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Stablecoin Liquid

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I’m sharing the following as an interesting exchange that I had that I believe is of value enough to be reposted here.

I recently read an article on Hacker News regarding “Having a safe CEX: proof of solvency and beyond”. My response to this was:

From my understanding, this only solves one issue - exchanges holding crypto assets.

I would expect an exchange to also hold traditional liquid money, which currently couldn’t be captured by this. If you could get the US financial system onboard, maybe you could get them to maintain a 1:1 representation of a digital coin, but I don’t see why they would be motivated to do so.

The next problem then is that you can’t diversify your holdings beyond that of crypto, so you are completely trapped by the relatively unstable nature of crypto. One day you hold a billion meme coins worth one billion dollars, the next day it is worth zero.

web3isgoing then commented:

Fiat assets was addressed in the post.

Stablecoins can be used to avoid price volatility, and work within the framework Vitalik is suggesting.

aww_dang then commented:

Backed tokens are still a trust liability with the issuing party. They have a place and are interesting, but it would make sense to limit the scope of exposure.

This brings me to my final comment which I thought was valuable enough to repeat here. I replied with:


Take Tether for example. Every time BTC starts to dip, USDT starts to de-peg. They are not at all uncoupled. Tether doesn’t have the market cap to cash out all of the BTC, and never will. The amount of apparent value in the crypto market heavily outweighs any possibility of cashing it all out.

And that doesn’t even begin to touch the questionable liquid assets held by stable coins. Tether claim to be holding 82% of “extremely liquid” assets [1], but I’m unsure it’s proven or tested. From the report [2]:

The valuation of the assets of the Group is based on normal trading conditions and does not reflect unexpected and extraordinary market conditions, or the case of key custodians or counterparties experiencing substantial illiquidity, which may result in delayed realisable values. No provision for expected credit losses was identified by management at the reporting date.

Substantial liquidity could be caused by, say, global inflation or recession conditions. But that surely won’t happen…



Let’s just hope that Tether and other stablecoins don’t have their liquid assets tested during hard times. Such a scenario is hardly like? Is it?