Stablecoin Watch: Has the FTX Contagion Spread Into Stablecoins?
- By Dalvir Mandara
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- 8 min read
Summary
- US 3M treasury yields outpace stablecoin yields.
- USDT broke its peg amid the FTX debacle.
- Binance USD (BUSD, +8%) and Pax Dollar (USDP, +3%) registered the largest gain in market cap over the past month.
- Magic Internet Money (MIM, -51%) and Neutrino USD (USDN, -15%) registered the largest loss in market cap over the past month.
Stablecoins Slipped on FTX Debacle
FTX declared bankruptcy after a chaotic start to the month for crypto markets. It all started with a report from Coindesk that revealed the hedge fund, Alameda Research, owned by FTX CEO, Sam Bankman-Fried (SBF), had much of its $14.6bn in assets in FTT – an exchange token issued by FTX.
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Summary
- US 3M treasury yields outpace stablecoin yields.
- USDT broke its peg amid the FTX debacle.
- Binance USD (BUSD, +8%) and Pax Dollar (USDP, +3%) registered the largest gain in market cap over the past month.
- Magic Internet Money (MIM, -51%) and Neutrino USD (USDN, -15%) registered the largest loss in market cap over the past month.
Stablecoins Slipped on FTX Debacle
FTX declared bankruptcy after a chaotic start to the month for crypto markets. It all started with a report from Coindesk that revealed the hedge fund, Alameda Research, owned by FTX CEO, Sam Bankman-Fried (SBF), had much of its $14.6bn in assets in FTT – an exchange token issued by FTX.
A back and forth with CEO of Binance Chengpeng Zhao followed. It went from Binance announcing that they are liquidating any FTT on its books to Zhao announcing intentions to purchase FTX.
Ultimately, Binance called off the deal and FTX collapsed. The developments plunged bitcoin to sub $16,000 – levels not seen since the end of 2020. We know the FTX debacle has riled traditional cryptocurrency markets, but how has it effected stablecoins?
Tether (USDT), the largest stablecoin by market cap, saw significant price volatility around the FTX news (Chart 1). Remember, USDT is supposed to be pegged 1:1 against USD. It dropped to around 98 cents between the time Binance signed a non-binding LOI to purchase FTX and when it pulled out of the deal. On the Kraken exchange, it fell as low as 93 cents momentarily.
Other stablecoins also saw volatility around the FTX fallout. Tron DAO’s USDD stablecoin broke its peg on 8 November after a whale exchanged over 11 million USDD tokens to USDT and USDC. Justin Sun (Tron founder) speculated that this could be Alameda Research selling their USDD to cover liquidity on FTX. Elsewhere, Neutrino USD (USDN) fell as low as 86 cents on 9 November.
Tether (USDT) has since regained its peg and released a statement asserting that they have ‘absolutely no credit towards FTX or Alameda Research. Tether is completely unexposed to Alameda Research or FTX’. USDD has started to recover but still trades below 99 cents, and Neutrino USD (USDN) is still exchanging hands significantly below its peg at 93 cents.
That USDT has regained its peg is constructive for the largest stablecoin. However, its volatility also highlights that so-called stablecoins are subject to the market turmoil brought about by black swan events just like the rest of the cryptocurrency market.
Stablecoins are not always stable.
Latest Developments
Market Cap and Peg Risk
The market caps of Binance USD (BUSD, +5%) and Pax Dollar (USDP, +3%) are up the most over the past 30 days (Chart 2). Meanwhile, the market caps of Magic Internet Money (MIM, -51%) and Neutrino USD (USDN, -15%) are down the most over the past 30 days.
Neutrino USD (USDN) has de-pegged the most. It dropped to lows of around 86 cents around the news of the Binance-FTX deal fallout and is yet to reclaim its peg.
Volatility
The one-month annualised volatility of USDN is the highest at 21% (Chart 3).
Over the past three months, USDN, MIM, and FRAX are the most volatile stablecoins. A similar conclusion is true when extending to the past year with USDD marginally more volatile than MIM. Fiat-collateralised stablecoins remain the least volatile.
Yields
Turning to yields, on Compound, average lending and borrowing rates for Tether (USDT) spiked to over 20% on 10 November, which pushed the seven-day average up (Charts 4 and 5). They have since come back down closer to 3%.
On average, US 3M treasury yields remain higher than the yields on all five stablecoins we track on Compound.
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.