Stablecoin Watch: BUSD Demand Plummets

Summary

• Pax Dollar (USDP, +14% MoM), TrueUSD (TUSD, +12% MoM), and Magic Internet Money (MIM, +11% MoM) registered the largest gains in market cap over the past month.
• Binance USD (BUSD, -24%) registered the largest loss in market cap over the past month.
• Pax Dollar (USDP) is the most volatile stablecoin over the past month.
• US 3M treasury yields continue to outpace stablecoin (lending) yields.

BUSD Exchange Balance Tanks

In September 2022, Binance, the largest cryptocurrency exchange in the world by trading volume, announced that they would be automatically converting all USD Coin (USDC), Pax Dollar (USDP), and TrueUSD (TUSD) to their native stablecoin, Binance USD (BUSD). Simply put, this means that if a user had 1 USDC, USDP, or TUSD on Binance, it was converted to 1 BUSD.

According to Binance, the auto-conversion was being done to ‘enhance liquidity and capital-efficiency for users’. Notably, the move effected existing balances and new deposits, but not withdrawals. That is, users are still be able to withdraw USDC, USDP, and TUSD from Binance using their BUSD. After this, the exchange balance of BUSD rose to highs of around $22bn on 8 November (Chart 1) – around the same time that the FTX debacle started to unfold.

However, in the wake of the FTX collapse, Binance has come under fire as users increasingly lose confidence in centralised exchanges. Indeed, during a wave of outflows Binance saw close to $1bn of withdrawals in just 24 hours back in December 2022. There are other concerns linked to the FTX collapse. Binance received $2.1bn from FTX when it exited its investment in FTX which could potentially be clawed back as a result of FTX’s bankruptcy proceedings.

Binance USD (BUSD) has not been spared. According to data from Glassnode, BUSD’s exchange balance has plummeted from highs of around $22bn in November 2022 to around $13bn currently, a staggering $9bn reduction and wiping out all the gains made by the auto-conversion. At the same time, the exchange balance of stablecoin competitor, USDC, has been rising (+$2bn MoM, Chart 2). Meanwhile, the exchange balance of USDT, the largest stablecoin by market cap has moved sideways.

Muddying the waters more, on Tuesday, Binance admitted that there were past flaws in the management of its Binance Smart Chain BUSD stablecoin reserves which led to it being undercollateralised to the tune of $1bn at times. So, fears around the stability of BUSD are to be expected.

Latest Developments

Market Cap and Peg Risk

The market caps of Pax Dollar (USDP, +14% MoM), TrueUSD (TUSD, +12% MoM), and Magic Internet Money (MIM, +11% MoM) are up the most (Chart 3). Meanwhile, Dai (DAI, -1% MoM), Gemini Dollar (GUSD, -3% MoM), and Binance USD (BUSD, -24% MoM) are down the most in terms of their market cap.

Neutrino USD (USDN) has de-pegged. It is currently exchanging hands at around 36 cents and Sasha Ivanov, founder of its parent blockchain, Waves, announced that he will launch a new stablecoin after a ‘$USDN situation resolution plan’ is set in motion. For now, we have replaced USDN with GUSD in this report going forward.

USDD de-pegged to 97 cents on 6 Jan and is currently exchanging hands at around 98 cents.

Volatility

On stablecoin volatility:

• The one-month annualised volatility of Pax Dollar (USDP, 5%) is the highest among the stablecoins we track (Chart 4).
• Over the past three months, USDP, USDD, and GUSD are the most volatile stablecoins.
• Over the past year, GUSD, FRAX, USDD, and MIM are the most volatile.

Yields

Turning to yields, on Compound, average (over the past seven days) lending rates are highest for TUSD (c. 2.6%) and lowest for DAI (c. 0.9%). Lending rates across the five stablecoins we track on Compound remain eclipsed by US 3M treasury yields (Chart 5).

Meanwhile, average (over the past seven days) borrowing rates are highest for TUSD (c. 4.3%) and lowest for DAI (c. 2.6%). Borrowing rates have been rising closer in line with US 3M treasury yields (Chart 6).

Appendix

USDT: Tether is a fiat-collateralised stablecoin primarily issued on the ethereum and bitcoin blockchains. It aims to be pegged 1:1 against the US dollar. Tether’s reserves are not backed 100% by US dollar deposits. Instead, they are backed by reserves that include cash, cash equivalents, short-term deposits, commercial paper, corporate bonds, funds, precious metals, secured loans, and other investments including digital tokens.

USDC: USD Coin is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is 100% backed by cash and short-dated US treasuries. USDC publishes a monthly public attestation of 100% reserves.

BUSD: Binance USD is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is backed 100% by USD held in Paxos-owned US bank accounts and US treasury bills (including through repurchase agreements and/or money-market funds invested in US treasury bills). Paxos is a New-York-regulated financial institution and publishes a monthly public attestation of 100% reserves.

TUSD: TrueUSD is a fiat-collateralised stablecoin issued by the TrustToken platform that is issued as ERC-20 tokens on the ethereum blockchain. It aims to maintain its 1:1 peg against the US dollar by being fully collateralised by US dollars using multiple escrow accounts to reduce counterparty risk.

USDP: Pax Dollar is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It aims to be pegged 1:1 against the US dollar by holding USD reserves in Paxos owned US bank accounts.

DAI: Dai is a crypto-collateralised stablecoin that attempts to maintain a 1:1 peg against the US dollar by depositing other crypto assets into smart contracts on the ethereum blockchain every time a new DAI token is issued. DAI is maintained by a decentralised autonomous organisation (DAO) called MakerDAO. And since the mechanism is maintained by a system of smart contracts, it has higher decentralisation than the centralised entities controlling USDT, USDC, or BUSD.

MIM: Magic Internet Money is a crypto-collateralised stablecoin launched by the DeFi platform Abracadabra. MIM is backed by interest-bearing tokens (ibTKN).

UST: TerraUSD is a crypto-collateralised hybrid stablecoin native to the Terra blockchain. To mint 1 UST, $1 worth of UST’s reserve asset, LUNA, must be burned. The idea was to try and ensure LUNA’s long-term growth. More people buying into UST means more LUNA gets burned, which should make the remaining LUNA supply more valuable. However, the system collapsed recently when UST de-pegged from the US dollar.

FRAX: Frax Finance is a fractional-algorithmic stablecoin that uses both collateralisation and an algorithmic process to create its decentralised stablecoin that is pegged 1:1 to the US dollar. Only stablecoins (currently, USDC) are accepted as collateral by the protocol.

FEI: FEI is an algorithmic stablecoin that aims to be pegged 1:1 against the U.S dollar that is backed mostly by ETH.

Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)