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Why do Stablecoins lose PEG?

By
Paul Ugbede Godwin
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0

Stablecoins are a type of cryptocurrency designed to have a stable value relative to a specific asset or a basket of assets, typically a fiat currency such as the U.S. dollar, euro or Japanese yen.

Stablecoins are designed to offer a “stable” store of value and medium of exchange compared with more traditional cryptocurrencies like Bitcoin (BTC) and Ether (ETH), which can be highly volatile.

Fiat money, cryptocurrencies, and commodities like gold and silver are examples of assets used to collateralize or “back” stablecoins. Tether (USDT), USD Coin (USDC) and Dai (DAI) are a few examples of stablecoins pegged to the U.S. dollar.

Stablecoins can also be algorithmically stabilized through smart contracts and other mechanisms that automatically adjust the supply of the stablecoin to maintain its peg to the underlying asset.

Despite the potential benefits, stablecoins are not without risks. The most significant risk with any stablecoin is the potential for its peg to break, causing it to lose its value relative to the underlying asset.

Depegging is where the value of a stablecoin deviates significantly from its pegged value. This can happen for various reasons, including market conditions, liquidity issues and regulatory changes.

USDC is a fully reserved-backed stablecoin, meaning every USD Coin is backed by actual cash and short-dated United States treasuries. Despite this, USDC issuers, Circle, announced on March 10 that USDC had depegged from the U.S. dollar, with around $3.3 billion of its $40 billion in USDC reserves stuck in the now defunct Silicon Valley Bank. The bank — the 16th-largest in the U.S. — collapsed on March 10, and is one of the biggest bank failures in U.S. history. Given USDC’s collateral influence, other stablecoins followed suit in depegging from the U.S. dollar.

Stablecoins can depeg due to a combination of micro and macroeconomic factors. Micro factors include shifts in market conditions, such as an abrupt increase or decrease in stablecoin demand, problems with liquidity and modifications to the underlying collateral. Macro variables involve changes in the overall economic landscape, such as inflation or interest rate increases.

For instance, a stablecoin’s price can momentarily exceed its pegged value if demand spikes due to increased cryptocurrency trading activity. Yet, the stablecoin’s price could drop below its fixed value if insufficient liquidity matches heightened demand.

On the macroeconomic front, if there is high inflation, the purchasing power of the underlying assets that support the stablecoin may drop, leading to a depeg event. Similarly, adjustments to interest rates or other macroeconomic measures may impact stablecoin demand.

Regulatory changes or legal issues can also cause a stablecoin to depeg. For example, if a government were to ban the use of stablecoins, demand for the stablecoin would drop, causing its value to fall. A depegging event can also be caused by technical problems like smart contract bugs, hacking attacks and network congestion. For instance, a smart contract flaw could result in the stablecoin’s value being computed improperly, causing a sizable departure from its peg.

The most significant risk with any stablecoin is the potential for its peg to break. Depegging is where the value of a stablecoin deviates significantly from its pegged value.

Stablecoins can depeg due to a combination of micro and macroeconomic factors. These include shifts in market conditions, such as an abrupt increase or decrease in stablecoin demand, problems with liquidity and modifications to the underlying collateral.

In simpler terms, a stablecoin’s price can momentarily exceed its pegged value if demand spikes due to increased cryptocurrency trading activity. Yet, the stablecoin’s price could drop below its fixed value if insufficient liquidity matches heightened demand. This was the dynamics that affected Terra’s $UST last year.

Regulatory changes or legal issues can also cause a stablecoin to depeg. For example, if a government were to ban the use of stablecoins, demand for the stablecoin would drop, causing its value to fall.

Will $USDC go the $UST Way?

By
Paul Ugbede Godwin
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0

Although $USDC has since regained its peg to the US dollar, there are justifiable fears that it might end up like collapsed UST especially since the full effect of its exposure to SVB has not been revealed. However, amidst this fear, $USDC would not likely crash to zero like $UST, the algorithmic stablecoin by Terra, did last year.

Recall that the collapse of $UST was attributed to its structure and backing by other digital assets, including Bitcoin and $LUNA. Since it depended on algorithms to track the value of the USD and always ensure parity, any pressure on its underlying coins (Bitcoin or LUNA), led to intense selling pressure, which caused a de-peg. 

While USDC’s depeg is unideal in the short-term, 91.75% of Circle’s USDC reserves remain liquid, even if the 8.25% of funds are totally lost, Coinbase would probably step in. It’s not like the FTX situation. Circle has 91.75% of the money. FTX had way less.

Circle is a regularly audited US entity and USDC has maintained a solid peg since its inception, unlike many other troubled stablecoins. Circle tweeted that “Circle and USDC continue to operate normally”

Now, USDC, issued by Circle, is backed 1:1 with cash, and redemption means every backing cash or cash equivalent from Circle must be sold and disbursed to the client. Reports showed that out of the entire basket of assets backing $USDC circulating supply, only $3.3 billion are stuck in SVB, less than 9% of its market cap’s USD equivalent. And even the funds are expected to be recovered sooner or later through bank insurance procedures instituted by FDIC.

The Federal Deposit Insurance Corp [FDIC] announced that all depositors, both insured and uninsured, at Silicon Valley Bank [SVB] and Signature Bank, will be made whole while equity and bond holders are wiped out. Why, I wonder, will equity and bond investors remain loyal to regional banks? This is how the Fed intends to backstop other liquidity issues through a new facility called the Bank Funding Term Program.

The idea is to provide banks with an alternative to liquidate their bond holdings when in need of raising liquidity to meet deposit outflow.

As a result, the damage done by its exposure to SVB might have been exaggerated. That’s why it is overdramatic to compare the $USDC troubles to those that led to the collapse of the Terra ecosystem almost a year ago.

The tremors caused by Circle’s exposure to SVB have reverberated through the crypto sphere, and as the dust continues to settle, questions are still hanging, not only on $USDC but overall stablecoins and their ability to maintain their pegs in times of distress.

Panic over SVB is over. Now, the onus lies on the crypto industry to regain public trust regarding stablecoins which is one of the bedrock of mainstream adoption, by putting in place measures to prevent future systemic failures.

I would especially keep an eye on zkEVM for Polygon, Bedrock for Optimism, Solana Migration for HNT, RDNT V2 and CAKE V3.

Stablecoins for Curve and Aave could fit in a narrative, especially with what happened to USDC. Of course now that USDC is close to peg, it’s easy to say it was a safe bet to buy USDC. Still USDC is not on the same level of risk UST was.

Always remember when something happens, crypto twitter’s reaction is 10x worse. Rationality leaves the door quickly in a state of panic. Seen people compare $USDC to $UST. UST was backed be magic internet money (algorithmic). USDC is backed by real reserves.

Nigerian Government Records 12.9million Cybersecurity Attacks During 2023 General Election

By
Tiamiyu Ismail
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0

The Nigerian Government has said not less than 12.9million multifaceted Cyber-attacks were recorded internally and externally in Nigeria during and after the just concluded presidential and National Assembly elections in the country.

In a statement credited to the minister of Communications and Digital Economy, Professor Isa, Ali, Pantami, about 12.9million cybersecurity threats were recorded from within and outside Nigeria during and after the 2023 general elections. The minister disclosed that on the general election day alone, over 6.9 million attacks were recorded.

Professor Pantami however noted that most of the attacks were successfully neutered as a result of the sophisticated infrastructure that were put in place by different government agencies responsible for protecting the nation’s cyberspace.

The minister was also reported by the Nation to have said that in the building up to the presidential election, threat intelligence revealed an astronomical increase in cyber threats to Nigeria’s Cyberspace.

The statement reads in part: “During this period, a series of hacking attempts were recorded, including Distributed Denial of Service (DDS) email and IPS attacks, SSH Login Attempts, Brute Force Injection attempts, Path Traversal, Defection Evation and Forceful Browsing.

“A total of 12,988,978 cyber attacks were recorded, originating from within and outside Nigeria. It is worth noting that the centers successfully blocked these attacks and/or escalated them to the relevant institutions for appropriate action.

The minister lauded the parastatals under the supervision of his ministry for playing significant roles towards the successful conduct of a credible, free, fair and transparent election in the country. He also commended President Muhammad Buhari for providing enabling environment for agencies of government to perform their assignments without hindrances.

According to Professor, also instrumental to the successful curtailment of the cybersecurity threats received during the elections period are some cybersecurity centers under his ministry including the Computer Emergency Readiness and Response Team (CERRT) of the National Information Technology Development Agency (NITDA), the Computer Security Incident Response Team (CSIRT) of the Nigerian Communication Commission (NCC) and the Security Operations Center (SOC) of the Galaxy Back Bone (GBB).

Innovate, and be differentiated in your strategy!

By
Ndubuisi Ekekwe
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0

We created an investment and portfolio management program , and this morning, I received this feedback from an experienced professional who co-runs a fund in Lagos, and who is attending our program:

 “I don’t know how to thank you for all that you’re doing. 

You’re truly a BLESSING to our generation. 

Thank you very much Sir. You’re a GENIUS. 

As usual, I am also enjoying this investment course”. 

Late last night, I sent a step-by-step process on how anyone living in Nigeria or broad Africa can set up an investment account in the United States, providing everything needed to do that, with ways to drive tax efficiencies in structures. By doing that, they will bypass investing-apps and banks, and own the assets in their names with protections offered to “US persons” by law. Practical business education is  what we do at Tekedia Institute.

How do you manage your assets? How diversified are your revenue sources? How do you spread risks? Silicon Valley Bank would not have collapsed if its “customer base” was diversified. Indeed, it goes beyond assets to diversification of income. In a piece in Harvard, I proclaimed: “ Innovators Go It Alone” and “do not herd by following everyone to do it the same”. There is a risk there: a single competitive bullet will take everyone down. (read in Harvard here )

Ratings agency Moody’s has downgraded its outlook on the U.S. banking system from “stable” to “negative,” following the failures of Silicon Valley Bank, Signature Bank and the crypto-focused Silvergate Bank. The move reflects the “rapid deterioration in the operating environment,” Moody’s said, adding that other banks with unrealized losses or uninsured depositors could be at risk despite government efforts to shore up the sector. Moody’s on Monday put six regional banks — including First Republic and Western Alliance — under review for possible downgrades.

Shares of First Republic and Western Alliance Bancorp dropped a record 62% and 47%, respectively, on Monday. They regained some of those losses Tuesday. Many investors now expect central banks to slow their interest rate increases. Accounting giant KPMG faces possible scrutiny after auditing SVB two weeks before its collapse.

Innovate, and be differentiated in your strategy – a message from Tekedia Institute.

Beat the Early Bird Deadline for Massive Discounts, Register for Tekedia Mini-MBA

By
Ndubuisi Ekekwe
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0

Welcome! At Tekedia Institute, we co-learn with thousands of professionals and students, from 41 countries, on the mechanics of business, connecting innovation, growth and operational execution, across market territories and industrial sectors.

Our Faculty members come from Microsoft, Google, Shell, Flutterwave, Nigerian Breweries, NNPC, Jobberman, Coca Cola, PwC, and other great organizations. Besides pre-recorded courseware, thrice weekly, we hold live Zoom sessions (Tue, Thur and Sat at 7pm WAT).

We have opened registrations for a new edition (June 5 – Sept 2 2023). REGISTER and join us!  Beat the early bird for massive discounts https://school.tekedia.com/course/mmba11/

Tekedia Mini-MBA >> This is the #best school

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