We are used to the fact that stablecoins are always stable and it should always be equal to one dollar. But is it? Is it safe to keep all the money in one stables? Why USDC won’t repeat the fate of UST?
Most recently, the USDC has fallen by about 10%. The stablecoin cost not $1, but $0.88. Now he has already recovered, but is it necessary to worry?
The USDC issuing company kept about 7% of its reserves in the failed Silicon Valley Bank.
Investors are afraid that USDC has collapsed to almost zero, like UST, so they are panicking and selling off their portfolio.
Should I be concerned?
- USDC, unlike UST, is backed by real assets. Therefore, a repetition of the fate of UST is technically impossible.
- USDC is currently more than 90% backed – there is simply nowhere to fall below $0.90.
- USDC reserves at Silicon Valley Bank are not lost, but frozen.
- Even if all banks with USDC reserves fail (which is unlikely), USDC will not fall below $0.77 because 77% of their reserves are in US Treasury bills.
- There is nothing stopping them from filling the security hole with loans or their own income, or waiting for the FDIC to pay Silicon Valley clients the money.
- Few people are interested in the fall of the USDC – this will cause a new wave of bankruptcies.
- Circle, the company behind USDC, has a good reputation in the crypto market. If they can’t get their reserves back from SVB, there will be dozens of big companies to help them.
The fall in the price of a centralized stablecoin is not something unique. In April 2017, USDT fell to $0.91. It took several weeks to recover.
This situation once again shows how important it is to keep your funds in several stablecoins at once, and not in one.
5 lessons we learned after the USDC crash
- Stablecoins are not the safest place to store funds.
It is essential to understand how each of the stables works in order to be aware of their risks.
- Banks pose a risk to fiat-backed stablecoins.
Centralized stablecoins have evidence of money in banks, but the banks themselves may not have that money.
Banks risk the money of depositors because they need to somehow pay interest on deposits, cover infrastructure costs and earn something on top. Plus, do not forget about fractional reserve banking.
- DeFi cannot rely on centralized stablecoins.
At any time, your funds can be frozen, lost in banks, restricted by regulators.
Centralized stablecoins are now very common in DeFi because it is easier to bring more liquidity to the market.
- Most decentralized stablecoins are not really decentralized.
DAI is deeply integrated into traditional finance. Most of their income comes from loans to banks, and DAI itself is partly backed by USDC.
FRAX and MAI are also highly dependent on USDC, so they are subject to the same risks.
- DeFi needs more truly decentralized stablecoins.
LUSD, for example, is only 110% backed by ETH. Although ETH cannot be called a highly decentralized cryptocurrency either.
Disclaimer: This news is not investment advice. Assess the risks yourself before making any investment decisions.
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