> Every other asset has a risk of its price changing. It may be worth $1 today but it may or may not be worth $1 tomorrow.

A rational market would react by revaluing USDCUSD and pushing the price point to where they'd expect.

But we should look to what happened when USDT openly admitted they were backed somewhere around nine cents to the dollar: absolutely nothing, the peg held.

So has the market really priced in the risk of 39% of assets not being cash/cash equivalent? I suspect that's unlikely, but I also expect no material change to USDCUSD. Today, at least.

The Economist this week has a really eye-opening article about the state of Tether. "With estimated leverage of 383-to-1, Tether would be unable to honour all its tokens after losses of just 0.26%". The moment we have a major adjustment in the bond market this not-actually-stable coin seems likely to explode.

https://www.economist.com/leaders/2021/08/07/why-regulators-...

This is normal. Regular banks do this.

Regular banks undergo real audits and have specific regulations around how much real cash reserves they have to have on hand. My bank can't go overvalue a bunch of junk bonds to meet their capital requirements.

What's not normal is misleading your customers about it. I confess I'm mostly thinking about Tether here, since it's the largest example of a coin that pretended to be backed by dollars and actually isn't. But this case doesn't seem much different.

Also banks are highly regulated about requirements for backing assets. Triply so since the 2008 collapse.

Yeah, but banks don’t create a market for themselves in a notoriously unstable ecosystem by explicitly promising that their deposits are backed by 100% cash.

That is what USDC did. And it turns out not to be true. Which is… concerning.

I agree, but I also think that reserves are only part of the game. A lot of the story resides in Coinbase' market transactions. How do they stabilize their stablecoin, precisely?

It is not guaranteed. You should not treat is as FDIC insured funds.

But let's do a little game theory. Say the market starts losing faith in USDC and people start selling 1 USDC for, say, 0.98 USD.

Coinbase can either let this happen, or they can start using their cash and investments to buy back USDC at a 2% discount.

If Coinbase has every reason to believe that USDC is just fine, then they have a large financial incentive to start buying USDC back. This will raise the market price back to near $1 USD.

That is how they stabilize their stablecoin.

It is game theory and market mechanics and not a government that stabilize stablecoins. If you don't trust this, then you should not hold USDC.

That's the optimistic scenario. The pessimistic is USDC goes down to $0.98 and then people panic and sell and it goes down to $0.97, $0.96, ... Meanwhile Coinbase tries to borrow a whole lot of cash to try to prop up the currency. The amount they have to borrow keeps going up though and at some point they stop being able to cover the promise.

This scenario is not implausible. It literally happens every few years in the modern economy with different assets. Real assets that are backed by real things, not a completely synthetic currency.

The dollar assets backing USDC are the only thing that really secures it. Not "game theory". Sometimes you lose games.

I think you're describing stablecoins just right. If that's all of it though, why should anyone be interested in what reserves these stablebanks hold.

What they're doing is, creating a USD bank. It's not just about bank guarantees. Game theory describes the stable outcome, it doesn't predict it.

BUSD is the most backed by USD you can get at this point.

USD is the only backed USD. Everything else is smoke and mirrors.