Today, I’m going to start my article with a story that a lot of you are familiar with.
I remember back in 2020, when I had zero knowledge in cryptocurrencies and we went into a serious market crash due to the COVID-19 shutdown, I jumped into the cryptocurrency space trying to look for ways to earn some passive income with my extra savings and got into Bitcoin somewhere around $8k & ETH around $250. Then, the birth of CEX offering high earning programs from 4% to 10+% from the likes of Crypto.com, Celsius, BlockFi and many more have attracted me to put my money there.
Then came the king of stablecoin trio: USDT, USDC & BUSD, and all these centralized platforms are offering 6 to 12% APY worth of yields, and I figure “It’s a no-brainer”. The highest yield I can get from my fixed deposits (FD) is around 2 ~ 3% back then, while these platforms can get me to earn 3 or 4 times more on stablecoins that reflect the similar value as USD with very minor fluctuation.
Back then, I was jubilant, especially in a massive bull market where everything in crypto keeps going up. Everyone seems to be talking about crypto being built as a “generational wealth”, and I’m sure a lot of you may have experienced reading these things and feeling so hyped about it.
I also remembered the time where I put quite a sum into the Anchor Protocol, and keep earning an almost stable rate of between 18% to 20% APY on the UST stablecoin, thinking that it’s the highest yield I have ever earned in a stablecoin & it’s “decentralized” powered by algorithm between LUNA & UST. In all honesty, there’s actually a few reasons why I liked what Terra Luna blockchain is building back before it starts to crumble down, and it’s a story for another day but….
Well, here’s today…..
I’m also sure that a lot of you would feel stupid or dreadful for a long time since last year, where all the dominos start to fall, one by one. Terra USD stablecoin, Three Arrows Capital (3AC), FTX, Alameda Research, Celsius, Voyager, Digital Currency Group (DCG), BlockFi, and now Silvergate Bank & Silicon Valley Bank. Even the people who did not expose to these platforms are also greatly affected by it.
A lot of people swapped their cryptos into stablecoins during a bear market because it feels like the safer place to park their wealth. I was one of the very few people who disliked centralized stablecoins like USDT & USDC for their centralized nature, and chose UST as my preferred destination of storing stablecoins despite ignoring Do Kwon’s cockiness while focusing on what was built in the Terra ecosystem.
Anyhow, life goes on and we learnt lessons along the way, so it’s time to move forward and write my piece about why I’m not planning to hold stablecoins for the time being regardless of the volatility of the cryptocurrency markets.
Regulatory & Censorship Risks
Recently, there’s been a lot of talk about the SEC cracking down on stablecoins. Back when I wrote my 1st Pizza Bits, I talked about the SEC cracking down on dollar-pegged stablecoins such as BINANCE USD (BUSD), which is owned by Paxos, and the potential risk of framing stablecoins as securities.
I totally disagree this point, as I think that stablecoins, if regulated correctly, can at least be a better alternative form of money than the current fiat system, while being utilized as a medium of exchange in a world where goods & services are still priced in fiat money that everyone benchmarks with. The embedment of USD into the best properties that blockchain technology offers such as immutability, transparency, decentralization & efficiency is what makes USD stablecoins a special form of USD money that can be easily adopted widely because everyone like to benchmark the value of financial assets in USD.
However, with the news of SEC crackdowns on stablecoins (algorithm & overcollaterized ones included), we won’t know which stablecoin will be affected next, as governments may take the east route and labelled all stablecoins as securities, no matter what unique properties does the stablecoin have.
Each crackdown on over-leveraged banks & centralized parties with the implementation of block and token censorship will hamper the backing of stablecoins to real US dollars causing a depeg, while also dangerously taking away user sovereignty by freezing the USDC coins from many wallet addresses
Until the regulatory entity has a very clear view of how they want to move forward with stablecoin policies that are at least fair towards all parties, I would stay away from stablecoins for now.
Alternative, non-centralized backed stablecoins?
Frankly, there are not many popular options out there where stablecoins are not backed by centralized assets.
is an overcollaterized stablecoin in the Ethereum blockchain that is backed by centralized stablecoins such as USDC & Paxos USD, to which both has suffer negative news of backing loss by real dollars due to the downfall of Silvergate & Silicon Valley Banks, and regulatory crackdowns on Paxos, therefore causing similar depegging as USDC. Not to mention MakerDAO, the entity that created the DAI stablecoin, has suffered a potential vulnerability before in that may cause a total lost all of the DAO funds.
is partially overcollaterized by other notable assets such as USDC, and is algorithmic with the minting & burning of Frax Shares (FXS). However, it also has more than 10% backing by USDC, and 60% of FRAX is largely controlled by Curve’s smart contracts used to perform automatic arbitraging (buying & selling of two or more identical assets in different markets), while Curve also has a history of a DNS hack back in Aug 9
Almost every stablecoin that I heard of as of now are backed at least by either USDT or USDC, or they are algorithmically backed by a high risk crypto assets such as the example of
Except for two…..
is also another interesting stablecoin on Cardano that is also overcollaterized by ADA and algorithmic with the minting & burning of SHEN as a reserve currency. At the moment, it’s one of overcollaterized, crypto-backed stablecoin that is not backed by centralized currencies such as USDC. However, it’s still a pretty new system that is yet to be battle-tested, while also has some centralization risks, especially that the stablecoin is run by (another blockchain that is enterprise-focused) and they have a roadmap mentioning they may want to bring centralized stablecoins such as USDT, USDC & BUSD into their treasury. With the recent news of USDC depegging going around, I think Coti need to think twice about this.
Back before Djed was introduced, there’s also another stablecoin called SigmaUSD (SigUSD) which is a USD stablecoin on the Ergo blockchain. SigUSD has been battle-tested for 2 years without any security breaches. So far, SigUSD is actually the most decentralized stablecoin which is only backed by ERG & SigRSV (Sigma Reserve, similar to SHEN), and they don’t have third parties to run their stablecoin protocol unlike Cardano’s DJED with Coti. The only problem with SigUSD is that it’s still very underutilized due to the limited financial products that are being offered in the Ergo blockchain.
I’m sure there are a lot more stablecoins out there that I haven’t explored, but as of now, DJED & SigUSD seems to be the better options to hold stablecoins that does not backed by centralized assets. However, this does not mean that they are safe, because they are run by code, meaning that there will be unforeseen bugs or hacks that may put these protocols under scrutiny and will result in massive financial losses, regardless of how many audits have been done.
My two ‘sens’
As much as we don’t like how the banking systems are currently run, with the potential risks of bank runs & bailouts to save the banks that went under, we can still agree most of the time that as long as governments do not screw up the country’s economy, it’s still safe to park your USDs or other equivalent fiat money in your banks instead of stablecoins.
Unless if you’re into trading and want to maintain high liquidity to trade assets, then you may store stablecoins as much as what you can afford to lose, no matter if it’s in a centralized exchange, or in your private crypto wallets.
With increased Overnight Policy Rate (OPR) due to the inflationary nature of the economy, even though borrowers need to repay more of their debt due to the increased in interest rates, the positive thing about this is the fixed deposit rates also increased, so you are able to keep your Ringgits in your FDs to earn a guaranteed rate of 3 ~ 4%.
Therefore, in my opinion (as a friendly pizza delivery man and not a pro financial advisor), centralized & decentralized stablecoins both have inherent risks that may result in huge financial losses. I’ll leave it up to you to decide how you want to manage your overall financial risks. My only hope is that you don’t lose your entire savings putting into something that you don’t fully understand the risks.
?----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Twitter: https://twitter.com/pizzadren
Substack: https://t.co/DGXkaPPnSV
Follow me on Twitter & Medium for more Malaysia-related crypto content. Subscribe to my Substack newsletter so you won't miss any of my articles from your email.
