Stablecoins have existed for roughly seven years but talk about them has never been as heated as in recent weeks, not only within the crypto community but among regulators and traditional market investors. 

What is a stablecoin? 

Stablecoins are a type of cryptocurrency whose value is usually pegged to a range of assets, whether it’s a government-issued currency like the U.S. dollar, a precious metal like gold or even another cryptocurrency. 

Issuers have been trying different methods for realizing and maintaining stablecoins’ price peg to the underlying assets. Some stablecoins pegged 1-to-1 to the U.S. dollar – such as USDT (+0.04%), USDC (-0.01%), BUSD and GUSD – are backed by reserves whose dollar value is supposed to match the tokens’ circulating supply. Others are backed by physical commodities, such as tether gold, representing one troy fine ounce of gold on a London Good Delivery bar. 

There are also decentralized stablecoins such as DAI (+0.05%) and FEI, which are powered by algorithms. 

How are stablecoins used? 

Prior to the rise of stablecoins, most people traded cryptocurrency against government (“fiat”) currencies and other cryptocurrencies. “Starting in 2017, spot trading against stablecoins started to dominate a larger share of the trading activity,” noted Pankaj Balani, CEO of crypto derivatives exchange Delta Exchange. 

Compared with trading crypto against fiat currencies, stablecoins offer a faster, less expensive option, allowing for more liquidity. They’re also theoretically less prone to the market-price fluctuations witnessed in other cryptocurrencies. 

Stablecoins are also used in crypto lending. You can earn an annual interest rate of 4% from depositing USDC in a savings account at Coinbase, one of the companies behind the stablecoin. The interest rate for depositing USDT could range from 1.66% to 13.5%. 

There has been much going on about stablecoins recently, and some of it can be overwhelming. Here are the three big things happening right now: 

1. Tether is under a cloud

As the most traded cryptocurrency in the market, USDT has become a backbone for the entire cryptocurrency ecosystem. Over half of all bitcoin (BTC, +3.47%) trades are made against it. 

However, Tether, the company behind the digital token, has been plagued by regulatory issues.

Monday, Bloomberg reported the U.S. Justice Department is conducting an investigation into whether Tether, in its early days, hid from banks that transactions were linked to crypto. 

Tether published a response on its website, saying the Bloomberg article was based on “years-old allegations, patently designed to generate clicks.” However, the company didn’t explicitly deny the allegations. 

Some investors are also uneasy about Tether’s reserves, skeptical of the company’s ability to redeem its tokens in the worst circumstances. In May, the company revealed the breakdown of its reserves as part of its settlement with the New York Attorney General’s office. As disclosed by Tether, roughly half of the reserves are invested in “commercial paper” – typically short-term corporate debt – while 13% are in secured loans and 10% are in corporate bonds and precious metals. 

Tether’s holdings of commercial paper, loans and corporate bonds are exposed to market risk, term risk and credit risk, said economist Frances Coppola. “If the value of their commercial paper was to fall, or value of their corporate bonds was to fall,” Coppla said, “then the value of their tokens in issuers would not be $1, it would be less.”

2. Regulatory heat

Stablecoins had a total market capitalization of $116 billion as of July 26, an almost fourfold increase since the start of this year, according to CoinMarketCap. As growth increased so has the attention from U.S. and other regulators. 

“Regulators look at stablecoins because they’re more adjacent to the existing banking system than other types of cryptocurrencies,” Alex Svanevik, CEO of crypto analytics company Nansen, wrote to CoinDesk via email. “There’s a real chance stablecoins could be disruptive for traditional finance.”

A month ago, Eric Rosengren, president of the Federal Reserve Bank of Boston, identified tether and other stable-value tokens as a risk to the financial system, citing concerns of potential disruption to short-term credit markets. 

Also, U.S. Treasury Secretary Janet Yellen announced she would examine stablecoin regulation and risks as part of a presidential advisory group. Shortly thereafter, officials from the Treasury Department, Federal Reserve, Securities and Exchange Commission, Commodity Futures Trading Commission, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. met to discuss the issue “in light of the rapid growth in digital assets.”

Separately, SEC Chairman Gary Gensler suggested last week that some stablecoins should be deemed to be securities, subject to his agency’s oversight.

In China, Fan Yifei, a deputy governor of the People’s Bank of China (PBOC), said digital currencies pegged to a fiat currency had the bank “quite worried” and “may bring risks and challenges to the international monetary system,” as reported. 

3. Circle going public, other stablecoin issuers disclose more info 

Circle, the issuer of USDC, the second largest stablecoin, has also been in the spotlight. Circle plans to go public through merging with Concord Acquisition Corp., a publicly traded special purpose acquisition corporation (SPAC). The deal would value the crypto financial services firm at $4.5 billion.  

Following CEO Jeremy Allaire’s pledge to make the company more transparent, Circle published, for the first time, a breakdown of the assets backing its stablecoin in its most recent attestation, dated July 16. The company reported about 61% of its tokens are backed by “cash and cash equivalents,” meaning cash and money market funds. “Yankee Certificates of Deposit” – meaning CDs issued by foreign (non-U.S.) banks – comprise a further 13%. U.S. Treasuries account for 12%, commercial paper is 9%, and the remaining tokens are backed by municipal and corporate bonds. 

Another stablecoin issuer, Paxos, also released for the first time a breakdown of reserves for its stablecoins, Paxos standard and the Binance-labeled BUSD. Some 96% of the reserves were held in cash and cash equivalents, while 4% were invested in U.S. Treasury bills as of June 30.

The takeaway: Stablecoins’ systemic role, and risk

The systemic role stablecoins play in crypto trading and lending has caused some investors to worry about worst-case scenarios, such as what could happen should stablecoins issuers face massive redemption requests. 

The risk could also spill over to the traditional markets. The credit ratings firm Fitch said in a report earlier this month that risks facing stablecoins are potentially “contagious.” As of March 31, Tether’s commercial paper (CP) holdings amounted to $20.3 billion, which suggests that its CP holdings may be larger than most prime money market funds in the U.S. and Europe, the Middle East and Africa, according to Fitch. 

“A sudden mass redemption of USDT could affect the stability of short-term credit markets if it occurred during a period of wider selling pressure in the CP market, particularly if associated with wider redemptions of other stablecoins that hold reserves in similar assets,” the rating firm said. 

Stablecoins may also affect money supply, according to David Grider, head of digital assets Research at Fundstrat Global Advisors. “Stablecoins let you do something very interesting, which is to let you earn interest on both sides of the same dollar,” he told CoinDesk. 

The actual dollars being reserved could be lent out in the real economy, while the digital receipts may be lent out again in the crypto economy and earn interest as well. As Grider wrote in an analyst note, that’s “effectively taking the same dollar and lending it twice.”

Chainlink, the market-leading provider of data feeds to blockchain-based smart contracts, is expanding its services to include decentralized off-chain computation – a job done by a network of node operators known as “Chainlink Keepers.”

Chainlink Labs is also standing up cross-blockchain bridges that come with an anti-fraud risk monitoring component.

Announced Thursday at Chainlink’s annual event, SmartCon, Keepers is a kind of service layer to tell smart contracts how and when to behave. The feature is now live on Ethereum and being adopted by Aave, Synthetix, PoolTogether, Barnbridge, Bancor and Alchemix.

The evolution of decentralized finance (DeFi) is a cross-pollination of on-chain logic in the form of smart contracts and real-world data that lives outside the blockchain.

Chainlink allows inputs – such as market data for DeFi, random number generators for gaming or sports scores for prediction markets – to be piped into blockchains via decentralized oracle networks that are maintained by a committee of Chainlink nodes.

Keeping time

The next step, as outlined in the Chainlink 2.0 white paper, is to offer computation as well as data inputs via the same decentralized network. To illustrate what is meant by computation in this context, Chainlink co-founder Sergey Nazarov picked the simplest use case.

“A smart contract can’t know what time it is,” Nazarov said in an interview. “It doesn’t have a conception of time. So if you want a smart contract to settle at midnight on Tuesday, you need a Keeper.”

A common sort of computation used in DeFi applications would be the triggering of limit orders, or it could be more advanced things like the monitoring of certain debt pools for under-collateralized loans. What project teams currently do is build this computation layer in-house. But that’s antithetical to the whole decentralization narrative, said Nazarov.

“We’ve created an end-to-end decentralized application,” he said, adding:

“It has decentralization of the code and it has decentralization of all the systems controlling the code. Because if you arrive at partial decentralization of the code but not everything controlling the code, that’s where you can have flash loan attacks and all these other attacks.”

Chainlink keepers will be selected from the network’s existing pool of reliable node operators, said Nazarov, and the profit they earn will ensure they provide computation at any level of congestion or cost scenario. Going forward, more enterprise-grade keepers will be added to the network, like Deutsche Telekom’s T-Systems.

Missing links

Slightly further down the Chainlink roadmap, but something the team has been working on for the last two years, is the Cross-Chain Interoperability Protocol (CCIP). Chainlink also announced a Programmable Token Bridge that will be built atop the CCIP. The bridge can be used to send tokens and computational commands to any blockchain network, opening the door to more advanced cross-chain applications.

Crypto lender Celsius announced Thursday it has committed to using the CCIP.

The time is ripe for this, Nazarov said, pointing to last month’s high-profile THORChain exploit.

“When other people make cross-chain [bridges], they have two fundamental problems,” Nazarov said. “Either they haven’t designed a secure system, or they don’t have a relationship with the other blockchains that will result in adoption of the bridge.”

Under the hood, Chainlink’s CCIP leverages something like multi-signature security, Nazarov said, but done in a way that efficiently aggregates signatures from hundreds of reliable Chainlink nodes.

In addition, a new anti-fraud network will run parallel to the Chainlink cross-chain bridge, and monitor every single signature, transfer and addition or reduction of a node, Nazarov explained. The anti-fraud network has the ability to lock the bridge at any moment completely unilaterally, he added.

“This creates a critical layer of risk management and anti-fraud management,” Nazarov said, adding:

“If you look at any system out there in the world that moves value and transacts value, they all have anti-fraud, and anti-risk departments. They have huge investments in anti-fraud systems. But for some reason, we want to move around billions of dollars in all these bridges without a risk management system. How does that make sense?”

UPDATE (Aug. 6, 0:45 UTC): Adds clarifying language about the CCIP and Chainlink’s Programmable Token Bridge.

How a ‘Lazy Robot’ Might Solve a Big Problem for Crypto’s Whale Traders

It can be hard having a giant pile of crypto.

Especially if you want to trade it for a different giant pile of crypto.

Sometimes investors or organizations want to move a lot of cryptocurrency, and they would prefer to do it in a way that doesn’t have a big impact on the market. The folks at venture fund Paradigm have a new idea for addressing this issue without having to trust anyone.

Called the time-weighted average market maker (TWAMM), it’s an idea that assembles a variety of needs and insights from crypto’s recent days and is worth unpacking.

Oftentimes, when some entity or person wants to shift a large number of assets they would prefer that doing so had relatively little effect on the market. Odds are, the person who makes this kind of trade wants to basically trade at the current price. The problem is that large trades have a way of moving the price.

When people want to sell off a lot of one asset without a lot of so-called slippage, they go to specialized brokers who know how to tease out such a trade. If the priority is more the right price and not so much getting it done quickly, that’s a boon to market makers because it gives them liquidity to work with.

(Sometimes there are people who want to move a lot of assets really quickly, and that’s a whole different story but it’s not relevant here.)

There’s no great way to do a big, slow trade trustlessly in crypto yet.

As we’ve previously reported, we are in an era where decentralized autonomous organizations (DAOs) are getting forward-thinking about managing their treasuries, but they have largely had to rely on cutting sweetheart deals with venture capitalists to turn governance tokens into something more liquid, such as stablecoins. 

Furthermore, Paradigm’s idea is based on one of the biggest successes for decentralized finance (DeFi) in recent years: enabling human traders to transact with robots, known as automated market makers (AMMs). instead of people, so they don’t have to trust a third party.

These AMMs use internal pricing systems that go haywire if someone trades too much of one asset too fast.

Plus, since these trades are all transparent, Ethereum is littered with hustlers looking to steal value from big trades with all kinds of strategies that take advantage of market participants announcing their move before a trade is finalized. 

If it’s built and works as intended, Paradigm’s TWAMM would give traders the benefits of an AMM while allowing them to execute large trades over time in a way that would likely cause only minimal market fuss.

Whether or not this specific design sees fruition, it helps to illuminate the kinds of problems that entrepreneurs in decentralized finance are thinking about.

And it is also worth talking about because it will probably see fruition.

Can we talk about numbers just a little?

Before we even get into it, I want you to forget about crypto and markets for a second.

Picture a big curve on a graph. You know what the curve represents, right? A series of paired values. Say you have a price going up and down and you have time going from left to right.

If the curve makes a big upside-down U shape, then you can picture price going up, peaking and then falling again, eventually reaching zero as time passes.

With me so far?

So let’s say it starts at 1 p.m. and goes to 10 p.m.. At 1 p.m. the price is $0. At 5 p.m. it’s $100 and at 10 p.m. it’s $0 again. That’s the arc of the curve.

So you have all these little moments in there when the price is slightly different from what it was a moment ago. Either it’s going up or it’s going down.

Let’s say you wanted to make a bunch of equally sized purchases along some part of the curve. Though you are buying multiple times at different prices, the average price would in fact be the final price you’d paid for all those individual purchases combined.

To say it with specifics, it wouldn’t really matter if the first buy had been made at $80, the next $90, the next $100, the next $90 again and the last one also at $80. In effect, you would have paid $88. That’s the average price. And from your wallet’s perspective, it was the price of all of them.

Over a series in which for whatever reason, things are changing, then it’s just really in practice one average price across each purchase.

That insight is at the heart of Paradigm’s proposal. More likely than not, it will probably end up informing some kind of big decentralized exchange designed for buying or selling large amounts of crypto in a transparent way.

Who wants to sell lots of crypto slowly?

If history is any guide, probably more people than we expect.

But one obvious example of a group that might like to make a very large sale in a transparent way might be the decentralized autonomous organizations (DAOs) diversifying their treasuries these days.

These are organizations with a large but undiversified treasury that might want to reallocate to some other asset in order to insure against a downturn or to participate in yield farming in order to cover operational costs.

While a DAO has an interest in diversification, it also has an interest in not tanking the token price and upsetting its community. By communicating clearly with the market and making the sales steady and predictable, it can avoid a market shock.

Hedge and venture funds that have made outsized gains in a token and just want to sell off a small portion of that position just to rediversify might also be interested in this kind of service.

This isn’t without risk, but for a certain kind of user it can be worth it. As Paradigm notes in its paper: “The biggest tradeoff long-term traders are likely to encounter with the TWAMM is the information leakage they are exposed to when placing publicly visible orders, which are necessary due to the nature of Ethereum.”

But for some market players that openness might be the point, as well.

How does it work?

The core trick of the TWAMM is laziness.

Before we get to that we have to talk about patience.

The TWAMM has an AMM built into it, in this design. Perhaps when it gets built it will be added as a feature to an existing market maker, but that would take a lot of clever engineering. For now, the TWAMM is envisioned as a standalone thing.

So if it had a pool of two tokens and someone wanted to put in an order for a long series of trades on that pool, selling a ton of tokens into that pool is really going to shift the price.

AMMs set prices based on the ratio of the two tokens in each pool, so 2,000 DAI (+0.05%) and 1 ETH (+4.54%) in a pool means that ETH is trading at $2,000 (or 2,000 DAI). But as soon as users start adding DAI to buy ETH, that starts pushing the price up a tiny bit.

Adding a lot at once will push the price up wildly.

But adding a little bit over a long period of time will have a very different effect, because everyone else in the market will start to see when the price has begun to get out of sync with the rest of the market. When that happens, market makers looking for arbitrage opportunities will trade it away (arbitrage is when a trader makes free money by spotting small discrepancies in a market).

So that’s the first insight. Trade slow and count on arbitrageurs.

Obviously, the very fact that a large trade is happening and everyone knows it will have some effect on the broader market price, but probably not as much as doing it suddenly. When people are willing to trade a lot openly over time, that’s a way of communicating to the market that the trader doesn’t know anything the market doesn’t. 

The really fun notion here, though, is the second insight: the idea of laziness.

Simply put, the TWAMM saves its users gas by doing trades without doing them.

That’s not really true, it does do them, it just does fewer of them than it seems.

Remember the example at the top. We made six trades with a different price on each, but in the end it was really just one price, the average price, right?

Well, AMMs can do the same thing.

If you have a pool with a certain amount of two tokens in it and you announce that you want to trade, say, 1 million ETH for some other token in that pool, and you want to do it evenly over, say, 3,000 blocks, you can predict the average price for all 3,000 blocks from the very first one, at least if nothing else happens. (A new block is added to the Ethereum chain every 13 seconds, on average.)

As Paradigm’s paper explains, there’s a certain class of plugged-in broker who does this for large equity trades in traditional stock trading. This proposal does the same in a more crypto-native way.

If no one else trades in the pool over those 3,000 blocks, the average price of all 3,000 would be completely predictable from the start. You could calculate the average price over all 3000 blocks and just do one trade for all of it at that price at the 3,000th block. 

What’s the advantage there? The trader pays gas (the cost of sending transactions or performing computations on Ethereum) one time, not 3,000 times. 

This is what’s called “lazy.” It pretends to take a bunch of actions but actually does as little as it can get away with.

Remember how I wrote that if you trade in a ton of one asset into a two-sided pool, it will knock the price out of whack with the market? That will still happen here, but because it’s happening slowly, the market can knock it back in line as it goes.

See, the TWAMM also makes it clear to the public market where the trades it has running have moved the price, even if it hasn’t actually executed the trades yet on-chain (because it is being lazy).

This would allow arbitrageurs to step in and readjust the underlying prices anyway, even though the trades have not been logged on Ethereum. If nothing is changing, the smart contract waits but if someone steps in and makes a trade in the pool, that changes the math. So the  TWAMM goes ahead and totals the extended trade up to that point, registers it on chain and then starts the lazy operation again based on the new state of the pools.

This mechanism not only lowers gas but also makes sure that the long trade largely stays in line with the overall market. 

Is that it?

No, that’s just the crux of it.

The TWAMM is also able to make other more sophisticated moves. Say, for example, two long trades are running on the same pool. Provided no one else interacts with the pool, it can run multiple long trades lazily as well.

This design has some other benefits as well. It should make it harder for attackers to use miner extractable value (MEV) to steal some of the thunder from a large trade using this model. 

What if prices go crazy elsewhere in the market during a trade?

A long trade can always be canceled midway (though the trades up to that point will execute, whether it’s been lazy or not). That said, an automated canceling system is not built into the design for the TWAMM.

This is probably for the best. If an order posted that it would stop the trade if prices changed too much one way or another, third parties would be able to game that information.

That said, if the TWAMM gets built, someone probably will build a tool that would allow a trader to send an order to kill a trade if the market moved too much against them while it was running.

What does TWAMM have to do with other AMMs?

We can only guess about that right now.

As noted above, as it stands any AMM that wanted to add a TWAMM-like feature would need to do a code update. The Uniswap team is cited on the document as consulting on it; Uniswap did not reply to a request for comment from CoinDesk.

SushiSwap is in the middle of a big code change right now and the team is basically planning to incorporate every AMM format into their own. Perhaps they will add the TWAMM design to the mix as well?

This is all just conceptual right now anyway. A design and code to run it are two very different things.

Into what crypto trends does this product fit?

As more and more DAOs begin to act like large players in the market, functioning more like the crypto equivalent of publicly traded companies rather than traders, they will want more crypto-native ways to make big moves.

Right now they are selling their tokens to prepare for a downturn. Later, they may turn to buying back their tokens to reward supporters.

They would want to do all of this in the spirit of crypto: openly, without spooking the market.

It also fits into the ongoing conversation about MEV. It should make it a bit harder for attackers to jump the line and steal value from some big players making moves in the market.

Perhaps most importantly it fits into the story of markets becoming truly decentralized. 

AMMs have proven to be one of the most transformative technologies to sprout from blockchains and the more useful varieties of AMMs that can be devised, the less of a role centralized exchanges will have to play.

The Coinbase crypto exchange is adding support for more payment and cash-out methods in the U.S. as well as allowing users with linked bank accounts to instantly sell as much as $100,000 per transaction.

In a blog post published Thursday, Coinbase announced new integrations with Apple Pay and Google Pay, previously only available when synced with the Coinbase Visa debit card. Now, users with any Visa or Mastercard debit card linked in their Apple Wallets will automatically have Apple Pay appear as a payment method when transacting with Coinbase on their cellphones. Google Pay will be available in the fall. 

Coinbase fees for Apple Pay and Google Pay purchases will be 3.99%, the same amount as applied to debit card purchases.

Instant cash-outs will be made through the Real Time Payments (RTP) network as an alternative to Automated Clearing House (ACH) transfers, which can take up to five days. RTP cash-outs allow for near-instantaneous transfers of funds around the clock, with no limits on the number of cash outs per day.

The RTP Network is controlled by the Clearing House (TCH), a payments company and banking association owned by the largest U.S. commercial banks. TCH has been following the evolution of the cryptoeconomy since at least 2014, when it sponsored a report on the risks and regulation of virtual currency.

Additionally, Coinbase said the exchange will now accept crypto purchases via linked Visa and Mastercard credit and debit cards in over 20 countries.