The recent collapse of Silvergate and Silicon Valley Bank has sent shockwaves through the banking industry, with significant implications for the world of stablecoins. Centralized stablecoins, in particular, are at risk due to their high exposure to impacted banks, as well as other potentially at-risk institutions.
Stablecoins are digital currencies that are pegged to a stable asset, such as the US dollar. They are designed to provide users with the stability of traditional currencies, while also offering the benefits of blockchain technology, such as faster transaction times and lower fees. However, stablecoins are only as stable as the assets they are backed by, and if those assets become at risk, the stablecoin’s value can be impacted.
With only the first $250,000 of bank deposits insured by the FDIC, the vast majority of stablecoins’ bank deposits represent unsecured deposits to underlying banks, which bear some risk of not receiving full repayment if a bank is closed. This means that stablecoin issuers may have to take steps to limit their exposure to potentially impairing banks and other risky institutions.
One such example is Circle, which has reported roughly $3.3 billion in exposure to Silicon Valley Bank, representing a bit more than a quarter of their roughly $11 billion in bank deposit exposure. MakerDAO, a decentralized finance protocol, is proposing changes to limit its exposure to potentially impaired stablecoins and other risky collaterals while maintaining enough liquidity to prevent DAI, its stablecoin, from trading significantly above $1 if conditions change.
One proposed change is to reduce the debt ceilings for LP Collaterals Containing USDC to 0 DAI, as they are exposed to potential USDC tail risk, and available debt ceilings are not critical to maintaining adequate DAI liquidity. MakerDAO is also proposing to reduce the gap parameter from 950 million DAI to 250 million DAI for the USDC PSM, which has historically been Maker’s primary liquidity source. The increased fee will help prevent excessive dumping of USDC into the PSM, potentially incentivizing users to dispose of USDC via other methods and ensuring it is only used if DAI price significantly diverges upwards.
Furthermore, MakerDAO is proposing to reduce the gap from 50 million to 10 million DAI for PSM-GUSD-A, as GUSD has large uninsured bank deposit exposure, which potentially could be associated with at-risk institutions. To limit potential losses, MakerDAO is proposing to increase the maximum debt ceiling line to 1 billion from the current 450 million DAI and increase the gap from 50 million to 250 million DAI for PSM-USDP-A, which has relatively stronger reserve assets.
In addition to these proposed changes, MakerDAO is temporarily deactivating Compound v2 D3M and Aave v2 D3M to prevent exposure to potential insolvencies. Lastly, Maker governance may want to make further parameter changes to account for rapidly changing market conditions over the coming days, and reducing the governance security module delay will allow for greater agility. A GSM delay of between 12 to 24 hours could be considered, at the discretion of the Protocol Engineering core unit.
In summary, the recent collapse of Silvergate and Silicon Valley Bank has highlighted the risks associated with centralized stablecoins, particularly their exposure to impacted banks and other at-risk institutions. Stablecoin issuers must take steps to limit their exposure to these risks while also maintaining enough liquidity to prevent their stablecoins from trading significantly above $1. MakerDAO’s proposed changes are a step in the right direction, but the situation is still evolving, and further parameter changes may be necessary in the coming days. As always, it’s important to do your research and make informed decisions when investing in digital assets.
