Stablecoins vs. $T ‘Peg-Attacks’ by a Bank
Good Luck!
What I have not seen any Stablecoin Team articulate is: How are they going to defend the value held in their Stablecoin against a $T ‘Peg-Attack’ by a Bank.
(Which banks would do an attack like that? Any of these Banks. I know the Chinese Communist Party would love to direct the top 4 Banks on that list to crush anything that is a competitor to the Yuan in China & was created by a non-domestic entity.)
A Stablecoin Team ‘defending’ their peg could happen 1 of 2 ways:
1. Have a large enough reserve to thwart any ‘peg-attack’.
(This doesn’t really make sense, the reserve would have to be ~infinite to be guaranteed to thwart any attack…not going to happen.)
OR
2. Have another mechanism defend the value held in their Stablecoin.
(‘Redeemability’ is one mechanism that comes to mind here.)
Let’s look through the categories of how each type of Stablecoin would weather a $T ‘peg-attack’ by a Bank:
Centralized IOU Issuance
Fiat-Backed (ex: TUSD, Tether) & Asset-Backed (ex: DigixDAO)
If redeemability is allowed, there will be no problem when there is a $T ‘peg-attack’ by a Bank. That Centralized IOU Stablecoin will be worth “the value it is redeemable for” no matter if the Market Price of the Stablecoin is $0.01, $0.50, $1.00, or $20.00.
If redeemability is NOT allowed, BIG Problem. That Stablecoin will be worth “what the market will buy it for”. In the Event of a $T ‘peg-attack’, everyone will be running towards the door, and Stablecoin Users may get very little value for their Stablecoin as they ‘exit’ (a la Nubits). Holders — Dump these Stablecoins as fast as you can and exit these Stablecoin Ecosystems and never look back.
On-Chain Collateralized
Overcollateralized with ‘Digital Assets’ Foreign & Independent of that Stablecoin System (ex: MakerDAO)
If redeemability is allowed (at some time t <∞)AND there is a ‘sufficiently diversified’* Collateral Pool AND there is no on-going Black Swan Event to all types of the ‘sufficiently diversified’ Collateral, then there will be no Problems when there is a $T ‘peg-attack’ by a Bank. The Stablecoin from that On-Chain Collateralized System will be worth “what it is redeemable for**” no matter if the market price of the Stablecoin is $0.01, $0.50, $1.00, or $20.
*Sufficiently Diversified = Cryptocurrency + Fiat-Backed/Asset-Backed Stablecoins with Redemption + Security Tokens of Real Estate/Company Stocks, all as Collateral in the System.
**If redemption is not automatic, then you may need to wait a little while for somebody to trigger the redemption process.
If redeemability is NOT allowed, BIG Problem. That Stablecoin will be worth “what the market will buy it for”. In the Event of a $T ‘peg-attack’, everyone will be running towards the door, and Stablecoin Users may get very little value for their Stablecoin as they ‘exit’ (a la Nubits). Holders — Dump these Stablecoins as fast as you can and exit these Stablecoin Ecosystems and never look back.
Overcollateralized with ‘DCF Assets’ Native & Dependent on that Stablecoin System (ex: Havven/Terra)
[What are y’all doing? You’re backing your Stablecoin with a Derivative of your Stablecoin’s own Usage? Seriously??? Stupid is a choice. Stop choosing to be Fucking Stupid.]
The asset backing the Stablecoin in reserves (at a ratio of 1:1 or greater) are simply assets that have a DCF value based on the expected future fees the Stablecoin System generates & distributes to Hodlers of said ‘DCF asset’. This means Reserves = NPV of DCF future Stablecoin usage fees.
The Stablecoins are Redeemable for these ‘DCF Assets’ and there will be problems when there is a $T ‘peg-attack’ by a Bank. That is because the owners of these DCF assets will be spooked when the Stablecoin drops 50% & has a market price of $0.50 & they don’t know how their ‘tx fee income’ will be affected. Since they cannot safely model the NPV based on consistent data points, they will simply sell their ‘DCF assets’ and ‘exit’ the Stablecoin Ecosystem, and just wait for clarity. Since the market price of the DCF assets will fall as the market sells them off (and as their NPV value organically drops from the drop in expected fee income), so too does the Reserve backing the Stablecoin. This means that not everyone who holds the Stablecoin is guaranteed to be able to redeem it for $1 of ‘DCF Assets’. And even those that are able to redeem them for $1 of ‘DCF Assets’ may not be able to sell them for a full $1 of value as other ‘DCF Asset’ holders are also trying to ‘exit’ at the same exact time.
Holders — Dump these Stablecoins as fast as you can and exit these Stablecoin Ecosystems and never look back.
Seignorage Shares
Algorithmic (ex: Basis)
Y’all are choosing to be Fucking Stupid, too. Stop it!
There’s nothing backing the Stablecoins of this System, therefore there is no Redeemability, therefore this Stablecoin is always worth “what the market will buy it for”. In the Event of a $T ‘peg-attack’, everyone will be running towards the door, and Stablecoin Users may get very little value for their Stablecoin as they ‘exit’ (a la Nubits). Holders — Dump these Stablecoins as fast as you can and exit these Stablecoin Ecosystems and never look back.
Hybrid-Algorithmic
These are fine in the ‘Fiat Backed’ Stage with Redeemability (But it’s just a simple Centralized IOU Stablecoin). There will be no problem when there is a $T ‘peg-attack’ by a Bank. This Stablecoin will be worth “the value it is redeemable for” no matter if the Market Price of the Stablecoin is $0.01, $0.50, $1.00, or $20.00.
These are Fucking Stupid in the ‘Fully Algorithmic’ Stage when there is no Redeemability. That Stablecoin will be worth “what the market will buy it for”. In the Event of a $T ‘peg-attack’, everyone will be running towards the door, and Stablecoin Users may get very little value for their Stablecoin as they ‘exit’ (a la Nubits). Holders — Dump these Stablecoins as fast as you can and exit these Stablecoin Ecosystems and never look back.
So, who can defend themselves against a $T ‘Peg-Attack’ by a Bank?
- Centralized IOU Issuers who offer Redemption.
- On-Chain Collateralized Stablecoins that are Overcollateralized with ‘Sufficiently Diversified Digital Assets’ Foreign & Independent of that Stablecoin System and offer Redemption.
That’s it- only those 2 types can successfully weather a ‘peg-attack’ by a Bank.
Now why would a Bank perform a $T ‘peg-attack’ in the first place?
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