Crash of the TITAN

The hard truth about stable coins that no one talks about

100% guaranteed profits… You can 10x your money in no time… This is too big to fail…

Sounds familiar? If this isn’t one of those guru’s mantras from ads or investment thesis that you might have come across via social media platforms, you must be living in the wrong century. To some extent, there’s a layer of truth in some of the information that’s readily available out there at a click of the mouse; it’s POSSIBLE to make such levels of returns and it’s TRUE that some of the analysis actually uncovers gemstones. However, what lies beneath that is indeed shocking.

So before we go on, just to make it clear, I’m super optimistic about blockchain technology and the benefits it could potentially bring to our society as a whole. You can check out this video here on our thoughts on blockchain with a comparison to NFTs.

Back to the topic, the truth about stablecoins is that there’s no certainty in which they are stable or not, or at least to a certain extent.

A stablecoin is defined as a class of cryptocurrencies that attempts to offer price stability and are backed by a reserve asset, which we would classify generally as fiat and cryptocurrency (though there’re commodities such as gold as well).To put it in context, some coins (eg: Tether — USDT, USD coin — USDC, Binance USD — BUSD, Gemini Dollar — GUSD) are fiat-collateralised that make it more “stable” and established out there, while the others (eg: Dai — DAI, TerraUSD — UST) are crypto-collateralised with the underlying assets being Ether (ETH) and Luna (LUNA) — higher risk in general.

Ironically, the recent collapse of a single token caused the entirety of the stablecoin concept to be questioned and put under scrutiny. To summarise, this catastrophe was caused by a series of large holders selling iron titanium (TITAN) tokens to redeem IRON tokens that triggered algorithms to print more IRON to stabilise the falling coin. We all know that this action is a negative feedback loop where the new supply would further depreciate the token’s value, eventually wiping out most of the $2B market cap after more TITAN holders ran for the hills.

This may be the world’s first large-scale crypto bank run where due to an event, people panic and run over to the bank to withdraw their money in a short period, the bank will collapse. Shelving the whole fractional reserve banking concept aside, this piece of news would perhaps be a blow to crypto-collateralised stablecoins because many of such coins are entangled with complex mechanisms that involve staking crypto, burning tokens, or even a combination of both (list is not exhaustive). Such 1-to-1 swaps in terms of absolute value with other crypto tokens would be dangerous for stablecoins after this incident (on top of the present volatility that these tokens inherently face on a daily basis), especially with coins that do not have a hard cap on supply — GUSD being one of them.

The question then comes, “Isn’t GUSD fiat-collateralised? How is that dangerous for me?”

True, fiat-collateralised stablecoins are indeed much safer than crypto-collateralised ones as they are backed by real paper money in FDIC-insured US banks. For example, both GUSD and BUSD are regulated by the New York Department of Financial Services and are audited on a monthly basis by private and independent accounting firms that ensure there is parity between the amount of USD in reserve and the amount of stablecoin in circulation.

However, let it be known that there’s still a certain form of risk involved, such as bank runs, which could still be possible for GUSD because of the aforementioned reasons. BUSD certainly does not face such issues as the BNB 200 million tokens supply cap and plans to “burn” away half of them over time for stability of the coin would cause BUSD to be a better bet.

However, nothing is 100% for sure in the world of cryptocurrencies, not even the USDT as there is no guarantee provided by Tether Ltd. for any right of redemption or exchange of Tethers for real money. In fact, in May 2021, Tether published a report revealing only 2.9% of Tether was backed by cash, with over 65% backed by commercial paper. Well, there’s some truth that Tether is indeed 1:1 backed by their reserves but that wouldn’t be enough to prevent a bank run either. Hence, this also means that for it to be exchanged into cold hard cash, it has to be converted into another cryptocurrency such as Bitcoin (BTC) and Ethereum (ETH) that are the two most widely accepted cryptocurrencies with higher volume and liquidity. This would enable easier access and faster conversion into fiat currency through sales of the aforementioned via any crypto trading platform.

To end this off, there’re inherent risks that one must bear even when dealing with stablecoins. The fiasco of IRON Finance itself comes as a jarring reminder to individuals (both experienced and new) that the word “stable” should not be taken as a given as this particular incident exposes one of the many possibilities how a conjugated system that provides the best of both financial and crypto world could have a loophole of such devastating impact. As a general rule of thumb, individuals should consider applying the existing risks regarding tokenised cryptoassets and coins to stablecoins as well, given how interconnected they are through different unique and intricate mechanisms.

As for the postmortem of this incident, billionaire investor Mark Cuban, who had “lost enough that I wasn’t happy about it” had called on the regulators to redefine stablecoins. While the investigation and scrutiny goes on, we share the same sentiments and encourage a stricter regulation on cryptocurrencies in general. Till then, who knows, we could see stable coins being totally eradicated or regulated strictly to only a handful.

We would think it’s more of the latter.

You heard it here first.

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