USDR Stablecoin Plummets to $0.53 Raising Concerns About Stability
By Noah Washington October 14, 2023
- USDR stablecoin lost its peg to the US dollar, dropping to $0.53 amid liquidity issues and panic selling
- Rapid redemptions depleted USDR's reserves, its development team says real estate/crypto collateral intact
- Depegging highlights risks of real estate-backed stablecoins - traders lost full investment during volatility
The real estate-backed stablecoin, USDR, saw its value plummet to $0.53 per coin on October 11. This sudden depegging from the United States dollar has sent ripples through the crypto world, raising concerns about the stability of such assets, particularly when faced with liquidity challenges.
The Depegging Incident
USDR, backed by a mix of cryptocurrencies and real estate holdings, is issued by the Tangible protocol, a decentralized finance project aiming to tokenize real-world assets. Its primary trading hub is the Pearl decentralized exchange (DEX), which operates on the Polygon blockchain.
The depegging incident can be traced back to a rapid depletion of the stablecoin's reserves, primarily composed of DAI, a stablecoin pegged to the US dollar. The USDR treasury was drained as a result of a sudden surge in redemptions, causing a swift decline in its market cap. Panic selling ensued as the supply of DAI for redemptions ran dry, further exacerbating the depegging.
At approximately 11:30 a.m. UTC October 11, USDR's price hit a low of $0.5040 per coin, though it managed a partial recovery, reaching around $0.53 shortly thereafter.
Despite losing nearly 50% of its value, the USDR development team swiftly took to social media to reassure users that the issue was primarily a liquidity problem. They emphasized that the real estate holdings and digital assets backing USDR remained intact and would be used to facilitate redemptions.
A significant portion of USDR's collateral, 14.74%, consists of Tangible (TNGBL) tokens, which are part of the coin's native ecosystem. The remaining 85.26% is collateralized by real-world housing and an "insurance fund". On October 11, despite the loss in the treasury, the official website stated that USDR's assets were still worth more than the entire market cap of the coin, offering hope for redemption efforts.
The Broader Context of Stablecoins
Stablecoins are designed to maintain a value of $1 on the open market, but they can sometimes lose their peg during extreme market conditions.
Recently, Circle's USD Coin (USDC), which was the sixth-largest cryptocurrency by market capitalization at the time, experienced a significant drop in value. On March 11, USDC fell to $0.885 per coin, a decrease of over 11% from its pegged value of $1. This drop was likely caused by a combination of factors, including several U.S. bank failures that led to a decrease in investor confidence and a subsequent sell-off in the cryptocurrency market.
However, USDC was able to regain its peg just a few days later, on March 14. This quick recovery was likely due to a combination of factors, including the stablecoin's collateralization by Circle's reserve of US dollars, which helped to maintain investor confidence in the coin, and the fact that the drop in value was not driven by any fundamental issues with the stablecoin itself.
Stablecoins Still Challenging
In contrast, Terra's UST stablecoin had not been so fortunate. UST lost its peg in May 2022 and has not recovered, with a value of just $0.01 per coin as of October 11, according to CoinGecko. This drop in value is likely due to a combination of factors, including a lack of confidence in the stablecoin's collateralization and a decrease in investor interest in the coin.
The USDR depegging incident sheds light on the challenges and opportunities within the real-world assets niche of the cryptocurrency market. While USDR's real estate holdings were a source of attraction, offering high yields of up to 16%, they also posed a risk due to their speculative and illiquid nature. In contrast, stablecoins like Circle's USDC maintain reserves in highly liquid short-term Treasury bonds.
Tangible, a specialist in creating real-world assets, has announced plans to abandon USDR once the redemption process is complete. This underscores their commitment to learning from this experience and improving their future products.
A Wake-Up Call for Cryptocurrency Market
The depegging of the USDR stablecoin has raised several regulatory and legal questions, particularly regarding the role of stablecoin issuers in maintaining the stability of their assets. Regulators may view such events as a sign of the need for greater oversight and regulation of stablecoins, especially those backed by real estate, to ensure that they are properly managing risk and maintaining adequate liquidity.
In the future, regulators may require stablecoin issuers to implement stronger risk management measures. This could include maintaining larger reserves or implementing automatic rebalancing mechanisms to prevent similar incidents from occurring.
Additionally, the USDR depegging incident highlights the challenges of using real estate as collateral for stablecoins. The value of real estate can be subject to significant fluctuations, making it difficult to maintain a stable peg. The broader cryptocurrency market can learn from this incident the importance of implementing robust risk management strategies, maintaining adequate liquidity and carefully considering the collateral used to back stablecoins.