Payment tools are not investment tools! Why did the stablecoin USDR, which is backed by real estate, suddenly decouple by 50% overnight?

This article is written by XREX.

Real USD ($USDR), a stablecoin issued by TangibleDAO, uncoupled from the U.S. dollar on 10/11, resulting in a 50% drop. Real USD is the fourth-largest protocol in total locked value on the Polygon chain. As stablecoins are being used more widely, from trading cryptocurrencies to financial applications like cross-border payments in the real world, the decoupling of $USDR is worth our attention and reflection. What exactly is the role of stablecoins? And because of this role, what kind of design and regulations should they have?

$USDR has two main features: firstly, it is primarily backed by real estate, and secondly, it distributes the profits from the reserve, which is real estate, back to the users. "Dividend stablecoins" are a type of stablecoin that serves as a payment tool while also providing rebates to users from its own profits. Recently, this type of topic has been very popular in the blockchain industry, but there seems to be insufficient discussion and awareness about the associated risks.

The Risk of Insufficient "Money Velocity" for Stablecoins

The primary defense of any currency lies in its "transaction scenarios and usage frequency," also known as its "money velocity." Stablecoins are considered as "payment tools." The system's stability and product-market fit are not determined by the issuance volume or user count, but by:

1. How frequently is it "used"?
2. Do users hold and use this currency frequently due to "payment" and "transaction" needs?

In simpler terms, the key is whether this stablecoin has a rich variety of transaction-related applications and is frequently used and traded.

For example, USDT is popular in emerging markets such as India, Africa, the Middle East, and South America. It is widely used by small and medium-sized enterprises for cross-border payments, settlement tools, and individual cryptocurrency investments and asset allocation. USDT serves as a critical medium and unit. USDC, on the other hand, is favored by large financial institutions for large transactions and settlements, or as a safe haven to convert to USDC while trading cryptocurrencies.

The risk of "yield-bearing stablecoins" arises when a currency is not seen as a "payment tool" but as an "investment tool." In such cases, if the currency is not used for transactions but purely as an investment, it can lead to a situation where the currency has a large issuance volume but low velocity. When its returns decrease, holders have no reason to continue holding, and non-holders have no incentive to acquire it, leading to significant selling pressure and strain on the reserve behind it.

If we quantify various risk factors of a currency, then:

Currency Risk Factor.1 = Issuance Volume / Velocity

In other words, a large issuance volume and low velocity pose a significant risk factor for any currency. "Yield-bearing stablecoins" are prone to triggering this risk factor if they lack robust payment application scenarios.

Looking back at the collapse of Terra Luna $UST, the issuer Terra offered a "subsidized" 20% annualized interest rate through the Anchor protocol to attract users to hold $UST. Most users held $UST solely for the high staking rewards, not for its intended use as a stablecoin for payments, highlighting its inadequacy in meeting payment demands.

The subsequent collapse was partly due to the unsustainable high staking rewards provided by the Anchor protocol. When the annualized interest rate decreased, many users immediately sold off $UST, and new users had no motivation to step in. Since $UST was viewed purely as an "investment tool" rather than a "payment tool," lacking payment utility scenarios.

Apart from stablecoins like $USDR backed by real estate, another hot topic in the crypto space is the trend of issuing stablecoins backed by U.S. Treasuries to capitalize on high yields and distributing the Treasury returns to users.

"Yield-bearing stablecoins" are attractive, easily understandable, and promotable. However, the interest rates offered by these projects do not stem from "organic rates" derived from market lending or trading but are subsidized rates by the U.S. government, lacking sustainability. The exceptionally high U.S. Treasury yields will eventually revert to low rates.

At that point, if such "U.S. Treasury yield-bearing stablecoins" are not treated as payment tools, they will inevitably face:

1. High "Currency Risk Factor.1" index
2. Significant fluctuations in "Currency Risk Factor.1" due to changes in the capital market
3. Potential runs like those seen with $USDR and $UST

The Inherent Contradiction Between Currency as a "Payment Tool" and an "Investment Tool"

There is an inherent contradiction between currency being used as a "payment tool" and an "investment tool," which can be divided into two aspects. Firstly, "investment tools" inherently carry speculative elements, leading to significant fluctuations in issuance volume based on market sentiments and varying investment returns. Since investment tools often require maturity transformation, mechanisms like lock-up periods, such as fixed deposits, are implemented to protect reserves during drastic issuance reductions, reducing liquidity to mitigate immediate pressure from runs. However, such mechanisms conflict with the need for maximum liquidity in "payment tools," which should offer easy access for transactions like instant withdrawals and transfers. When payment tools become intertwined with speculative elements, resulting in large issuance fluctuations, it undermines the essential convenience and stability required for payment tools.

Secondly, the contradiction between currency serving as a "payment tool" and an "investment tool" lies in the services provided. "Payment tools" inherently foster repeat usage habits and predictable user behavior due to the services they offer, reducing the impact of speculative elements. To enhance stability, many payment tools strive to eliminate speculative elements, ensuring that changes in issuance primarily stem from shifts in payment demand rather than market speculation or interest rates.

This is why disclaimers like "Investment involves risks, investors should assess the risks themselves" are common in brokerage apps but not on transportation cards or banknotes, which do not carry disclaimers about risks associated with the payment system.

If you are interested in a popular "yield-bearing stablecoin" in the current crypto market, consider whether its primary focus is on being a payment tool or an investment tool. Do users choose it primarily for its payment features or its investment properties?

The value of a payment tool lies in its payment scenarios. This is why transportation cards and fiat currency do not offer interest payments. Furthermore, in traditional finance, base money / M0 / fiat currency does not yield interest. Users' demand for and usage of them must stem from a need for payment rather than profit-sharing or financial gain. Central bank digital currency (CBDC) whitepapers issued by various countries, including Taiwan, emphasize that CBDCs do not yield interest as they are intended as payment tools, not investment instruments.

How to Evaluate the Role of a Stablecoin?

How can you determine if a stablecoin occupies the role of a "payment tool"? Look at whether it serves as a "unique medium of exchange." Consider the following two simple questions to aid your assessment:

1. Which stablecoin has sufficient depth and liquidity for trading BTC and ETH?
2. In emerging market trades, which stablecoin would merchants prefer for settling payments in USD?

The U.S. dollar serves as a prime example: the U.S. has strategically leveraged its national power (military, economic) to establish the U.S. dollar as a unique "medium of exchange" in various transactions, such as U.S. stocks, oil, cross-border exchanges, government payments, and more.

Thus, even though the risks associated with U.S. debt have increased, individuals cannot immediately abandon or sell off the U.S. dollar because it remains essential for various transactions.

The Future Development of Stablecoins in Taiwan: Regulatory Innovation

XREX, a blockchain financial institution, has been focusing on the applications of stablecoins in cross-border financial flows, especially in developing countries like India. This year, we hosted the inauguralStablecoin Summit in Singapore, delving into the future development of stablecoins from various perspectives such as stablecoin models, institutional and individual applications, cybersecurity, bank integration, central bank digital currency connections, and regulations.

Taiwan's cryptocurrency regulation is becoming increasingly mature, with the central bank studying the issuance of a digital currency. Central Bank Governor Yang Chin-long recently emphasized that stablecoins are part of virtual assets and cannot be separated. The future development and applications of stablecoins are worth monitoring as they directly impact various aspects of the economy, trade, transactions, and more.

While we welcome numerous innovations in stablecoins, many projects still pose risks that require judgment and mitigation. Stablecoins are a new type of payment industry born from blockchain technology, attracting not only blockchain industry participants but also traditional financial institutions and electronic payment giants like PayPal, VISA, Mastercard, JPMorgan Chase, and Standard Chartered. The next decade of stablecoin development holds promise but requires close and constructive dialogue among the blockchain industry, regulatory bodies, and traditional financial sectors.

Related Articles:

1. Opening Speech at the Stablecoin Annual Conference: "Stablecoin Social Movement: The Next Decade"
2. From the UST Collapse, Understanding the Three Lines of Defense for Stablecoins Pegged to the U.S. Dollar
3. Can the USD Stablecoin UST Escape the Death Spiral? Insights from the Instant Unpegging of Algorithmic Stablecoins–
   

Note 1:

When there is a significant investment/speculative component in demand, the denominator of this currency risk factor becomes unstable, leading to large short-term fluctuations. This poses a risk of substantial price volatility, which is unfavorable for serving as a medium of exchange. The absolute value or magnitude of this index is not critical; the focus is on its volatility. A healthy payment-oriented stablecoin should exhibit minimal changes in this factor. Even if there are noticeable trends, they should be gradual rather than abrupt.