Reflecting on the USDR de-anchoring event: What lessons can we learn?

Written by Samuel McCulloch

Compiled: DeepTide TechFlow

On October 12, 2023, a full 523 days have passed since the UST crash, and we still don't know anything about stablecoins.

! [Reflecting on the USDR de-anchoring event: What lessons can we learn?] ](https://img-cdn.gateio.im/webp-social/moments-69a80767fe-0ffccfe39e-dd1a6f-69ad2a.webp)

USDR, a "stablecoin" with $60 million in circulation, most of which was mortgaged by UK real estate, quickly fell from $1 to $0.5 in a matter of hours. This is a classic "run" event, with a maturity mismatch between the stablecoin's highly liquid debt and its illiquid collateral.

It was issued by Tangible, a marketplace for buying and selling mortgage-backed bonds (RWA). On the platform, tokenized real estate, watches, wine, and gold can be purchased with USDR.

Real USD... And not a better currency

According to the Tangible document, "Real USD (USDR) is a new type of rebased, interest-bearing, overcollateralized stablecoin pegged to the US dollar. USDR is mainly collateralized by interest-bearing, tokenized real estate."

All USDRs can be converted to DAI at any time at a 1:1 fee of 0.25%. The agreement retains several million dollars in cash to act as a capital buffer and facilitate redemption.

Deriveting occurs when the reserve runs out of $12 million worth of DAI, which can be used to redeem USDR, and holders start dumping the token through a decentralized exchange. Now, USDR holders must wait for the company's financial assets to be allocated or sold to cover the collateral gap.

The more interesting aspect of USDR is that it is an algorithmic stablecoin.

USDR can be minted in TNGBL or DAI at a 1:1 scale. The protocol imposes a maximum limit of 10% on the amount of USDR generated from TNGBL. The money collected from the swap is then used to buy a house in the UK. The Tangible team wrote in its documentation that overcollateral above gearing was used to buy more real estate collateral. However, the Tangible team told us that they never did this and that all overcollateralization was kept as a reserve.

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Real estate support

Tangible offers two reasons to use real estate to support USDR.

First, real estate can generate earnings. All of Tangible's properties are rental homes and can generate monthly rent, which will flow into USDR holders through buybacks.

Tangible only buys properties in the UK market with a yield of 6.39%. In comparison, the yield on the 1-month gilt is 5.31%.

Second, the team pointed to the long-term role of real estate "price appreciation". Real estate has a "predictable history of appreciation," they said, and that "the average selling price of a home in the United States rose from $27,000 in the first quarter of 1970 to $383,000 in the first quarter of 2020."

They then claim in the document that USDR is a "better currency" because it is a "true store of value" because house prices rise for a long time and protect holders from inflation.

It's like we didn't learn any lessons from the 2008 financial crisis.

On-demand parity

The biggest lie in cryptocurrencies is how to present the three characteristics of money. We've all heard countless times that money has three properties: medium of exchange, unit of value, and store of value. But these are only relevant to denominations.

Bitcoin can become a currency because it retains value and the platform integrates it as a payment option. This is true for any commodity. Bitcoin can fluctuate by 5%, 10%, 15% per day, which does not diminish its ability as a payment method because the price is relative to the US dollar. They say 1 BTC = 1 BTC.

Debts denominated in dollars are subject to higher standards. USD stablecoins should be redeemable for $1 or about $1 under any circumstances.

If not, it's not dollar currency.

I say about because if you accept that privately issued money deserves a place in our society, it will always have slight price sensitivity. Only a government-issued currency can be considered price-insensitive, as it enjoys full confidence in the money printing press.

Stablecoins are an imitation of the US dollar, and FRAX is now stepping into this category with the launch of v3. Our stablecoins can be sold for USDC for a value of about $1, but there is no guarantee. FraxDAO is tasked with maintaining a treasury of highly liquid assets to maintain the peg, but things always change and portfolios are prepared for the worst.

Notably, Tangible implemented its growth strategy on Curve in the first and second quarters of this year. The Llama risk team raised concerns about their collateral support. Meanwhile, the Frax DAO voted to increase the collateralization ratio to 100%.

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The perspective that must be adopted when looking at stablecoins is "If something happens, the entire treasury must be sold at a discount, how much can I get back?" If it is not "due on demand", then the reference denomination is wrong.

Given the assets on the Tangible balance sheet, we can make the following assumptions:

In the event of a protocol failure, TNGBL tokens are "stake-like" and will be worthless. It cannot add any value to the support of stablecoins.

Both the insurance fund and POL held by the team will be withdrawn to near zero or until redemption is cut off to retain the remaining collateral.

When Tangible sells properties in a trade-in sale to recoup their money, they may have to sell below market price due to uncertain future market conditions. In addition, properties are distributed across the globe, increasing the monetary risk of their sales.

The question that needs to be answered, then, is how much discount should be allocated to the value of the property. With interest rates at their 15-year highs, liquidity from these valuations has evaporated.

Tangible action plan

Given the decoupling of USDR tokens, the team has proposed the following steps:

1. Asset Liquidation: Considering real estate and liquid assets, USDR currently has a collateralization ratio of 84%.

2. Introduction of baskets: Tangible will offer tokenized real estate pools, i.e. real estate index funds, rather than stablecoins. These baskets, such as UK real estate, will be distributed proportionally to USDR holders. Users can hold index tokens, earn money from rent collection, mine on Pearls, or sell them. If there is no demand for the basket, Tangible will begin liquidating the property, but the process will most likely take several months to complete.

3. USDR Redemption: Once the basket assets are in place, Tangible will initiate the USDR redemption process. USDR will be redeemed in the form of a combination of stablecoins, basket tokens, and locked 3,3+ TNGBL NFTs. If there is a mortgage gap thereafter, it will be covered by TNGBL 3,3+, locked for one year.

Assuming the property can be sold without a significant discount, each USDR holder will receive:

0.052 USD Stablecoin (DAI);

$0.78 real estate in the form of a basket;

$0.168 locked TNGBL for a yield from rent.

Every stablecoin bill discussed or passed requires all issuers to hold only cash and short-term equivalents, and there's a reason for that. Market conditions have deteriorated and investors have panicked. If you don't have enough working capital redemptions, decoupling/runs are inevitable. Illiquid debt increases convexity exponentially. As soon as the market senses the slightest sign of illiquidity, asset prices are immediately discounted.

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At the time of writing, the price of USDR is $0.53. Even though the team claimed that the tokens had an 84% collateralization ratio, the market knew that liquidating the treasury portfolio could take several months, so it discounted accordingly.

After this process is over, USDR will no longer exist. Stablecoins are dead after the run.

Let's be clear... All stablecoins are a form of debt. An extremely liquid, fungible debt instrument in the form of tokens. Tangible thinks they can issue 78% of their multimillion-dollar debt backed by real estate with zero maturity risk. To some extent, the pre-crash 30% cash and POL buffer was sufficient to provide sufficient liquidity in the event of a run.

Today's incident is repeated countless times in traditional finance, when it is claimed that "measures set up to protect customers are too easy to manipulate to attack the protocol" shows the essence of the project. Nor does Tangible "try new things." The team consciously issues redeemable liquid debt tokens against illiquid assets. Tangible markets their jargon to non-institutional users who don't know anything else.

The reason why USDR's crash is frustrating is that the Llama risk team has documented the risks, writing:

In summary, Tangible has established several mechanisms to support USDR pegs. They conceived of a promising method (pDAI) to ensure that USDR holders can always redeem USDR with something of equal value. However, most measures are still new and untested, and some are fully centralized (e.g. real estate liquidation). Especially in the case of a run, it is questionable whether USDR can maintain the peg. In addition, the project adds multiple dimensions of complexity and potential weaknesses through its wUSDR token and cross-chain integration. These factors are not conducive to the stability of USDR.

However, today we are still discussing the failure of yet another "stablecoin". This is frustrating because these incidents are exactly what anti-crypto legislators cite when drafting draconian regulations and laws. The collapse of Tangible gives more reason to the anti-crypto lobby as to why our industry should be shut down.

It's time to dispel the idea that any stablecoin can be 100% backed by anything other than cash or short-term equivalents. Real estate is good collateral, but allowing a 100% loan to home equity in the form of stablecoins is obviously catastrophic.

At Frax, we are committed to building a robust stablecoin ecosystem with as little exposure as possible. In the latest v3 launch, Frax also uses RWA to provide income for DAOs, but only allows the most liquid assets with the shortest maturities: treasury bills, overnight repos, USD in the Fed's master account, and selected money market funds. There is no other.

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