Original title: "Reflections on USDR de-anchoring: More than 500 days after the collapse of UST, we still don’t understand stablecoins"
Original author: Samuel McCulloch
Original translation: TechFlow
On October 12, 2023, a full 523 days have passed since the UST collapse, and we still don’t understand stablecoins.
The USDR, a “stablecoin” with $60 million in circulation, much of which is collateralized by UK real estate, quickly fell from $1 to $0.50 in a matter of hours. This was a classic “run” event, with a maturity mismatch between the stablecoin’s highly liquid debt and its less liquid collateral.
It is issued by Tangible, a marketplace for buying and selling real estate backed securities (RWAs). On the platform, tokenized real estate, watches, wine, and gold can be purchased with USDR.
Real USD... not a better currency
According to Tangible’s documentation, “Real USD (USDR) is a new type of rebased, interest-bearing, overcollateralized stablecoin pegged to the US dollar. USDR is primarily collateralized by interest-bearing, tokenized real estate.”
All USDR can be redeemed 1:1 for DAI at any time for a fee of 0.25%. The protocol retains several million dollars in cash to act as a capital buffer and facilitate redemptions.
De-staking occurred when the reserve ran out of $12 million worth of DAI that could be redeemed for USDR and holders began to sell the token through decentralized exchanges. Now, USDR holders must wait for the company's financial assets to be distributed or sold to cover the collateral gap.
A more interesting aspect of USDR is that it is an algorithmic stablecoin.
USDR can be minted with TNGBL or DAI at a 1:1 ratio. The protocol imposes a 10% maximum limit on the amount of USDR generated from TNGBL. The funds collected from the swap are then used to purchase a home in the UK. The Tangible team wrote in its documentation that excess collateral above the debt-to-asset ratio is used to purchase more real estate collateral. However, the Tangible team told us that they have never done this and all excess collateral is kept as reserves.
Real estate support
Tangible provides two reasons for using real estate to support the USDR.
First, real estate can generate income. All of Tangible's properties are rental properties that can generate rent every month, and these rents will flow into USDR holders through repurchases.
Tangible only buys properties in the UK market and offers a yield of 6.39%. By comparison, a one-month UK gilt yields 5.31%.
Second, the team points to the long-term role of real estate "price appreciation." They say real estate has a "predictable history of appreciation" and that "the average selling price of a U.S. home increased from $27,000 in the first quarter of 1970 to $383,000 in the first quarter of 2020."
They then claim in the document that the USDR is a “better currency” because it is a “true store of value” because house prices rise over the long term, protecting holders from inflation.
Just like we didn’t learn any lessons from the 2008 financial crisis.
On-demand parity
The biggest lie in cryptocurrency is how it presents the three characteristics of money. We have all heard countless times that money has three properties: medium of exchange, unit of account, and store of value. But these are only related to denomination.
Bitcoin can be a currency because it retains value and platforms integrate it as a payment option. This is true for any commodity. Bitcoin can fluctuate 5%, 10%, 15% every day and it will not diminish its ability to be a payment method because the price is relative to the dollar. They say 1 BTC = 1 BTC.
Debt denominated in dollars is held to a higher standard. USD stablecoins should be redeemable for $1 or thereabouts in all circumstances.
If not, it is not a US dollar currency.
I say approximately, because if you accept that privately issued money should have a place in our society, it will always have a slight price sensitivity. Only government issued money can be considered price insensitive because it enjoys the full trust of the money printing press.
Stablecoins are an imitation of the dollar, and FRAX is now stepping into this category with the launch of v3. Our stablecoin can be sold in exchange for USDC at a value of about $1, but there is no guarantee. The Frax DAO is tasked with maintaining a treasury of highly liquid assets to keep the peg, but things can always change and the portfolio is prepared for the worst.
Notably, Tangible pursued a growth strategy on Curve in the first and second quarters of this year. Llama’s risk team raised concerns about their staking support. Meanwhile, Frax DAO voted to increase staking to 100%.
The perspective that must be adopted when looking at stablecoins is "if something happens and the entire treasury has to be sold at a discount, how much can I get back?". If it is not "maturity on demand", then the reference denomination is wrong.
Given the assets on Tangible's balance sheet, we can make the following assumptions:
In the event of a protocol failure, the TNGBL token is “equity-like” and will be worthless. It does not add any value to the stablecoin backing.
Both the insurance fund and POL held by the team will be drawn down to near zero or until redemptions are cut off to preserve the remaining collateral.
When Tangible unloads properties in discounted sales to recoup funds, they may have to sell at below-market prices due to uncertain future market conditions. In addition, the properties are scattered around the world, increasing the currency risk of its sales.
The question that needs to be answered, then, is how much of a discount should be assigned to property values.With interest rates at a 15-year high, liquidity in these valuations has evaporated.
Tangible's Action Plan
In light of the USDR token depegging, the team has proposed the following steps:
1. Asset Liquidation: Taking into account real estate and liquid assets, USDR is currently collateralized at 84%.
2. Introducing baskets: Instead of stablecoins, Tangible will offer tokenized real estate pools, i.e. real estate index funds. These baskets, such as UK real estate, will be distributed proportionally to USDR holders. Users can hold index tokens, earn income from rent collection, mine them on Pearl, or sell them. If there is no demand for the baskets, Tangible will start liquidating the real estate, but this process will most likely take several months to complete.
3. USDR Redemption: Once the basket assets are in place, Tangible will initiate the USDR redemption process. USDR will be redeemed in a combination of stablecoins, basket tokens, and locked 3, 3+ TNGBL NFTs. If there is a collateral gap thereafter, it will be filled through TNGBL 3, 3+, which will be locked for one year.
Assuming the property can be sold without a significant discount, each USDR holder will receive:
0.052 USD stablecoin (DAI);
$0.78 real estate in basket form ;
$0.168 of locked TNGBL, earning income from rent.
There is a reason why every stablecoin bill discussed or passed requires all issuers to hold only cash and short-term equivalents. Market conditions go bad and investors panic. If you don't have enough liquid capital to redeem, a decoupling/run is inevitable. Illiquid debt increases convexity exponentially. The moment the market detects even the slightest sign of illiquidity, asset prices are immediately discounted.
At the time of writing, USDR is priced at $0.53. Even though the team claims that the tokens are 84% collateralized, the market knows that liquidating the treasury portfolio may take several months and discounts them accordingly.
After this process is over, USDR will no longer exist. Stablecoins are dead after a run.
Let’s be clear… all stablecoins are a form of debt. An extremely liquid, fungible debt instrument in token form. Tangible believes they can issue millions of dollars of debt 78% backed by real estate, with zero term risk. At some point, the 30% pre-crash cash and POL buffer is enough to provide adequate liquidity in the event of a run.
Today’s event has been repeated countless times in traditional finance, and the nature of the project is revealed when it is claimed that “measures put in place to protect customers can be too easily manipulated to attack the protocol.” Tangible is not “trying something new” either. The team is purposely issuing liquid debt tokens redeemable for illiquid assets. Tangible is marketing their jargon to an unsophisticated, non-institutional audience.
What makes the USDR debacle so frustrating is that the risks have already been documented by the Llama Risk Team, who wrote:
In summary, Tangible has built several mechanisms to support the peg of the USDR. They have conceived a promising approach (pDAI) to ensure that USDR holders can always redeem USDR for something of equal value. However, most of the measures are still very new and untested, and some are completely centralized (such as real estate liquidations). Especially in the event of a run, it is questionable whether the USDDR can maintain the peg. In addition, the project has added multiple dimensions of complexity and potential weaknesses through its wUSDR token and cross-chain integration. These factors are not conducive to the stability of the USDR.
Yet, here we are today discussing yet another “stablecoin” failure. It’s frustrating because these incidents are exactly what anti-crypto lawmakers cite when drafting draconian regulations and laws. The Tangible debacle provides more reason for the anti-crypto lobby to argue why our industry should be shut down.
It’s time to dispel the idea that any stablecoin can be 100% backed by anything other than cash or short-term equivalents. Real estate is good collateral, but allowing 100% lending on home equity in the form of stablecoins is clearly disastrous.
At Frax, we are committed to building a robust stablecoin ecosystem with as little risk exposure as possible. In the latest v3 launch, Frax also uses RWA to provide returns to DAOs, but only allows the most liquid assets with the shortest maturities: Treasuries, overnight repos, US dollars in the Fed's master account, and selected money market funds. Nothing else.
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