Stablecoins: Are they really Stable? | QuillAudits

Table of Content:

What is a Stablecoin?

The Need for Stablecoins:

  1. Stablecoins have been developed with the objective of facilitating the broader adoption of cryptocurrencies.
  2. Stablecoins are an incredibly important piece of making sure Web3 works. We need a token that people can transact in without the spikes and volatility of native blockchain assets.
  3. Stablecoins are critical to decentralized finance because they allow investors to leverage the benefits of Defi without having to transact in highly volatile assets.

Types of Stable Coins

1. Fiat-Backed Stablecoins

2. Crypto-Backed Stablecoins:

3. Commodity-Backed Stablecoins

4. Algorithmic Stablecoins

Risks of Stablecoins:

  1. Counterparty risk and Lack of Transparency: By trusting the third party to print money and keep a cryptocurrency stable, the dollars could be fractionally reserved instead of fully backed. In this case, a bank run could cause the price of the coin to drop dramatically. These risks may be amplified by a lack of transparency with respect to the composition of reserve assets, as well as a lack of controls on.
  2. Centralization risk: Centralization risks mean the same monetary issues fiat currencies face when a central authority has the power to print money without oversight. For example, the most widely traded stablecoin on the market USDT is controlled by a company called Tether. Being a centrally backed asset interferes with the nature of blockchain technology, albeit not technically.
  3. Algorithm manipulations: Algorithmic stablecoins rely on an algorithm that buys up supply or produces it based on market fluctuations. These algorithms are often incredibly complex and difficult to execute which leaves scope for incorrect implementation and finally depeg of currency. We have seen what damage it can cause in the case of Terra UST depeg.
  4. Economic Instability and Inflation Issues: If stablecoins were issued in a much worse-run economic fiat currency, no one would exchange their money for it, which means that the stablecoin would have no liquidity and therefore no value. However, this also puts your stablecoins at risk against global black swan events or sudden economic downturns which can lead to inflation.
  5. Regulations: Stablecoins, like all digital currencies, possess inherent risks to the underworld. It makes it much easier to pay an arms dealer in cryptocurrency than it is with a bank check nowadays. Until proper regulations are put in place to safeguard your digital assets, it is probably not wise to fully commit to stablecoins.

Stablecoin Depeg Case Study:

1. Terra UST:

2. aUSD:

3. USDD:

4. HUSD:

5. DUSD:

Regulations on Stablecoins:

Final Verdict:


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