Why A Stable Coin Isn't So Stable

In the world of crypto we all know that a lot of scams, rug pulls and other bad things bad actors do to make a quick buck. It's extremely damaging to the crypto ecosystem as a whole and people for some reason find it very hard that they need to be responsible for losing their own funds and not doing proper research. But I get it you can do all the researching you want but some cases still sound solid and end up being flops.

Stable coins are suppose to be a representation of a 1:1 in USD fiat money. It means that 1 stable coin should be help in reserve by 1 fiat USD that is liquid and can be redeemed at any give time in most cases. These would be your USDC, BUSD, USDT etc.

Because of the recent public success of USDt which is tether many companies have been jumping on top of stable coins without waiting for government insight or SEC oversight. They have released that waiting on the government would result in inaction, lawsuits and just constant battles that get no where. It's sad but it's a trap the USA in general has fallen into where little to no action is taking place and instead the entire system just hemorrhages money.

This push from companies rolling out their own stable coins has in fact pretty much enabled them as operating like a bank. Investing the money into large stake investments like US treasuries that are paying nearly 6%!

The only issue with this is you are trusting the company to manage and profit these funds into the future and to have enough liquidity on hand to be able to pay out everyone if they ask for it. Most likely these companies are not required to hold 10% liquid like banks are required (and still gets them into trouble) so you're relying on the company to always be profitable and be able to pay out these funds. It's a risk especially since it's not FDIC insured like most banks are.

We have see some so called stable coins break peg and even crash to nothing like in the case of Terra network. In just three days it broke peg and disintegrated into nothingness in May of 2022.

This is creating massive passive wealth for these companies with little effort on their part. But stable coins have been expanding now into other areas.

New Versions Of Stable Coins

A new version of stable coins is starting to gain a little traction as of late. These are called algorithmic stable coins and they get their "stable" price based on other assets backing it besides fiat USD.

Idk about you but it's going to be crazy hard to keep something like that pegged and we are seeing countless cases of them getting this wrong.

One of the most recent examples of this is called USDR which is a real estate backed stablecoin. As we all know the real estate sector is a place to make lots of money but it's also a place to lose a lot and we are most likely headed towards loss a lot. This is because it's expected starting next year that housing prices will start to fall while loads remain at a high rate. Causing a massive stagnation of wealth in the economy and possibly triggering the recession they continue to keep trying to push off.

USDR recently lost peg and as of writing this current sits at $0.55 a drastic depeg from the $1 it should be holding.

The report so far is a follows...
Over a short period of time, all of the liquid $DAI from the $USDR treasury was redeemed.

This created a hyper deflation in the market cap of USDR.

Combined with the lack of DAI for redemptions, panic selling ensued, thus causing a depeg.

Which pretty much means the USDR was not backed with enough liquid assets and now the company is quickly trying to get those liquid funds which are EXTREAMLY hard to get when they are tied up in real estate.

Normally if you invest into real-estate through accredited places your funds are locked for 5 years otherwise you incur a early withdraw penalty.

It starts to make me wonder if buying into USDR via the depeg now could be a long term positive option. *not financial advice

Stable Coins

Stablecoins are here to stay for sure and if anything we will see more and more companies release them. However they come with little security other then simply trusting the company is going to keep enough liquidity on hand and be smart enough about their investments that they remain in profit.

What are you thoughts on Stable coins? If you enjoy that one ones are you betting on and why?

Posted Using InLeo Alpha