Crypto Stablecoin Report 07: Security Analysis of Stablecoins
Original link: https://bihu.com/article/1539751477
Original publish time: July 1, 2020
Original author: HaiBo Jiang, researcher of MYKEY Lab
We released MYKEY Crypto Stablecoin Report to share our interpretation of the development status of stablecoins and analysis of their development trends to help the participants in the crypto market stay updated on the development status of stablecoin. The MYKEY Crypto Stablecoin Report will be published every week, looking forward to maintaining communication with the industry and exploring the development prospects of stablecoin together.
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- The market circulation of stablecoin reached $11.692 billion, and USDT was suspended for additional issuance last week.
- The circulation of USDC increased by $124 million to $953 million.
- Algorand and Circle reached an agreement to issue USDC on Algorand.
- BUSD and HUSD are issued in cooperation with Paxos, and BUSD, HUSD, and PAX can be exchanged.
- Among the main stablecoins, the most concentrated holding address is HUSD, and the address holding the most tokens accounts for 89.9%, which is owned by Huobi.
- In addition to USDT, the compliance and asset transparency of main off-chain collateralized stablecoins are relatively good, and Asset Reserve Reports are issued at least monthly.
- The market price performance of USDT is becoming more and more stable, and the situation of large fluctuations is reduced.
1. Overview of Stablecoin Data
First, let’s review the changes in the basic information of the various stablecoins in the past week(June 20, 2020, ~ June 26, 2020, same below).
Market Circulation
Source: MYKEY, Coinmetrics
At present, the market circulation of major stablecoins is approximately $11.692 billion, and the market capitalization continues to grow.
Source: MYKEY, Coinmetrics
In the past week, the market capitalization of stablecoins has increased by approximately $145 million. Among them, the circulation of USDC increased by $124 million to $953 million, the circulation of BUSD, TUSD, and DAI increased by $17.37 million, $6.1 million and $7.74 million, the circulation of PAX, HUSD, and GUSD decreased by $5.14 million, $3.47 million and $1.24 million. Last week, USDT was suspended for additional issuance, the circulation remained unchanged, and the circulation of USDC continued to increase significantly.
The Number of Holding Addresses
Source: MYKEY, DeBank
Last week, the number of stablecoin holding addresses on Ethereum continued to decrease, mainly because the number of holding addresses of USDT decreased more.
Source: MYKEY, DeBank
The decrease in the number of holding addresses came from USDT, which decreased by 168,423, the number of holding addresses of USDC, TUSD, and DAI increased by 3,574, 126, and 3,065, and the number of holding addresses of PAX decreased by 1,413.
The Number of Active Addresses
Source: MYKEY, Coinmetrics
Last week, the number of active addresses of stablecoins rebounded slightly, up 3% from the previous week.
The Number of 24-hour Transactions on the Public Blockchains
Source: MYKEY, Coinmetrics
Compared with the previous week, the number of daily transactions of main stablecoins decreased by approximately 4.33%.
The Number of 24-hour Volume of Transactions on the Public Blockchains
Source: MYKEY, Coinmetrics
Source: MYKEY, Coinmetrics
Last week, the average daily volume of transactions of main stablecoins increased, mainly due to the higher volume of transactions of ERC20-USDT and TRC20-USDT on June 22nd.
2. Security Analysis of Major Stablecoins
The market circulation of USD stablecoins is close to $11.7 billion, of which the market capitalization of USDT ranks third among cryptocurrencies. Since July 2018, the trading volume of BTC/USDT has accounted for more than half of the trading volume of BTC. According to the data of Coinmarketcap, the daily trading volume of USDT has far exceeded that of Bitcoin. In addition to USDT, the main stablecoins include USDC, PAX, BUSD, HUSD, TUSD, GUSD, and DAI. Faced with a wide variety of stablecoin projects, investors will inevitably have some questions: Are these projects safe? Is it compliant? Is there sufficient reserves? In this issue of MYKEY Stablecoin Report, we will analyze the market size, compliance, asset transparency, distribution of tokens, and market performance of these stablecoins in detail, and compare these dimensions.
Source: CryptoCompare
(1) Market Size
Generally, the larger the scale of stablecoins, the better the robustness, and the breadth of applications, and the number of users will all be relatively better. The larger the scale of stablecoins is, the easier it is to produce network effects and attract more users.
The scale of stablecoins generally shows an upward trend and has accelerated since March this year. Currently, the stablecoin market has 9.956 billion USDT, 953 million USDC, 242 million PAX, 164 million BUSD, 144 million TUSD, 117 million HUSD, 107 million DAI, and 8.62 million GUSD. USDT accounts for 85.15% of the stablecoin market share, USDC accounts for 8.15%, PAX accounts for 2.07%, BUSD accounts for 1.41%, TUSD accounts for 1.23%, HUSD accounts for 1.00%, DAI accounts for 0.92%, and GUSD accounts for 0.07%.
Source: MYKEY, Coinmetrics
(2) Compliance
As the scale of stablecoins increases, the regulatory pressure stablecoins facing will increase. Among mainstream stablecoins, USDT has the worst compliance and other off-chain collateralized stablecoins meet different levels of compliance requirements, while DAI, the on-chain collateralized stablecoins are difficult to regulate.
USDT: iFinex, the parent company of Tether, is also the parent company of Bitfinex. USDT is not a compliance project and has made some concessions to regulation in recent years. For example, in the United States, only Eligible Contract Participants are provided with services, and North Korea, Iran, Pakistan and other countries are prohibited from using Tether.
USDC: USDC is a stablecoin developed by Centre Consortium, a joint investment and operation company of Coinbase and Circle. The source code of USDC is open source, and it has obtained the permission to act as a currency transfer institution in the United States and as an electronic currency institution in Europe, which complies with the supervision of the U.S. “Currency Transfer Law”. USDC is issued using the CENTER open-source framework and member system. With this framework, financial institutions can become issuers of USDC and other stablecoins (EURC, JPYC, GBPC). Issuers should meet the requirements of technology, operations, regulations, compliance , and audit.
Pax: Paxos is a New York State Chartered Trust Company regulated by NYDFS. It is subject to the highest degree of regulation to ensure the highest degree of protection of customer assets and meet the special requirements of NYDFS for capital reserves, compliance, anti-money laundering, etc. PAX is one of the most compliant stablecoin projects. Similarly, there is an Exchange behind Paxos. Paxos established the itBit Exchange in Singapore in 2013.
BUSD: BUSD is a stablecoin issued by Binance and Paxos. The issuance of BUSD has also been approved by NYDFS and is mainly used in Binance’s own channels. Its compliance, custody, asset transparency are similar to PAX’s.
HUSD: Similar to BUSD, HUSD is issued by Stable Universal under Huobi, and also uses the Paxos channel, which is mainly used in the ecology of Huobi. HUSD belongs to an address of Huobi, and HUSD held accounted for 89.9% of the total.
TUSD: TUSD is a stablecoin issued by TrustToken, registered in the United States as Money Sevice Business (MSB). There is little news about compliance on the official website. TrustToken claims that it will not take over the funds. Investors transfer the funds to the trust company and generate TUSD through smart contracts.
GUSD: Gemini is an American compliance Exchange that has the highest level of bank compliance and standards of fiduciary duty. GUSD is issued by Gemini Trust Company, LLC, the regulated New York trust company. The first batch of GUSD and PAX were approved by NYDFS for issuance.
DAI: DAI is a decentralized stablecoin without borders, which is generated by collateralizing digital assets in MakerDAO. MakerDAO is a decentralized protocol on Ethereum, which is difficult to be regulated and may not face compliance issues.
From the background of these stablecoins, almost all of them have Exchanges and trust institutions behind them. Although USDC, PAX, BUSD, HUSD, TUSD, and GUSD are all compliant stablecoins, the degree of compliance is different. We believe that the stablecoin approved by NYDFS has the highest degree of compliance, including the first batch of PAX and GUSD, as well as BUSD and HUSD jointly issued by Paxos, then USDC and TUSD, finally USDT, and DAI is not included in the comparison. It can also be seen from the information on the official website that USDC and TUSD have little information about compliance.
(3) Asset transparency
Asset transparency allows investors to know the reserves behind stablecoins in time. It is difficult for investors to find out the bank account funds of issuers of stablecoins on their own, only through professional custody, audit and other channels.
USDT: Although Tether stated that all digital currencies issued are backed by 100% assets, and clearly lists the number of each token issued and the assets behind them, these data are daily updated , but many investors still doubt it. Before 2019, USDT had a negative premium of more than 10% every year due to rumors of insufficient funds. USDT’s asset transparency is poor, and the asset certificate given on its official website was currently issued by Freeh, Sporkin & Sullivan LLP (FSS) in 2018.
USDC: USDC is issued by a regulated and licensed financial institution and has all reserves equivalent to legal currency. Mortgage funds are deposited in independent bank accounts that are monitored and audited by third parties. Issuers must regularly report their holdings of dollar reserves, and Grant Thornton LLP publishes reports on these reserve funds every month.
PAX: Paxos hired Withum to verify its account at the end of each month to prove that the supply of Paxos Standard tokens is consistent with the dollar assets in the U.S. bank reserve account held and managed by Paxos. BUSD and HUSD are same as it.
TUSD: TUSD uses Armanino’s Blockchain Guarantee Platform TrustExplorer, which can view the issued TUSD and the reserve funds behind it and generate asset certificates in time. Armanino is one of the top 25 independent accounting and business consulting companies in the United States.
DAI: The Maker protocol is built on Ethereum, and assets can be queried in the blockchain browser. From 2017 to 2019, the core code of MakerDAO was audited by Trail of Bits, Whitehat Group, Bok Consulting, and PeckShield.
In terms of asset transparency,TUSD provides a real-time dashboard of reserves and generates asset certificates in time and other compliant off-chain collateralized stablecoins are provided with asset certificates once a month by third-party institutions. Although Tether also updates its balance sheet every day, no authority can prove its authenticity. It has been nearly two years since Tether last provided asset certificates. The code of MakerDAO has been reviewed by many institutions, and its stablecoin system has been operating normally for nearly 3 years.
(4) Distribution of Tokens
The more addresses holding tokens, the more likely more people are willing to hold the asset, and the lower the risk of centralization. The lower the proportion of tokens held by the top 10 addresses, the more scattered the token holdings.
The number of holding addresses of USDT, USDC, DAI, PAX, TUSD, BUSD, GUSD, and HUSD are 967,461, 84,736, 55,352, 54,125, 17,327, 4,049, 1,657, and 1,178.
Source: MYKEY, DeBank
The proportion of USDT, USDC, PAX, BUSD, TUSD, HUSD, DAI, and GUSD held by the top 10 addresses on Ethereum is 22.49%, 45.21%, 69.58%, 91%, 34.91%, 99.15%, 30.31%, and 87.69%.
Source: MYKEY, etherscan
In general, the larger the number of stablecoin holding addresses in circulation, the smaller the proportion of tokens held by the top 10 addresses, and the more scattered the token holdings. DAI, the on-chain collateralized stablecoin, accounts for a lower proportion than expected of the top 10 tokens holding addresses, and no whale-users are holding it in a centralized way, and more are distributed in the DeFi application of Ethereum. The most concentrated holding address is HUSD, and the address holding the most tokens accounts for 89.9%, which is owned by Huobi.
(5) Market performance
The question of how to maintain the price of stablecoin anchored to the legal currency is a consideration for all project parties, who usually design a certain strategy or even pay a certain cost to solve this problem. In general, all mainstream stablecoins have performed well in this regard, and there are now very few cases where prices are significantly higher/less than $1.
From 2016 to 2018, due to the Crisis of Confidence, USDT experienced a negative premium of about 10% every year and lasted for 1–2 months. The situation has only improved in the last 1–2 years and the increased demand for USDT has also improved this situation. Almost all Exchanges support USDT, and the application of USDT in DeFi is also increasing. You can see that less and less dramatic fluctuations in USDT prices, and USDT/USD has hardly experienced a positive/negative premium of more than 10% in the last year.
Source: Tradingview
Among stablecoins, DAI is more volatile and the price is usually higher than $1. For stablecoins, the high price of tokens is also considered a defect. For example, if there was outstanding debt in MakerDAO during the 3.12 plunge, but you did not hold DAI, then you would need to pay a price much higher than $1 to buy DAI from the market to repay the debt.
Conclusion
Among the main stablecoins, USDT has the largest scale, more users, more ecological partners support, and more decentralized holdings, but the worst compliance. PAX, GUSD, BUSD, and HUSD are more compliant than USDC and TUSD, and their asset transparency is very good. The holding positions of stablecoins are generally concentrated. The sum of the proportion of HUSD, BUSD, and GUSD held by the top 10 addresses on Ethereum is 99.15%, 91%, and 87.69%. The prices of main stablecoins are all close to $1, and the volatility of USDT has declined.
3. Views of Experts
The guest invited in this issue is Mable from Multicoin Capital. Here are the observations and comments made by Mable.
Last week, we launched a vote on WeChat and Twitter respectively. The same problem, but the voting results are not the same, which can reflect the judgment of different people on the capital flow:
Results of Twitter
Results of WeChat
This vote reflects the difference between Eastern and Western perceptions of stablecoins, which is also consistent with some observations I have made in the past:
1. For the expectations of Ethereum 2.0, overseas communities are more optimistic than domestic communities, although various ecological participants such as validator services and mining pools agree that Ethereum 2.0 is a matter of at least about two years later. Many Crypto Twitter community members are more willing to hold Ethereum and Bitcoin and believe in their long-term value accumulation.
2. Compared with overseas, the domestic demand experience for cross-border payment is stronger, and it is more willing to keep the profits obtained in stablecoin.
3. A number of companies creating centralized clearing houses for stablecoins have begun to deploy overseas since last year, further proving that overseas sensitivities are a step behind China and Asia in terms of stablecoins. The stablecoin swap tool of FTX is quite sufficient. Binance also launched a lot of exchange pairs of stablecoin earlier (although some liquidity may be relatively weak, but the operating idea is in this direction). For the centralized clearing house, the profits it needs to maintain its operations cannot cope with the rapidly compressed profit margins of this track.
4. Of course, it remains to be seen whether the compliance agency needs a large clearing house between additional exchange pairs of stablecoin, or even a clearing house between foreign exchange stablecoin. But in the trend of things, from the present and even in the longer term, the development of digital stablecoins will lead to a further compression of weak sovereign currencies, two or three currencies may be sufficient, and the settlement of multiple foreign stablecoins may be a pseudo-proposition.
This is what we’re sharing in this MYKEY Crypto Stablecoin Report, welcome to stay tuned for follow-up crypto stablecoin reports. We will provide more interpretations of the development status of stablecoins and analysis of their development trends to help you stay updated on the development status of stablecoin in the follow-up report.
PS: MYKEY Lab has the final right to interpret the content of the article, please indicate the source for the quotation. Welcome to follow our official account — MYKEY Lab: MYKEY Smart Wallet.
Past review
MYKEY Crypto Stablecoin Report 03: Where are the users of DAI?
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