From everything-claude-trading
- Evaluating stablecoin peg mechanisms, reserve compositions, and risk profiles
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- Evaluating stablecoin peg mechanisms, reserve compositions, and risk profiles
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Fiat-Backed (Custodial):
Crypto-Backed (Decentralized):
Algorithmic (Uncollateralized or Partially Collateralized):
Hard Peg (Fiat-Backed):
Market price > $1.00:
- Arbitrageurs mint new tokens at $1.00 from issuer
- Sell on market above $1.00
- Profit drives price back to $1.00
Market price < $1.00:
- Arbitrageurs buy on market below $1.00
- Redeem at issuer for $1.00
- Profit drives price back to $1.00
Requirement: issuer must honor redemptions promptly
Soft Peg (Crypto-Backed):
DAI above $1.00:
- Governance lowers stability fee (cheaper to mint DAI)
- More DAI minted and sold, pushing price down
- DSR can be lowered to reduce DAI demand
DAI below $1.00:
- Governance raises stability fee (more expensive to hold vaults)
- Vault holders buy DAI to repay debt, pushing price up
- DSR can be raised to increase DAI demand
- Redemption mechanism (if available) provides hard floor
Algorithmic Peg (UST Model — Failed):
UST above $1.00:
- Mint UST by burning $1 of LUNA
- Sell UST above $1.00
- Increases LUNA scarcity (bullish reflexivity)
UST below $1.00:
- Burn UST to mint $1 of LUNA
- Sell LUNA on market
- But selling LUNA crashes LUNA price
- LUNA crash reduces confidence in backing
- More UST redemptions -> more LUNA minting -> death spiral
Key Reserve Metrics:
Reserve ratio = total reserves / total stablecoin outstanding
>1.0: over-collateralized (safe)
=1.0: fully backed (standard for fiat-backed)
<1.0: under-collateralized (risky)
Reserve quality:
Tier 1: Cash, overnight repos, short-term T-bills
Tier 2: Longer-duration government bonds, money market funds
Tier 3: Corporate bonds, commercial paper
Tier 4: Secured loans, other investments, crypto assets
Higher quality = faster liquidation in stress, less mark-to-market risk
Reserve Transparency Hierarchy:
Systemic Factors:
Stablecoin-Specific Factors:
UST/LUNA (May 2022):
USDC (March 2023):
Watch for:
1. Curve pool imbalance >60/40 (stressed stablecoin becoming dominant in pool)
2. CEX withdrawal suspensions or delays for the stablecoin
3. Issuer communication changes (delays, vagueness, leadership changes)
4. Sustained discount >0.5% for 24+ hours
5. Large redemption queues (on-chain observable for crypto-backed)
6. Social media sentiment shift (FUD can become self-fulfilling)
7. Declining reserves in attestation reports
8. Regulatory announcements targeting the issuer
Low risk:
- Supply to Aave/Compound (3-8% APY variable)
- Curve 3pool LP (2-5% base + CRV rewards)
- DSR (MakerDAO savings rate, currently 5-15% depending on governance)
Medium risk:
- Lending on newer protocols with higher rates (higher smart contract risk)
- LP in volatile/stablecoin pairs on DEXs
- Delta-neutral basis trading using stablecoin as collateral
High risk:
- Exotic stablecoin farms on new chains
- Leveraged stablecoin lending loops
- Algorithmic stablecoin incentive programs
Situation: USDC trading at $0.93 after SVB news
Analysis:
- Circle's exposure: $3.3B of $40B reserves (8.25%)
- Worst case: 8.25% haircut on reserves -> USDC worth $0.9175
- Best case: deposits recovered -> USDC worth $1.00
- Expected value at $0.93: strongly positive if deposit recovery likely
Trade: Buy USDC at $0.93
- If deposits recovered (70% probability): profit = 7.5%
- If haircut applied (30% probability): loss = 1.4%
- Expected value: 0.7 * 7.5% + 0.3 * (-1.4%) = 4.8%
Outcome: Fed backstopped all deposits. USDC repegged within 48 hours.
7.5% return in 2 days.
Monitoring: Curve 3pool composition
Normal state: ~33% DAI / ~33% USDC / ~33% USDT
Warning signal detected:
- DAI: 25%
- USDC: 25%
- USDT: 50%
Interpretation: Market is dumping USDT into the pool, buying DAI/USDC.
This suggests concern about USDT peg or reserves.
USDT discount on Curve: 0.2%
Action:
- Reduce USDT exposure
- Monitor Tether redemption data and reserve attestations
- Set alert for >55% USDT imbalance (escalation threshold)
- Check if discount is also present on other venues (confirms systemic concern vs pool-specific flow)
DAI stress test scenario: ETH drops 40% in 24 hours
Current state:
- Total DAI: 5B
- ETH-backed DAI: 2B ($4B ETH collateral at 200% CR)
- USDC-backed DAI: 1.5B
- RWA-backed DAI: 1.5B
After 40% ETH drop:
- ETH collateral value: $4B * 0.6 = $2.4B
- Collateral ratio: 2.4B / 2B = 120% (below 150% threshold)
- Liquidations trigger: ~$800M of ETH vaults liquidated
- Liquidation penalty generates revenue but may cascade
- DAI supply contracts as vaults are closed
Assessment:
- USDC and RWA backing provides stability floor (3B backing 3B DAI = 100%)
- ETH liquidation cascade is contained if oracle stays live
- Key risk: oracle failure during ETH crash would prevent liquidations
- DAI should hold peg due to diversified collateral
Before relying on or investing in stablecoins, verify: