Updated: May 5, 2022
What is a Stable Coin?
A stable coin is a cryptocurrency that is pegged(Holds its $ Value) to a single USD through algorithm, collateralization through real world cash/ asset reserves or Digital asset vaults/reserves.
It is intended to maintain an approximate $1 USD value at all times and can be a great place to hold funds while waiting for an investment opportunity without losing value over time.
Stable Coins and the Fork
Because of the upcoming launch of Pulsechain and the World’s Largest Airdrop, where any held token on the Ethereum network is copied over to Pulsechain, there has been speculation as to whether or not holding a stable coin is a safe bet. One of the major questions is wether or not when the Stable coins are copied over, will they maintain their value?
A further question has also been whether or not a stable coin could be stopped from being used on Pulsechain via being invalidated or frozen.
This Blog is intended to compare only USDT, USDC, and DAI in regards to these questions, so lets dive in.
USDC - Circle Finance
USDC, owned and operated by a centralized organization known as Circle Internet Financial, LLC, is a stable coin that is backed by real world cash/ asset reserves.
At the end of section 1 of their USDC Terms, they write: Circle is a founding member of the Centre Consortium (“Centre”), a member-based consortium of institutions that provides an open source asset-backed stable coin framework. USDC is produced in accordance with the Centre framework. As a member of Centre, Circle is subject to certain rules promulgated by Centre, some of which directly impact our obligations to you.
So Circle is affiliated with Centre Consortium, but what is that?
Consortium: An association or a combination, as of businesses, financial institutions, or investors, for the purpose of engaging in a joint venture.
USDC - Centre
Here is an excerpt from the Centre explanatory document.
The Centre Consortium (“Centre”) has the ability to block individual Ethereum Blockchain addresses from sending and receiving US Dollar Coins (“USDC”). In this document, this ability is referred to as “blacklisting.” When an address is blacklisted, it can no longer receive USDC and all of the USDC controlled by that address is blocked and cannot be transferred on-chain. It is not possible to blacklist individual USDC tokens. This USDC Network Blacklisting Policy (“Policy”) sets forth the Centre policy on blacklisting individual addresses.
A Centre issuer (“Issuer”) is a licensed entity with the authority from Centre to issue USDC for US Dollars. Issuers have KYC(Know Your Customer), AML(Anti-Money Laundering), and CFT(Countering Financing of Terrorism) controls in place in connection with the issuance and redemption of USDC on their platforms. Issuers are required to comply with applicable laws and regulations, Centre policies, as well as their own internal compliance policies.
USDC - Section 8 of legal terms
As a result of the decentralized and open source nature of the blockchains on which USDC is supported, it is possible that a party unaffiliated with Circle could create an alternative version of the blockchain (a “fork”). Note that in the event of a fork of one of the USDC Supported Blockchains, Circle may be forced to suspend all activities relating to USDC (including tokenizing USD for USDC, redeeming USDC for USD, or sending and receiving USDC) for an extended period of time until Circle has determined in its sole discretion that such functionality can be restored (“Downtime”). This Downtime will likely occur immediately upon a “fork”, potentially with little to no warning, and during this period of Downtime you will not be able to conduct various activities involving USDC. In the event of a fork of one of the USDC Supported Blockchains, Circle shall, in its sole discretion, determine which fork it will support, if any.
So going into the fork, understand that Circle has the option to not only stop supporting USDC after an unsupported fork, but through Centre, it can blacklist addresses and permanently halt the ability for that address to send or receive USDC(even if this is the least likely of outcomes).
Additionally and most concerning, all USDC copied over to the network would not be backed by any cash or real world assets at all, which could be cause for concern and possible shutdown from Circle.
Circle does not mention in their legal terms what they might do in the case of an entire supply duplication, as it has never happened before.
Let’s look at USDT next.
Tether is a token (often referred to as USDT) issued by Tether Limited, a company registered in Hong Kong in 2014; It, in turn, is owned by the same guys who rule the Bitfinex crypto exchange.
USDT is claimed to be backed 100% by cash reserves and assets.
It maintains its peg with supply increase or decrease through arbitrage bots buying up the USDT or selling and redeeming for $1 within Tethers reserves.
But is it all backed 100% by cash?
In February 2021, both Tether and Bitfinex(Ifinex) paid a sum of $18.5 Million to close a dispute on an apparent loss of $850 Million of internal funds that were “held” by Crypto Capital Corp of Panama. It is now illegal for Tether to operate or be used in NY City due to this dispute.
So it seems that not all USDT is backed, though there has been continuous printing of USDT over the last few years.
USDT has also previously blacklisted 39 Ethereum Addresses, worth a total of $7.9 Million USDT. Once blacklisted, the addresses cannot send or receive any USDT.
From reading the legal terms, I could find no talk of freezing USDT due to forking or not supporting coins.
I will look further in to that in the future, but for now let’s summarize.
USDT is pegged to the dollar and guaranteed by cash reserves that have been shown to be less than a 1:1 USDT per $ in reserve. It has in the past frozen and blacklisted addresses, either for internal reasons or from actions required through law enforcement.
It is unclear if a fork could be a reason to not support USDT on another network let alone copying an entire supply tat would not be backed by any cash or asset reserves.
Considering that USDT may be under-collateralized as it is, adding an entire token supply which has no backing on a new chain could be major cause for concern immediately upon the fork.
Let’s now take a look at DAI
Maker DAO - DAI
From the abstract: The Maker Protocol, also known as the Multi-Collateral Dai (MCD) system, allows users to generate Dai by leveraging collateral assets approved by “Maker Governance.” Maker Governance is the community organized and operated process of managing the various aspects of the Maker Protocol. Dai is a decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar. Resistant to hyperinflation due to its low volatility, Dai offers economic freedom and opportunity to anyone, anywhere.
The project is managed by people around the world who hold its governance token, MKR. Through a system of scientific governance involving Executive Voting and Governance Polling, MKR holders manage the Maker Protocol and the financial risks of Dai to ensure its stability, transparency, and efficiency.
Dai is easy to generate, access, and use. Users generate Dai by depositing collateral assets into Maker Vaults within the Maker Protocol. This is how Dai is entered into circulation and how users gain access to liquidity. Others obtain Dai by buying it from brokers or exchanges, or simply by receiving it as a means of payment.
Dai Holds its peg by arbitrage bots buying and selling DAI whenever the price moves above or below $1.
While Maker DAO is fully decentralized, it relies on a 150% minimum collaterallization in order to not have the automated system liquidate the collateral in a vault.
This unfortunately, is where things get dicey for DAI on Pulsechain.
In order to obtain $642,980 in DAI at the minimum collateral amount of 150%, you would need to deposit 300 ETH at a price of $3219.26 as of the time of writing.
When the fork happens, the AMM fixer bot is NOT injecting any supply into non Liquidity pools; therefore Maker DAO will not have the proper ratio to back the vaults that have ETH(which will be converted to PLS at a 1:1 Ratio in the vaults).
300 PLS at even a 10x higher price from the lowest sacrifice rate is equal to $0.30. As of November 1, 2021, DAI’s vaults were compromised of 41.4% ETH and 34.5% USDC. This means that there is the potential for the automated liquidation process to liquidate somewhere around 41% of the collateral in all vaults.
Not only this, but in the case of USDC on Pulsechain not being supported like they state they have the ability to in their legal terms, almost 75% of collateral associated with DAI on Pulsechain could be effected.
Unfortunately, it doesn’t end there for DAI.
In order for the liquidation process to happen as well as for users to interact with the protocol and add funds as collateral, a front end/ interface needs to be built for Pulsechain specifically in order to even interact with Maker DAO’s protocol.
Think of a front end like go.hex.com, in order to utilize the staking function of HEX, that website needs to exist and be connect to the protocol/blockchain.
"If the value of collateral in a vault falls below a threshold compared to the DAI issued, the vault becomes undercollateralized. This starts the liquidation process where a collateral auction occurs. Case I: If the auction raises less DAI than the vault has issued, the vault is bankrupt.
(MKR Token = Equity and DAI= debt) Maker mints MKR token to dilute MKR holders and fill the gap. If enough users buy the minted MKR, the system is stable. If not, the MKR system breaks and DAI could lose its peg. Case II: if the auction raises enough DAI to cover the amount issued by the vault, the first marginal amount goes to paying a liquidation penalty (fee) to the Maker system. Case III: If the vault has enough value to cover both the DAI issued AND the full liquidation penalty, Maker returns the extra value to the original vault owner."
In addition to the aforementioned, there are measures that can be implemented in emergency situations to prevent a complete failure(but in order to explain these fully I’d need a full video on just that, so we wont cover that here).
The problem with implementing these failsafe measures is they still need a front end in order to be implemented, meaning until that happens the state of MakerDAO could be a total mess.
Even once the front end is up, the massive potential under-collateralization of vaults has such massive ramifications that it seems extremely unlikely that DAI could possibly have its peg held.
So it seems that not only is DAI likely to lose its peg drastically, but there is an unknown period of time that it would take before a front end is created to fix the situation.
The minting and utilization of MKR token for emergency measures can only occur once the front end is built. It could be hours, days, weeks or more before we get the full scope of how this will play out after launch, but we do not have a way to know for sure.
To make things even more interesting, $278,196,151 in DAI are currently held by the PulseX Sacrifice wallet. We do not have any expectations of what this wallet will do, but in theory it could use the copied DAI to buy liquidations and possibly help keep the system solvent if a front end is built.
It should also be noted that it could do something completely different or nothing at all, but is an interesting thought and something to pay close attention to.
We do not know if the automated Arbitrage bots that hold price to the $1 Peg will operate correctly, given that this presentation does not even touch on what may happen to Oracles during this initial phase of launch for the stable coins.
We do not know the full ramifications of reaction times from teams to make decisions regarding stable coins or build front ends to the take measures to either fix or shut down any decentralized protocol with emergency measures.
It is impossible to say if the worst case or best case scenarios could happen for all stable coins mentioned in this Blog.
This Blog is not intended to be advice on which Token to hold but merely to inform you of the possibilities of outcome. It does seem however that with much uncertainty looming, there may be risk involved in regards to having value translated through holding stable coins for the Pulsechain Airdrop.
Thank you so much for reading this blog! Please share it so more people can understand the ramifications of holding Stable Coins going into the Pulsechain Airdrop.