How does the “transparency” of USDC’s issuance reach a new high to stabilize the market?

At the beginning of 2022, the issuance of USDC will exceed $43 billion, a record high. But what is confusing is that in actual applications, the number of active addresses of USDC has not continued to grow, but has been fluctuating. So, how did the current situation of aggressive issuers and hesitant investors come into being? Today we will explore together through this article.

How are stablecoins “stable”?

Stablecoins are a vital part of the crypto ecosystem, and we can think of them as a bridge between fiat and crypto-native currencies. Stablecoins enable assets and value to be mapped and flowed in the encrypted world and the real financial world. It is assumed that on the “waters” of the encrypted market, all kinds of assets are connected and the flow area of ​​encrypted assets is expanded.

Today, there are more than 200 stablecoins in the world, with a total market value of more than $30 billion last year and a total market value of more than $170 billion this year. The rapid growth of crypto-stablecoins reflects rising investor demand for price-stable assets during turbulent times.

How does the "transparency" of USDC's issuance reach a new high to stabilize the market?

Stablecoin uses the value of the underlying asset as collateral to anchor the value of the token with the collateral asset, so that the value of the token tends to be stable. Therefore, for stablecoins, it is very important whether the anchoring target really exists and whether the value of the target can be verified and maintained stable.

However, in practical applications, due to the demand for “decentralization” in the cryptocurrency field, there is no effective and proven method for the supervision of stablecoin issuers. Therefore, stablecoin issuers will use methods such as providing transparency reports and commitments to prove.

For example, Circle’s USDC has provided a concise and easy-to-understand transparency report since October 2018. The report will express the USD held in the escrow account in intuitive words, that is, for every USDC issued, the Circle account will mortgage 1 USD. .

How does the "transparency" of USDC's issuance reach a new high to stabilize the market?

USDC’s Transparency Doubts

However, a transparency report is more of a “commitment” that can easily be changed without the involvement of a third party or independent agency. In March 2020, Circle USDC added a new clause to its Transparency Statement — USDC-owned collateral from a single U.S. dollar reserve was increased for “approved investments.”

How does the "transparency" of USDC's issuance reach a new high to stabilize the market?

Circle’s 2020 Transparency Report

It is worth noting that Circle’s “approved investment” lacks the subject, which means that as an investor, there is no way to know what organization the asset is approved by, and therefore no way to know its authority and safety.

Although many “investment assets” are allowed in stablecoin anchors, such a hasty shift does not bode well for USDC, which initially marked itself as a “pure dollar” to gain investor trust. In the face of investors’ questions and interviews, Circle’s co-founder and CEO Jeremy Allaire completely avoided this issue-the official proof could not be self-certified, and the managers avoided talking about it, aggravating investors and the market to USDC Stability and security concerns.

On the other hand, the hidden danger comes from the opaqueness of the investment. Compared with other stablecoins that add non-US dollar targets to anchor assets, USDC’s “seeing flowers in the fog” also makes many investors stop. So far USDC has not disclosed the proportion of US dollar assets and “approved investment assets”. How many dollars does it have in its account? How many investment assets are there? What are the respective proportions? The outside world has no way of knowing.

Also, Circle’s Proof of Transparency is always subject to changes, such as delayed releases. Its April 2021 proof was released on June 9 after a two-month delay, while its May proof was released on July 16. In its July certificate, though, Circle revealed more details on its reserve assets: about 61% of its tokens are backed by cash and cash equivalents, with Yankee certificates of deposit accounting for another 13%, U.S. Treasuries 12%, and commercial paper 9%. , the remaining tokens are backed by municipal and corporate bonds. 

Under the cloud of doubts, it is not just investors who have many doubts about Circle. As one of the issuers of USDC, Coinbase also changed its presentation on USDC transparency in August 2021.

Coinbase’s introduction changed the original “Backed by US dollars” to “Backed by fully reserved assets”. The explanation for this feature has also been changed to “Each USDC is backed by $1 or equivalent fair value assets held in accounts with U.S.-regulated financial institutions.”

Continued changes have repeatedly swayed investor confidence in USDC, which has also had a very bad impact on the market. The delay of the Circle transparency report usually matches the time of the large-scale additional issuance. If investors panic and cause a large number of runs, and Circle and Coinbase may not actually support rapid redemption, then the close connection between Circle, USDC and Coinbase will be Causes multiple crashes of currency prices and platforms.

How does Circle stabilize the market?

Of course, Circle isn’t ignoring investor sentiment toward USDC.

In November 2021, Cicle founder and CEO Jeremy Allaire responded positively to the Biden administration’s regulatory proposals for stablecoin issuers. He emphasized that the proposal, which aims to regulate U.S. dollar stablecoin issuers as banks by the Federal Reserve at the federal level, is a significant development for the development of the industry. Jeremy Allaire noted that the current steps would upgrade the current regulation focused on money transmission to “a more basic infrastructure, at its core, what the future of banking and capital markets might look like.”

Such a statement and active cooperation with U.S. regulators demonstrate Circle and USDC’s confidence in the compliance and safety of their own reserve assets, and also play a role in stabilizing the market.

But the flip side of the coin is that embracing regulation itself is a departure from the original intention of cryptocurrency decentralization. For example, in October 2021, Cricle disclosed in a regulatory filing that they had received an “investigative subpoena” from the SEC in July, asking it to “provide certain documents and information on shareholdings, client plans and operations.” In line with its listing plans, USDC’s user privacy has also been threatened by regulation.

How to find a balance between security compliance and decentralized privacy protection and a way to convince investors is still a long way to go for USDC.

In addition to the doubts of transparency reports and the “centralized position” that embraces regulation, stablecoins like USDC, which are always testing on the edge of risk, also add instability to the market.

Risks for ordinary investors to hold USDC

From the perspective of ordinary investors, using USDC trading pairs has certain risks, and when this insecure collateral enters the DeFi network, the risks will spread more widely. For example, in April 2020, the crisis of lendf.me’s $2,500 assets was looted, and a large number of projects integrated USDC.

Such vulnerabilities are related to the token mechanism setup of USDC.

Since USDC has added a pre-proxy contract to the token implementation. When the user uses the USDC contract to transfer money, he accesses the USDC proxy, which then accesses the USDC target contract through the internally set address. This leads to the fact that the proxy contract can change the proxy target with administrator rights. The original intention of the design is to solve the problem of contract upgrades with administrator rights, but at the same time, if the proxy contract management rights are breached, the attacker can change the proxy target address Point to any address – attackers can complete a large number of target transfers as long as they attack the USDC forward proxy contract and obtain management rights.

Therefore, from the application level, USDC’s previous vulnerabilities and assets are at greater risk of being hijacked. If regulators or trading platforms track these hijacked non-performing assets, and these assets enter the same liquidity pool as ordinary users’ assets, then these users will face the risk of their assets being polluted into non-performing assets.

All in all, stablecoins are the basis for the circulation of the cryptocurrency market, but at the same time they are also under multiple threats of decentralization, regulation, transparency and security. Although USDC has opened a multi-chain ecological road, to support market stability and ensure the safety of investors’ basic assets, USDC still has a long way to go.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-does-the-transparency-of-usdcs-issuance-reach-a-new-high-to-stabilize-the-market/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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