At the beginning of 2022, USDC circulation will exceed 43 billion US dollars, a record high. But what is confusing is that in actual applications, the number of active addresses of USDC has not continued to grow, but is fluctuating. So, how did the current situation of aggressive issuers and hesitant investors come into being? Today we will explore together through this article.
How are stablecoins "stable"?
Stablecoins are a vital part of the crypto ecosystem, and we can see them as a bridge connecting fiat currencies and crypto-native currencies. Stablecoins enable assets and value to be mapped and flowed in the encrypted world and the real financial world. It is assumed that on the "waters" extending in all directions in the encrypted market, various assets will be connected and the flow area of encrypted assets will be expanded.
Today, there are more than 200 stablecoins in the world, and their total market value exceeded 30 billion U.S. dollars last year, and its total market value has exceeded 170 billion U.S. dollars this year. The rapid growth of crypto-stablecoins reflects rising investor demand for price-stable assets during turbulent times.
The stable currency anchors the value of the underlying asset as collateral, and the value of the token is anchored by the mortgage asset, so that the value of the token tends to be stable. Therefore, for a stablecoin, it is very important whether its anchor target really exists, and whether the value of the target can be verified and maintained stable.
However, in practical applications, due to the demand for "decentralization" in the cryptocurrency field, there is no effective and proven method for the supervision of stablecoin issuers. Therefore, stablecoin issuers will use methods such as providing transparency reports and commitments to prove it.
For example, Circle’s USDC has provided a concise and easy-to-understand transparency report since October 2018. The report will express the US dollars held in the escrow account in intuitive words, that is, for every USDC issued, the Circle account will pledge 1 US dollar .
Doubts about USDC’s transparency
However, the transparency report is more like a "commitment" that can be easily changed without the intervention of three parties or independent agencies. In March 2020, Circle USDC added a new clause to the transparency statement released - the collateral owned by USDC was increased from a single dollar reserve to an "approved investment".
Circle's 2020 Transparency Report
It is worth noting that Circle's "approved investment" lacks a subject, which means that as an investor, you have no way of knowing which organization the asset is approved by, and you have no way of knowing its authority and security.
Although many "investment assets" are allowed in the stablecoin anchor target, such a rash change does not bode well for USDC, which initially marked itself as a "pure dollar" status to gain investor trust. In the face of investors' doubts and interviews, Circle's co-founder and CEO Jeremy Allaire completely avoided this issue-the official proof cannot be self-certified, and the managers avoided talking about it, which aggravated investors and the market's suspicion of USDC. Doubts about stability and security.
On the other hand, the hidden danger comes from the opacity of the investment. Compared with other stablecoins that add non-dollar targets to the anchor assets, USDC's "seeing flowers in the fog" also makes many investors stop. So far, USDC has not disclosed the proportion of US dollar assets and "approved investment assets". How many dollars are there in their account? How many investment assets are there? What are the respective proportions? The outside world has no way of knowing.
Also, Circle's transparency proof release times are always changing, such as delayed releases. Its April 2021 proof was released on June 9 after a two-month delay, while its May proof was published on July 16. However, in a July proof, Circle released more details on its reserve assets: about 61% of its tokens are backed by cash and cash equivalents, Yankee certificates of deposit account for another 13%, US Treasury bonds account for 12%, and commercial paper accounts for 9%. , and the rest of the tokens are backed by municipal and corporate bonds.
Under the cloud of doubts, it's not just investors who have a lot of doubts about Circle. As one of USDC's issuers, Coinbase also changed its introduction on USDC transparency in August 2021.
Coinbase’s introduction changed the original “Backed by US dollars” to “Backed by fully reserved assets”. The explanation for this feature has also been changed to "Each USDC is backed by $1 or equivalent fair value assets held in accounts of financial institutions regulated by the United States."
The continuous changes have caused investors' confidence in USDC to fluctuate repeatedly, which has also had a very bad impact on the market. The delay of Circle's transparency report usually matches the time of large-scale additional issuance. If investors panic and cause a large number of runs, and Circle and Coinbase may not actually support fast cashing out, the close connection between Circle, USDC and Coinbase will be broken. Caused multiple collapses in currency prices and platforms.
How does Circle stabilize the market?
Of course, Circle didn't ignore investors' bad sentiment towards USDC.
In November 2021, Cricle founder and CEO Jeremy Allaire actively responded to the Biden administration's proposals for the regulation of stablecoin issuers. He emphasized that the proposal, aimed at federally regulating USD stablecoin issuers as banks by the Federal Reserve, is a significant development for the industry. Jeremy Allaire noted that the current steps will upgrade the current money transmission-focused regulations into "a more fundamental infrastructure with at its core what the future of banking and capital markets might look like."
Such a statement and active cooperation with the U.S. regulatory authorities have shown that Circle and USDC are confident in the compliance and security of their own reserve assets, and have also played a role in stabilizing the market.
But the opposite side of the coin is that the statement of embracing regulation itself deviates from the original intention of cryptocurrency decentralization. For example, in October 2021, Cricle disclosed in regulatory filings that they had received an "investigative subpoena" from the SEC in July, requiring them to "provide certain documents and information on shareholdings, customer plans, and operations." In order to cooperate with its listing plan, USDC's user privacy has also been threatened by regulation.
How to find a balance between security compliance and decentralized privacy protection and a way to convince investors still has a long way to go for USDC.
In addition to the doubts of transparency reports and the "centralized stance" of embracing supervision, stablecoins like USDC, which are always testing on the edge of risk, have also added instability to the market.
The risk of ordinary investors holding USDC
From the perspective of ordinary investors, there are certain risks in adopting USDC trading pairs, and when this unsafe collateral enters the DeFi network, the risks will spread more widely. For example, in April 2020, the $2,500 assets of lendf.me were looted, and a large number of projects integrated USDC.
Such loopholes are related to USDC's token mechanism settings.
Because USDC has added a pre-agent contract in the token implementation. When the user uses the USDC contract to transfer money, he visits the USDC agent, and the agent then accesses the USDC target contract through the address set internally. This leads to the fact that the proxy contract can change the proxy target with administrator privileges. Its original design is to solve the problem of contract upgrade with administrator privileges. Point to any address - as long as the attacker attacks USDC's pre-agent contract and obtains management authority, a large number of target transfers can be completed.
Therefore, from the perspective of application, USDC has a greater risk of past vulnerabilities and assets being hijacked. If regulators or trading platforms track down these hijacked non-performing assets, and these assets enter the same liquidity pool as the assets of ordinary users, then these users will face the risk of asset assets being polluted as non-performing assets.
All in all, stablecoins are the basis of cryptocurrency market circulation, but at the same time they are under multiple threats of decentralization, regulation, transparency and security. Although USDC has already embarked on the road of multi-chain ecology, USDC still has a long way to go in order to support market stability and ensure the security of investors' basic assets.