With the entry of Bluechip, a non-profit stablecoin rating agency, concerns have arisen about the legitimacy of its rankings.
After all, how come BUSD, a stablecoin that was recently halted by the New York State Department of Financial Services (NYDFS), is at the top of the list, while USDT, the largest stablecoin in the market by market value, is at the bottom?
It all comes down to SMIDGE, the six qualities that Bluechip measures: stability, management, decentralized implementation, governance, and externality.
“So no, some kind of regulatory crackdown is not a metric,” Bluechip chief economist Garett Jones told Decrypt. “That’s because that’s not its job.”
“We decided that our job was not to carry water for government regulators,” he said. “The rating itself is about whether this is a good business plan, whether it is a good, safe stablecoin plan. The question is not whether government regulators will take it on target.”
Although BUSD received an “A,” there is still a disclaimer next to the rating involving NYDFS actions.
As for the “D” in USDT, it’s all about auditing.
“Audits are critical,” Jones said. “I did some game theory research, and it made me very concerned about credibility. Our ratings director, Vaidya, comes from an accounting background. He wants to see audits, in part because that’s the norm. I want to see audits because if I don’t, what’s the signal?”
Focusing specifically on concerns surrounding Tether, Bluechip said the stablecoin provider could easily improve its ranking.
The agency recommends that stablecoin issuers disclose the name of their custodian; provide a transparent redemption schedule, similar to New York-based stablecoins like Gemini’s GUSD; and finally, reduce the redemption cap from $100,000 to $5,000.
Another interesting phenomenon near the top of the rankings is decentralized stablecoins, specifically Liquity’s LUSD (which received an “A”) and MakerDAO’s DAI.
The reason for this, though, comes down to one word: overcollateralization.
BUSD and USDT trust a third party to hold an arbitrary amount of equivalent assets to match the value of all stablecoins on the market, while LUSD and DAI rely on users to deposit more collateral than they can borrow in exchange for stablecoins.
This is highly inefficient, but that’s the trade-off required to ignore trusted third parties. According to Bluechip, it’s also super secure.
“We did some very simple value-at-risk testing and even over a worst-case 30-day period, at the amount of ETH currently collateralized, the liquidity [LUSD] would still be over-collateralized,” Jones said.
Essentially, this thing can handle a lot of volatility before folding.
He added that anything beyond that is “virtually impossible” (referring to the uncollateralized variety), unless an eccentric billionaire is willing to risk his reputation and a significant amount of his capital to become the enviable backer of an undercollateralized stablecoin.
As for Terra’s demise — the market’s harshest lesson about attempting the impossible — Jones claims to have seen it coming as early as 2017.
“This is the first time I’ve heard people talk about running full seigniorage,” Garrett told Decrypt. “Supporting tokens that are just governance tokens. I explained very clearly to everyone I could meet why this wouldn’t work and why it would fail. It’s probably like Saint Peter walking on water, he was able to do it for a while and then everything fell apart. I’m not ruling it out, I’m not saying it won’t work for a minute, or a year. One day people will stop believing in it and then everything will fall apart.”
Currently, there are only 15 tokens in the list, but this will soon change in August. Bluechip is expected to add more tokens to its list, which will surely cause another wave of