Incidents over the past weekend aroused hysteria throughout the global financial markets, but its impact was felt severely in the crypto markets. Silicon Valley Bank (SVB), the 16th largest bank in the US was forced to declare bankruptcy following a bank run, creating uncertainty among several fintech companies and startups holding their funds in the troubled institution. The long list of affected companies included one of the prominent stablecoin issuer – Circle.
USDC And DAI Suffer Stability Issues
Circle held around USD 3.3 billion worth of the collateral backing its USD Coin (USDC) with the now inoperative bank. That sum represented around 8% of USDC’s total collateral reserves. The fear of these funds becoming irrecoverable due to SVB’s insolvency triggered mass USDC sell-offs, causing the stablecoin’s peg to plummet from $1 to an all-time low of $0.87.
Similarly, another stablecoin, albeit decentralized, suffered a similar fate. DAI, managed and issued by MakerDAO, dropped to its all-time low of $0.88. What happened with DAI was a consequence of USDC’s de-pegging.
DAI is collateralized by other cryptocurrencies to maintain its peg to the US dollar. These cryptocurrencies include the likes of ETH (Ether), USDP (Paxos USD), and USDC. With USDC making up for over 51% of the collateral backing the DAI stablecoin, de-pegging of USDC against USD had a direct impact on the value of DAI, causing it to lose its peg as well.
Why Incidents Like These Are Highly Concerning
The de-pegging incidents have resolved themselves since then, bringing some sort of relief to those who still had their values stored in the “stable” cryptocurrencies. But that does not take away from the fact that such issues are prevalent with the current breed of stablecoins in the crypto industry. Despite the resolutions witnessed, de-pegging of these assets to such concerning values or any value at all should not occur.
The issue at hand here is how centralized stablecoins like USDC are witnessing large-scale usage on decentralized ecosystems. The underlying funds supporting the stablecoin’s peg, being managed by one centralized entity and stored by another centralized institution, affected users looking to enjoy decentralized payments and stores of value. Furthermore, DAI’s reliance on a centralized stablecoin made it a recipient of the ripples caused by the centralized stablecoin.
The predicament that stablecoins find themselves in, as a cryptocurrency subclass may be deliberating crypto users to say their goodbyes to this subclass. However, there exist superior stable cryptocurrency options that are using sophisticated, yet well-grounded, pegging mechanisms that can prevent them from going through the de-pegging ordeal. So, not all hope is lost.
DAVOS – A Truly Stable, Stable Asset
A pioneer in achieving the means to maintain a truly stable fixed value – the DAVOS Stable Asset is that superior stable cryptocurrency option. DAVOS is a decentralized stable asset that maintains parity with the US dollar using cryptocurrency collateral like MATIC and implementing smart contract functionalities.
Davos Protocol, the issuer of DAVOS, generates stable assets based on over-collateralized MATIC positions. Hence, the protocol sufficiently backs its stablecoin issuance with decentralized tokens, to prevent a repeat of the same phenomenon that DAI witnessed this past weekend. Collateral holding and liquidation of the protocol’s stable assets are managed singlehandedly by smart contracts, keeping every process decentralized, unlike those of USDC.
Additionally, DAVOS relies on smart contracts to adjust the minor price discrepancies that arise due to rising and falling demands. The contracts adjust the supply and demand of the tokens, allowing DAVOS to return to its peg of $1 instantly. This enables DAVOS to overcome certain shortcomings relevant to some of the largest stablecoins by market capitalization and usage.
DAVOS Is More Than Just a Stable Asset
Interestingly, DAVOS happens to be one of the most capital-efficient stablecoins out there while its peers let the available collateral remain idle. DAVOS Stable Asset issued by the protocol is always overcollateralized by at least 150%. Furthermore, the user-deposited MATIC collateral is used to participate in liquid staking to generate yields, to be maintained in the Davos Protocol revenue pool along with the interest payments received from DAVOS borrowers.
The accumulated returns in Davos revenue pool are in addition to the collateral holdings underlying the DAVOS Stable Asset in circulation. These assets are used for platform functions and to reward the Davos community for staking DAVOS on the protocol’s liquidity pools. On Davos, even borrowers stand to receive a portion of rewards from the revenue pool thanks to the enhanced capital efficiency of the protocol.
Davos Protocol has handpicked the beneficial features of both decentralized and algorithmic stablecoins to create a truly stable, capital-efficient, completely decentralized crypto asset capable of maintaining stable value in the face of hyper-volatility frequently exhibited by crypto markets.
Learn more about Davos Protocol at – https://davos.xyz/