Moving into stablecoins is a good way to hedge against bear markets, to lock in gains, or to just give yourself a weekend breather. But not all stablecoins are created equal, and their stability is not anywhere near guaranteed.
Anyone who tells you that moving into just any stablecoin is all the same doesn't know crypto. You need to be aware of the risks involved in stablecoins in general and especially with the top brands.
The PEG
Stablecoins are made to maintain a "peg," or a value of around $1 USD. (Why there aren't more stables pegged to other currencies, I don't know.) But this peg isn't magical. There's no code you can write to make a cryptocurrency just stay at $1. The peg's major protection comes from the "wall of money" on major exchanges protecting against price fluctuations.
Go check out the order book on a large exchange for a stablecoin pair to see what I mean. There is a certain amount of money at each price point. If you have more money than that, you can break the wall — such as with a flash loan.
Bank runs can cause enough pressure to break this wall. For instance, should the US government turn on Circle and proclaim USDC illegal, you can bet a lot of people would attempt to move out of USDC at the same time. If you've been around for any of the more volatile moments in crypto, you know that the system as a whole breaks down during those times. Exchanges stop working. Prices go wonky. And the scammers come out to play.
Each of the major stablecoins has strengths and weaknesses. I'll list them here so you know the attack vectors that could be breached and how.
USDT
Tether, which mints USDT, is still enveloped in a shroud of mystery. Somehow, no one can verify that their crypto assets are backed by real dollars. As a matter of fact, Tether recently said that only a small fraction of its USDT is actually backed by dollars. The rest of the backing involves some nebulous "assets" that nobody knows about. How the owners of the Tether company haven't been disappeared is beyond me, which makes me think there's something dastardly going on.
Doesn't necessarily mean that USDT is a scam. No more or less of a scam than what the US Fed does. The question is not whether USDT is a scam or not — just like there's no real question of whether or not the Fed is a scam. The real question is how stable is the platform, and how long can it last?
Technical Risk - LOW
Economic Risk - HIGH
Political Risk - HIGH
Overall Stability - MEDIUM
USDC
USDC is the most centralized and politically neutered of the four entries on this list. The company Circle that mints USDC is completely under the purview and functions at the pleasure of the United States government. That protects the company in calm times, but opens it up to a single devastating event should the US government decide that USDC (or crypto in general) threatens its financial hegemony.
Yeah, yeah, USDC has a "partnership" with Visa blah blah blah. Those partnerships you think make USDC untouchable are very small parts of the business in question. Yes, crypto payment rails help Visa, but if they lost them tomorrow, Visa's not going down. So they really don't care — they'll take the money as long as the government's on board. And if the government decides to Titanic this shit, Visa and Circle will bend over and take the fucking like good little sycophants.
Technical Risk - LOW
Economic Risk - LOW
Political Risk - HIGH
Overall Risk - MEDIUM
BUSD
BUSD stands for Binance USD and is the native stablecoin on Binance. This stablecoin has the least connection to any traditional nation-state, and that gives it a freedom that none of the other stables on this list have. In effect, Binance did was Facebook was trying to do with Libra. However, since Facebook did not think to go with a virtual headquarters and divest from the US before launch, the US stopped the project.
The strength of BUSD puts Binance in direct competition with central banks and sovereign nation-states, no matter what anyone wants to think. (Binance is a country, not a company; just like every crypto project.) And BUSD's survival shows just how powerful crypto is when put up against traditional nation-states. However, BUSD is controlled centrally and fully by Binance. The company has been known to pull some shady shit when shit hits the fan. Meet the new boss, same as the old boss. Do you trust Binance more than the US Fed? Personally I do, but that doesn't mean this is a perfect solution.
Technical Risk - LOW
Economic Risk - VERY LOW
Political Risk - VERY LOW
Overall Risk - LOW
DAI
DAI vaults are the most often attacked in defi. It's really interesting how no one has picked up on this, but it's true. Hacks on projects like Pickle didn't compromise the entire protocol — just the DAI vault. Why?
DAI is an algorithmic stablecoin, more or less. It's meant to be backed by ETH and math, not by assets or fiat dollars. Long story short, no one has perfected the algorithmic stablecoin yet. In order to remain viable as a large cap stable, DAI took on USDC as backing, which gives it some of the political risk that USDC holds. If USDC gets fuckt, then so does DAI.
Technical Risk - HIGH
Economic Risk - HIGH
Political Risk - LOW
Overall Risk - HIGH
TL;DR — Diversify your stablecoins at all times. I actually don't recommend diversity in crypto assets (consolidation creates wealth; diversification protects it), but I do recommend diversity with stablecoins. Why? When you're in stables, you're trying to protect wealth, not create it. So you owe it to your portfolio to spread out your risk there.
You should always keep an eye out for smaller stables to use for smaller sections of your portfolio. These are less likely to suffer political attack, and may actually end up being a better store of value in some cases. Regardless, it never hurts to diversify. I have an eye on TUSD and 50c Network. I thought Iron was good, but obviously that was wrong. XD
Overall, I think BUSD is the strongest stablecoin right now. It is the least vulnerable to a single devastating political attack because of Binance's nebulous political presence. I find this comforting — CZ is incentivized to lower the technical risk of BUSD because his only real political backing is Binance. If BUSD goes down, he's going to have people all over the world looking for him and really nowhere to hide.
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