Opinion: Censorable stablecoins are toxic DeFi collateral
Editor's Note: This article comes fromGolden FinanceEditor's Note: This article comes from
Golden Finance
Golden Finance
Recently, due to the request of the U.S. regulatory and law enforcement agencies, the USDC issuer blacklisted a USDC address and froze USDC worth 100,000 USD on the address. At the same time, Tether, the USDT issuer, blocked multiple USDT addresses, freezing a total of 5.51 million USD USDT. Many investors have discovered that stablecoins such as USDT, USDC, and PAX have already written the asset freezing function in the contract code. Tony Sheng, the former director of Multicoin Capital, recently published an article discussing the impact of these reviewable stablecoins as DeFi collateral on DeFi. Due to the interlinkage of DeFi, non-performing assets that can be reviewed and frozen may trigger a chain reaction. Reviewable stablecoins may be Toxic DeFi collateral.
USDC issuer CENTER Alliance froze a USDC asset for the first time. At the same time, it is worth noting that USDT has frozen 22 addresses in total.
I talked about this possibility in my article "Use Regulated Stablecoins, Reap Censorship" about two years ago. In the months that followed, three articles were also written on USDC/GUSD, DAI, and USDT properties.
secondary title
The nature of stablecoins
The picture below basically sums up my thinking at the time:
Fiat-backed stablecoins in the market are all censorable. But at least USDC and GUSD are regulated and thus hold verifiable reserves. If you want to use a non-sovereign currency pegged to the value of USD, then you need to use something like Dai.
I get three conclusions:
(1) USDT demand will disappear as it is neither censorship resistant nor verifiable.
For users who do not need a censorship-resistant store of value, regulated stablecoins are less risky than USDT
For users who need censorship resistance, censorship resistant stablecoins are less risky than USDT and regulated stablecoins
Therefore, USDT is in an awkward intermediate state, and there will be no market
This conclusion is so far wrong. At present, the demand for USDT in the market has surged. But I'm still surprised that Asian traders prefer USDT over other stablecoins.
(2) Carefully favor the use of USDC as I think it can convert speculators on Coinbase into web3 users:
This direction is correct. Demand is also surging for USDC, which has become a core part of DeFi and appears to be the main on-ramp for users.
(3) Only censorship-resistant stablecoins are competent for non-sovereign currencies
It’s too early to witness this, but most users today seem to prefer fiat stablecoins that are censorable. We'll need to see if that changes as awareness of censorship resistance grows.
secondary title
Stablecoins as DeFi Collateral
The thing that has changed the most since I wrote these articles is DeFi. Back then, stablecoins were used almost exclusively as reserve currencies for the purpose of trading them on centralized exchanges. Stablecoins are now being pooled, lent and leveraged through a complex system of smart contracts.
In what is supposed to be a "trustless" system, stablecoins are the largest form of collateral.
Distressed assets are one of three risks I outline in my twitter thread on yield farming, which I describe as "hijacking of the value of the asset itself."
There are 2 common ways you can lose money and one unusual way. (1) The asset storage place is robbed, (2) Borrowing too much and liquidating, (3) The value of the asset itself is hijacked (rarely encountered).
The third risk I give as an example is fiat stablecoins not fully backed by reserves. Freezing assets is another source of risk. It’s hard to tell right now how someone else’s bad assets might cause your losses due to the interconnected nature of DeFi.
The image below is an example of a hypothetical stablecoin pool.
