithmic process as opposed to collateralisation. They do this through using smart contracts to control the supply of the coins in circulation. Notable algorithmic stablecoins include FEI.
- Hybrid stablecoins. These combine elements of both collateralisation and algorithmic rules. Notable hybrid stablecoins include FRAX. The TerraUSD coin could also be classified as hybrid.
Latest Developments
Market Cap and Peg Risk
Tether (USDT) and USD Coin (USDC) make up around 80% of the aggregate market cap of stablecoins (Table 1). So, these are the key stablecoins to see if there is any contagion from the collapse of the TerraUSD (UST) stablecoin. Tether (USDT) temporarily lost its peg against the dollar on Thursday last week when it traded at around $0.95. It has since returned to parity against the dollar. Nevertheless, Tether (USDT) continues to lose market cap – down 0.1% over the past 24 hours and 10% over the past 30 days (Table 1 and Chart 1). All other stablecoins have also taken huge month-on-month losses in market cap, except Binance USD (BUSD) and USD Coin (USDC).
Volatility
There has been considerable volatility across stablecoin markets since UST de-pegged. We look at the annualised volatility of stablecoins over the past month to year to gauge which are most sensitive to moves. We exclude TerraUSD (UST) from our analysis since it has completely lost its peg and its volatility is therefore incomparable to the rest. Over the three time horizons, we find that FEI – an algorithmic stablecoin – is the most volatile (Chart 2). Lastly, the fiat-collateralised stablecoins (USDT, USDC, BUSD, TUSD, USDP) are the least volatile.
Yields
Turning to yields, both lending rates and borrow rates on the Compound protocol have been broadly declining since Q4 2021 (Charts 3 and 4). This comes at a time when yields on fiat currency, such as dollar cash, are rising. Pax Dollar (USDP) currently has the lowest lend and borrow annual percentage yield (APY) on Compound at 0.3% and 1.4%, respectively. Meanwhile, Tether (USDT) currently has the highest lend and borrow rates on Compound at 2.3% and 3.8%, respectively. Looking across other decentralized finance (DeFi) protocols, we find that lending and borrowing rates are mixed across the stablecoins (Tables 2 and 3).
Appendix
USDT: Tether is a fiat-collateralised stablecoin primarily issued on the ethereum and bitcoin blockchains. It aims to be pegged 1:1 against the US dollar. Tether’s reserves are not backed 100% by US dollar deposits. Instead, they are backed by reserves that include cash, cash equivalents, short-term deposits, commercial paper, corporate bonds, funds, precious metals, secured loans, and other investments including digital tokens.
USDC: USD Coin is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is 100% backed by cash and short-dated US treasuries. USDC publishes a monthly public attestation of 100% reserves.
BUSD: Binance USD is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is backed 100% by USD held in Paxos-owned US bank accounts and US treasury bills (including through repurchase agreements and/or money-market funds invested in US treasury bills). Paxos is a New-York-regulated financial institution and publishes a monthly public attestation of 100% reserves.
TUSD: TrueUSD is a fiat-collateralised stablecoin issued by the TrustToken platform that is issued as ERC-20 tokens on the ethereum blockchain. It aims to maintain its 1:1 peg against the US dollar by being fully collateralised by US dollars using multiple escrow accounts to reduce counterparty risk.
USDP: Pax Dollar is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It aims to be pegged 1:1 against the US dollar by holding USD reserves in Paxos owned US bank accounts.
DAI: Dai is a crypto-collateralised stablecoin that attempts to maintain a 1:1 peg against the US dollar by depositing other crypto assets into smart contracts on the ethereum blockchain every time a new DAI token is issued. DAI is maintained by a decentralised autonomous organisation (DAO) called MakerDAO. And since the mechanism is maintained by a system of smart contracts, it has higher decentralisation than the centralised entities controlling USDT, USDC, or BUSD.
MIM: Magic Internet Money is a crypto-collateralised stablecoin launched by the DeFi platform Abracadabra. MIM is backed by interest-bearing tokens (ibTKN).
UST: TerraUSD is a crypto-collateralised hybrid stablecoin native to the Terra blockchain. To mint 1 UST, $1 worth of UST’s reserve asset, LUNA, must be burned. The idea was to try and ensure LUNA’s long-term growth. More people buying into UST means more LUNA gets burned, which should make the remaining LUNA supply more valuable. However, the system collapsed recently when UST de-pegged from the US dollar.
FRAX: Frax Finance is a fractional-algorithmic stablecoin that uses both collateralisation and an algorithmic process to create its decentralised stablecoin that is pegged 1:1 to the US dollar. Only stablecoins (currently, USDC) are accepted as collateral by the protocol.
FEI: FEI is an algorithmic stablecoin that aims to be pegged 1:1 against the U.S dollar that is backed mostly by ETH.
Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.