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puranjay

How to audit a USD stablecoin:

1. Calculate all current circulating supply of said stablecoin across all chains

2. Calculate value of deposits across issuer’s bank accounts in USD.

If both number are equal, congrats, your stablecoin passed the audit.

It really should be that simple.

I’m oversimplifying, of course. But a stablecoin should really not be an investment fund and shouldn’t have its deposits in illiquid assets at all, not even t bills.

The issuer should only charge a small fee when the stablecoin is created or redeemed. Given the sheer volume and scale of stablecoin trades, this fee can easily run into tens of millions of dollars in revenue.

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The issue is figuring out which assets they have and are they the true owner. If you have assets distributed across dozens of banks and other parties who are holding them for you, this becomes incredibly difficult and rife for abuse, especially when you have other non-professional/non-traditional intermediaries holding assets for you, or for whom you are exchanging favors with.

Basically compiling the list of the assets they hold and verifying it is the biggest issue here. It is definitely not at all simple -- in fact it may be deliberately obfuscated for "reasons."

I don't understand your point. If a stablecoin issuer has trouble compiling a list of their assets that's a red flag. If a competitor comes out with simpler accounting I'll switch to them.

> If a stablecoin issuer has trouble compiling a list of their assets that's a red flag.

I agree.

>in fact it may be deliberately obfuscated for "reasons."

In accounting/auditing, the words "it's complicated" is generally the first place you look for detailed documentation and process.

If it is not there... Red flag.

Assets don't have value, just because the are on the books.

If the assets are bonds of questionable value, the face value of the bonds may not be meaningful.

No, #2 should be: "Calculate the value of deposits across issuer's bank accounts in USD and subtract any debts that the issuer has."

Debts would be #1 in parent posts example.

Based on the independent audit from earlier this month, they have combined liabilities of ~$82 billion in issued tokens and $75 million in other. Total assets exceed total liabilities by $162 million.

Issued coins aren’t the only possible kind of debt. They might also have taken out loans that wouldn’t show up on the blockchain but enable them to inflate their bank account balances

That is the $75m in "other liabilities."

Step 0: it’s crypto so it’s a pyramid scheme, case closed

that very well might be

some aspects of crypto though are pretty interesting. NFTs do offer a ton of use cases for ownership, licensing, memberships, etc. - if you can look beyond the current dumb trend of monkey pictures.

> NFTs do offer a ton of use cases for ownership, licensing, memberships, etc.

NFTs are claimed to offer a ton of use cases. To date, I'm not aware of any that are both meaningful and actually require NFTs.

To be fair, its a very new tech - the ERC-721 NFT standard was introduced in 2018. Whatever could be built or not on it was lost in the madness of the bullrun.

I remain on the fence, but can't dismiss it entirely.

All these claims fundamentally require trust in some external party, at which point you no longer have trustless distributed consensus.

Also fair criticism. Further, even if they were to one day be widely adopted as membership tokens, coupons, or licenses, the underlying networks are still wildly overvalued.

I also don’t like the idea of living in a world the crypto enthusiasts imagine. The world already feels overly financialized. If everything is “investable” and “fractionalized” and “tradable”, the level of financialization in the world will be nauseatingly high.

Short-term T-bills are essentially risk-free and absolutely should be liquid. In the event of a catastrophic market crash the Federal Reserve has stepped in as the buyer of last resort in every case (2008, 2020 COVID, etc.). Also, generally during a crash Treasuries spike in price because people flock to them for safety. That means there should be a liquid market for stablecoin issuers to dump into.

I understand and would ideally treat them at par with cash.

But the crypto world is highly volatile. Its also pretty small and news spreads rapidly. There is an inherent lack of faith in underlying systems as well, which is why bank runs and catastrophic collapses are so common.

T-bills, as secure as they might be, can’t be immediately redeemed into cash. If you’re a stablecoin issuer and you stop redemption for a day or two until you can refill your coffers, it can easily start off rumors that you’re insolvent. Depending on prevailing market sentiment, it can set off a panic bank run. If the stablecoin is widely used, this can set off a collapse in other associated pairs

Until this space matures enough, T bills present an avoidable risk factor

#2 is really hard when you have 50 billion dollars.

Most Fortune 500 companies don't actually know how much money they have. When I worked for a big one they generally knew within a $100 million margin of error.

Stablecoins or other central banks running their currencies should know better than the average Fortune 500, given that it’s pretty much their only job…?

But if you're in the business of issuing stablecoins, that's precisely what your job is - to know where your (or rather, a client's) money is.

It's a core competency. Not a treasury management issue as with Fortune 500 cos.

What are the variables that contribute to a $100m margin of error?

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