Off-chain stablecoins and the risk of crypto asset bubble created by them


To the moon!

This is any crypto-asset enthusiast who will tell you about the future prospects of crypto-assets.

However, the current situation, if a stablecoin some short-term problems caused not a permanent solution, encryption assets may really be used on the Moon currency .

As stablecoins dominate the crypto economy, a key question that needs to be answered is ” How much liquidity is in the system? “

Although stablecoins may be conceived as an “innovation”, they may also pose a threat to the entire crypto asset ecosystem.

They are considered a panacea that can help solve all problems, because stablecoins allow anyone to use them even without a bank account, and are a simple way to conduct transactions on a global scale.

Stablecoins make the entire system more fragile because they often rely on private organizations that lack transparency. Their balance sheets currently look like black holes, and we are not sure what lies behind them.

A quick premise is that stablecoins can traditionally be subdivided into off-chain (those that are not directly on the blockchain protocol and are supported by fiat currency 1:1) and on-chain (used by another crypto asset as Backed by collateral and located on top of the blockchain protocol).

In this discussion, when the term “stablecoin” is used, I mean off-chain.

As I explained in my article on TEDA, this type of stablecoin becomes the trick for CEX to transfer liquidity between different crypto assets (and to prevent having to deal with bank account closures). However, stablecoin has also brought the hidden systemic risk, as the encryption asset investment who we are to assume these risks.

Although stablecoin solves the liquidity problem of CEX, it also externalizes the entire hidden risk to millions of investors in the field of crypto assets.

If it seems that in the short term, stablecoins add value to the system by promoting (or possibly inflating) liquidity, but they are also conducive to large-scale speculation and potentially collapse the entire crypto asset ecosystem.

Who will be left behind if it collapses? The answer is simple: millions of retail investors with the potential of crypto assets (because whales may be released on bail by CEX).

Therefore, if we want to build a solid crypto asset ecosystem in the long run, we need to make some clarifications here.

To do this, we need to eliminate short-term threats.

Solve false liquidity and externalize risk to the entire system

The core problem of stablecoins is the asymmetry of the underlying system. On the one hand, they are used as the main medium of exchange by some central exchange platforms. On the other hand, although we do not know how much cash and liquid assets they have.

Although the financial system also creates wealth by retaining a small amount of liquidity. However, banks that do this (especially after the 2008 financial bubble) must not only disclose their balance sheets, but also undergo so-called stress tests and very strict supervision.

On the contrary, the “financial innovation” of stablecoins allows CEX to print cryptocurrencies without actually showing the world those Crypto assets that are already supported (some stablecoins are more regulated than others).

In short, stablecoins have become like black holes, without any clues that can be used to support their liquidity.

This “financial innovation” also surpassed what Wall Street managed to create during the 2008 financial bubble. There, financial derivatives with flashy names are repackaged so that they can be taken out of the balance sheet, thereby evading regulation.

Paradoxically, Bitcoin was born as a way of antagonizing Wall Street, and it has become its modern version.

The most interesting features of the crypto-asset-driven world (transparency and openness) have been erased by stablecoins. 

How do we understand this problem?

Let’s take a look at the top three stablecoins currently on the crypto asset exchange :

  • USDT
  • USDC
  • And BUSD

Tether has been extensively introduced here (I will add some key points at the end).

As we have seen in the TEDA case, this was originally pegged to the U.S. dollar, and USDT has indeed become the most popular Bitcoin exchange method (in fact, most of the Bitcoin transaction volume may come from TEDA).

This means that if you want to exchange your bitcoins into cash, you may need to exchange it through USDT. If so, there may be nothing to support.

So your Bitcoin has no liquidity (can be converted into U.S. dollars), so it may be worth zero in the short term (unless you are willing to hold it indefinitely).

If so, this may translate into a domino effect on the entire crypto asset market (although some Bitcoin holders claim that the collapse of TEDA may increase the price of Bitcoin, which makes no sense to me) .

What about other stable coins?


USDC is the stablecoin of Coinbase. As explained on the platform:

USDC is a stablecoin crypto asset. You can always redeem 1 USDC with 1 USD to make it have a stable price. Eligible customers on Coinbase can earn rewards for every dollar they hold.

What are the key components of this stablecoin? As Coinbase explained:


But how do we know that USDC will maintain its value? Coinbase explained in its FAQ:

Centralization, the consortium that mints USDC, collectively holds $1.00 for each USDC. These funds are deposited in a special bank account, subject to continuous monitoring and auditing.

Also in this section, Coinbase emphasized that the advantage of a stablecoin is that it does not require a bank account. It is borderless and it is easy to trade with any other crypto assets.

Although stablecoins do try to solve an important problem of CEX (the stability of the currency, and perhaps solve the liquidity), they undermine the entire purpose of the blockchain-based ecosystem. There, there is no central agency to cast them, and everything needs to be visible and open to the community.

On June 22, 2021, there was an announcement on the blog that the market value of USDC had exceeded $25 billion.

How do we know what the basis of this $25 billion is?

CircleAnd Coinbase publish a report on the central website every month. These reports do not tell us any breakdown of their reserves, they are only certified by the accounting services company Grant Thornton LLP (in short, accounting companies look for data consistency, if this is true, but it does not “guarantee” also Not “audit”).

It is important to emphasize that, as a proof, this does not really solve the risk of USDC’s balance sheet. Instead, it only looks for high-level information.

Such as the size of the USDC that has been issued, and the currencies that have been blacklisted. In fact, in the April 2021 report, we found that 100,000 USDC was blacklisted.

This is what the reserve account report looks like in April:


We only know the blacklisted tokens. Due to a request from law enforcement agencies, some keys have to be frozen.

There are more and more banned addresses, you can track them here.

Now let us look at another key stablecoin: BUSD.

BUSD: Binance stable coin

As in the case of the Coinbase stablecoin, Binance BUSD is advertised as a 1:1 USD backed currency and is “highly regulated” (we will see what this means).


It was developed in cooperation with Paxos (the creator of the crypto asset exchange ItBit and the stablecoin Pax).

On June 30, 2020, at the hearing of the Banking, Housing and Urban Affairs Committee of the U.S. Congress, on the topic of “digitization of money and payments,” Charles Cascarilla, CEO and co-founder of Paxos, explained:

We believe that stablecoins can solve the systemic problems in our financial system. We must update this architecture for the world of the 21st century. In this world, business happens in real time; we can no longer rely on a system that is available for only a few hours five days a week and has long delays. Due to delays in the settlement of bank transfers, international wire transfers and other activities, consumers and institutions cannot get their own funds in time, because their own funds may take more than five days to settle. This makes it difficult for us to manage other payments in any predictable form. This creates a complex loan obligation and unnecessary middlemen across the entire economy.

He continued: According to the design, blockchain-based stablecoins (such as those issued by Paxos) allow everyone to use Crypto wallets and Crypto dollars equally, just like cash. The simplest wallets can be set up as easy as an email account; besides adapting to regulatory requirements, they do not require a lot of paperwork and have no concept of a minimum balance. Stablecoins can build an ecosystem that supports disadvantaged groups and reduce unnecessary expenses, such as cumbersome fees caused by high-cost checking accounts, overdraft fees, predatory loans, and check cashing and cross-border remittance fees.

Stablecoins are essential to Binance, because these stablecoins act as a medium for transactions on the platform.

It should be emphasized that Binance stablecoins use Paxos technology to support them. In theory, Binance stablecoins may be safer compared to other currencies because their dollar deposits are held by FDIC-insured banks.

Here is an interesting table from “What makes stablecoins stable?” as an overview:


If we return to the Binance dollar, its proof is reviewed by Paxos.

The monthly proof report is also called the “reserve account report” and it only shows us the balance (the last time it was provided was May 2021).

The same report also explains the possible support for these reserves:


Therefore, the Paxos standard token (Binance USD is built on this basis) claims to maintain a strict 1:1 peg with the USD, and its reserves are also more standardized.

However, it is worth noting that we do not know how many FDIC-insured accounts Paxos has. For each FDIC-insured account, there is a limit of $250,000. So in order to make up for the 1 billion U.S. dollar market value of BUSD, we can imagine that Paxos must keep hundreds or even thousands of FDIC insurance accounts open?

In addition, in 2020, Coin Metrics discovered that the two most active accounts on Paxos were related to MMM BSC (a well-known Ponzi scheme company).

Therefore, several key issues still exist here.

What does it mean to be underwritten by an FDIC insurance company? What is the level of liquidity? Does the fact that this stablecoin is “more regulated” means that it is also audited more frequently?

As far as we know, we only have monthly proofs, just like other stablecoins, only showing the total available supply of these tokens.


The main revelation about what went wrong with the off-chain stablecoin

  • Although stablecoins initially tried to solve an important problem, and they do represent a potential currency evolution (by making them borderless and accessible to anyone), the way they are structured now also brings systemic risks.
  • The core risk of stablecoins is the asymmetry of their importance to the entire crypto asset ecosystem (some central platforms only use stablecoins as a medium of exchange, and stablecoins like USDT may be the main liquidity provider of Bitcoin) , And how much they are willing or must disclose to the public (So far, we have only a few months of proof telling us the total value of the stablecoins in circulation, but we have no clues about their breakdown).
  • Paradoxically, although stablecoins may be an evolution of currencies, they also require strict supervision to work properly and prevent fraud. However, as of now, they have only been regulated under certain circumstances. If this is the case, does it make sense to have an off-chain stablecoin in the first place?
  • When we look at the current situation of stablecoins, we can subdivide them according to what collateral they use as reserves. For example, stablecoins like USDT (Tether) are in the “Tether Treasury”, and USDC (Coinbase stablecoins) are in decentralized private accounts. Both are self-regulatory, and they need to have a high degree of trust in these organizations. Other stablecoins such as Pax (from Paxos) and BUSD (Binance stablecoin) are collateralized by FDIC-insured banks (how many of these accounts and how many are in it is difficult to know).
  • In some cases, stablecoins may lack transparency at all (Tether). In other cases, we may wonder whether these stablecoins can really be redeemed (such as USDC) if there is a possibility of liquidity flight. In other cases, we may want to know how much of these things are insured (such as Pax and BUSD). Therefore, having more clarity, available information, more supervision and better auditing of these stablecoins can help us have a more solid crypto asset ecosystem.

But isn’t this just a Bitcoin problem?

If Tether is exposed between 2018-2019, this may save the crypto-asset economy from disaster because its scale is still limited.

However, by the end of 2020 and the beginning of 2021, Tether’s market value exploded. Up to now, Tether has occupied the entire ecosystem, and trying to squeeze out a behemoth of more than 60 billion US dollars, it sounds like an python trying to digest an elephant. As this tweet emphasizes, Tether also occupies the DeFi space, so this is also a problem with Ethereum .

If these two major crypto assets collapse, what do you think will happen to all the other crypto assets? 

Can we solve this problem by converting all the liquidity into on-chain stablecoins?

On-chain stablecoins like Dai (an crypto stablecoin built on Ethereum) are very interesting because their philosophy is consistent with an open and transparent system.

This is in theory. In fact, Dai itself is mortgaged by an off-chain stablecoin.

In short, a successful on-chain stablecoin like Dai may also be less secure because its collateral is composed of USDT and USDC. 

what can we do?

It is difficult to predict what will happen next. And in the past ten years, Bitcoin has indeed survived the threat of survival time and time again. However, the paradox is that at this scale, Tether’s time bomb is really likely to kill Bitcoin and send the entire crypto asset space back to the Ice Age.

Therefore, for all players in the field of crypto assets, it is time to quickly leave the Tether system and do it now!

Original: hackernoon

Compilation: Bibabb

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