Stablecoin Watch: Stablecoin Reshuffle Incoming?

Summary

• True USD (TUSD, +34% MoM) and Magic Internet Money (MIM, +10% MoM) registered the largest gains in market cap over the past month.
• Binance USD (BUSD, -48% MoM) and Pax Dollar (USDP, -19% MoM) registered the largest drop in market cap over the past month.
• Gemini Dollar (GUSD) is the most volatile stablecoin over the past month to year.
• US 3M treasury yields continue to outpace stablecoin yields.

Paxos Stops Minting BUSD

On February 13, Paxos, a leading regulated blockchain and token infrastructure platform, announced that it has ended its relationship with Binance and will cease minting the BUSD stablecoin. Paxos stopped minting new BUSD tokens from February 21 in accordance with an order from the New York Department of Financial Services (NYDFS).

BUSD’s demand was already plummeting at the start of the year, thanks in part to the FTX contagion, while Binance itself admitting to past flaws in the management of its Binance Smart Chain stablecoin reserves only compounded the problem. Since Paxos announced on February 13 that is was halting BUSD minting, the balance of BUSD held on exchanges has dropped sharply by over $6bn dollars (Chart 1). Meanwhile, USDT’s exchange balance has been decreasing at a slower rate while USDC’s exchange balance is on the rise again. In just one month, BUSD’s exchange balance is down by a staggering $6.8bn compared to $1bn for USDT and a $3.2bn increase for USDC (Chart 2).

Binance’s decision back in September 2022 to automatically convert all USD Coin (USDC), Pax Dollar (USDP), and TrueUSD (TUSD) to their native stablecoin, Binance USD (BUSD), seems to have come full circle. Ironically, it looks like Binance is now ramping up the minting new TUSD, with the exchange balance of  TUSD on Binance surging by around $230mn since the Paxos announcement (Chart 3).

BUSD’s sharp drop in demand is putting its status as the third largest stablecoin at risk, with DAI and TUSD gaining ground on the falling BUSD. As the reshuffling of the stablecoin market’s biggest players loom, we will be keeping a close eye on potential developments in the coming weeks.

Latest Developments

Market Cap and Peg Risk

The market caps of True USD (TUSD, +34% MoM) and Magic Internet Money (MIM, +10% MoM) are up the most (Chart 3). Meanwhile, Binance USD (BUSD, -48% MoM) and Pax Dollar (USDP, -19% MoM) are down the most by market cap.

Volatility

On stablecoin volatility:

• The one-month annualised volatility of GUSD (11.4%) is the highest among the stablecoins we track while DAI (1.1%) is the lowest (Chart 4)
• Over the past three months, GUSD (7.3%) is the most volatile while USDT (1.9%) is the least volatile.
• Over the past year, GUSD (8.1%) is the most volatile while USDT (2.3%) is the least volatile.

Overall, Gemini Dollar (GUSD) is consistently ranking in as the most volatile stablecoin across all three time horizons recently.

Yields

Turning to yields, on Compound, average (over the past seven days) lending rates are highest for USDT (c. 2.47%) and lowest for USDP (c. 0.33%). 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 USDT (c. 4.1%) and lowest for USDP (c. 1.7%). The spread between US 3M treasury yields and stablecoin borrowing rates are tighter than the corresponding spread between stablecoin lending rates (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.

Photo Credit: depositphotos.com

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