Stablecoin valuation

For those who are well acquainted with the world of cryptocurrencies, it will not be news that Tether (USDT) occupies a leading position in the current list of stablecoins.

The token was issued and belongs to the private company Tether Limited.

First introduced under the name Realcoin, the Tether stablecoin was launched in 2014, becoming one of the pioneers in this category. Tether was originally issued using the Omni Layer protocol. The Omni Layer Protocol is an open-source, decentralized platform built on top of the Bitcoin blockchain. In theory, each USDT token has a corresponding US dollar held as collateral in the reserves of the Tether company.

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Tether, which issues the USDT stablecoin, has updated its wallet blocking policy. Tether will now restrict access to USDT to those wallets that are on the US sanctions list known as SDN and managed by the Office of Foreign Assets Control (OFAC).

This means that owners of these wallets will no longer be able to use USDT for any transactions, including transfers, purchases or sales. According to Tether, such actions are necessary to comply with international anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations.

USDC is a digital stablecoin issued by Circle Internet Financial Limited in conjunction with cryptocurrency exchange Coinbase, pegged to the US dollar and backed by fiat. Launched in 2018, the USDC token is designed to maintain a 1-to-1 relationship with the US dollar.

According to Circle, USDC's reserves are audited annually and published to the U.S. Securities and Exchange Commission (SEC).

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USDC is a centralized and fiat-backed stablecoin that is entirely controlled by the issuer Circle. This problem will likely continue for the life of the USDC stablecoin.

Like any other, USDC tokens are managed through a smart contract, into which developers can implement any functions, such as freezing addresses and withdrawing assets from circulation.

DAI is an Ethereum-based stablecoin whose issuance and development is managed by the Maker Protocol and the decentralized autonomous organization MakerDAO.

Stablecoin DAI is a long-time player in the cryptocurrency market, its first version with single collateral SAI was launched back in 2017, an updated version with multicollateral was released later, in 2019.

The price of DAI is soft-pegged to fiat (US dollar) and backed by a mix of other cryptocurrencies that are deposited into smart contract vaults every time a new DAI is minted. Such support is called algorithmic.

Users generate DAI by depositing crypto assets into Maker vaults using the Maker protocol. Users can access the Maker Protocol through Oasis Borrow or other community-created interfaces. On Oasis Borrow, users can lock collateral such as ETH or WBTC. They can then borrow DAI against the collateral as long as it is within the collateral ratio, which ranges from 101% to 175%, depending on the risk level of the asset locked up.

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The main advantage of DAI is that it is not run by a traditional private company, but by a MakerDAO - a decentralized autonomous organization operating on a software protocol. In this regard, all operations for the issuance and destruction of tokens are controlled and publicly recorded through autonomous smart contracts on the Ethereum platform, thereby increasing the transparency of the system and reducing the risks of corruption.

The DAI token cannot be blocked in the same way as USDT and USDC. This token is controlled exclusively by smart contracts running on the blockchain. Since the token does not have centralized management, blocking the address that owns DAI tokens is impossible.

TUSD is a stablecoin that was created by TokenTrust and maintains parity with the US dollar by maintaining a 1 to 1 ratio. This is achieved by maintaining a reserve of US dollars corresponding to the number of TUSD tokens issued.

TUSD uses smart contracts on the blockchain that allow the issuance and redemption of tokenized versions of the US dollar. If users want to buy TUSD, they first transfer US dollars to the designated bank account. After receiving the transfer, the smart contract automatically generates and sends the corresponding number of TUSD tokens to the user’s wallet, thereby replenishing the number of tokens in circulation.

When a user sells their TUSD, the smart contract immediately burns the redeemed tokens, removing them from TUSD circulation forever. At the same moment, the platform credits the user with US dollars.

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In February 2023, TUSD became a pioneer among US dollar-pegged stablecoins by introducing an automated coin release control system based on Proof of Reserve from Chainlink. This PoR algorithm automatically checks whether there are sufficient USD reserves. The integration of PoR into TUSD aims to improve the issuance process of stablecoins, increasing their transparency, security and risk management.

The company behind TUSD has the ability to tamper with tokens for a variety of reasons such as compliance with regulatory requirements, responding to law enforcement requests, or actions related to the detection of fraudulent or illegal transactions. This includes the ability to freeze, block or seize TUSD tokens in accordance with their policies and regulatory requirements.

First Digital (FDUSD) is a stablecoin created by FD121 Limited, the financial arm of First Digital Limited based in Hong Kong. This stablecoin was launched in June 2023 and is planned to be backed by the US dollar or an asset of equal value held by a designated custodian, First Digital Trust Limited.

As a trust company operating under the laws of Hong Kong, First Digital Trust Limited ensures that all FDUSD reserves are held in separate accounts to avoid commingling with other company assets. The company also commits to holding reserves in cash or highly liquid assets, which they claim guarantees a 1 to 1 FDUSD collateral ratio.

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Users of FDUSD should be aware of the risks associated with this stablecoin:

1. Risk of Loss of Peg: If FDUSD reserves are unable to support exchange at par at all times, this could undermine the stability of the stablecoin's value.
2. Operational Risks: FDUSD is subject to risks associated with fraud and cyber attacks, especially given its dependence on third-party services.

The USDP token, also known as USD Digital, is a Paxos product created on the Ethereum blockchain using the ERC-20 standard in 2018. This Paxos standard token is guaranteed to be backed 1:1 by the US dollar issued by the Paxos Trust Company. USDP is also regulated and approved by the New York State Department of Financial Services.

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The concept and software implementation of PAX are not unique. Despite the creators’ claims about the novelty of their cryptocurrency, it does not bring innovative solutions to the market. The USDP stablecoin is based on a standard ERC-20 token.

Frax was launched in 2020, inspired by the DeFi protocol Aave, one of the pioneers in the decentralized lending space. Frax's main goal is to provide the DeFi community with a stablecoin that is resistant to large price fluctuations and is based on transparent and stable financial policies.

FRAX is a stablecoin that operates on a partially algorithmic principle. This means that its value is pegged to the dollar using collateral in other tokens (similar to DAI) and via its FXS token (similar to UST).

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FRAX works in such a way that the market itself decides how much it will be supported by other assets. As people become more interested and buy FRAX, those holding the special veFXS token make money. This happens because money from the FRAX cash register is invested in other reliable financial projects in the world of cryptocurrencies.

If suddenly FRAX becomes very popular and people start actively buying it, then FXS, another token associated with FRAX, will be destroyed. This will make FXS more rare and possibly valuable. Since many FXS are already locked for a long time in one project (Convex), their number in circulation will decrease over time.

FRAX has a special system that combines an algorithmic approach and support from other assets. This makes it quite resilient and strong among other stablecoins, and protects it from serious problems, as happened with Luna and UST, two other cryptocurrencies.

The Gemini Dollar (GUSD) stablecoin was released on September 10, 2018. It is an ERC-20 token that runs on the Ethereum blockchain. The rights belong to the exchange of the same name.

The official documentation for the token states that it is pegged 1:1 to the US dollar. The actual dollars that back the asset are held at State Street Bank, where the accounts are FDIC insured. Audits are regularly carried out by BPM Accounting and Consulting.

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This token has a developed system of three levels of smart contracts. The first level, "Proxy", is responsible for issuing coins, their transactions and can stop these processes if necessary.

The next layer, "Impl", contains all the data and mechanisms necessary for the operation of smart contracts. The processes for creating, deleting, and transferring tokens are implemented here, which is typical for most ERC-20 tokens. The main difference is that functions at this level are only activated with permission from the Proxy level.

The third level, “Store,” can be compared to a ledger: user balances and token ownership are recorded here. It also displays all transactions with public tokens on the blockchain.

This structure provides system flexibility, but at the same time allows centralized control of key processes when necessary.

As of December 2023, Tether, which owns the USDT token, is especially distinguished by blocking stablecoins. This does not mean that they are the only ones blocking addresses with tokens, but they are the leader in blocking:

In November 2023, Tether locked up $225 million worth of USDT tokens, which is a record, according to Tether. The blocking of addresses took place in cooperation with the OKX exchange:

As another example, we can cite the blocking that occurred right during the writing of this article.

Case: Tether blocked 17.4 million USDT on the Ethereum network (12/15/23)

The blocked address has been active since November 2023 and received 17,400,000 USDT from another address that was also blocked by Tether in December 2023. According to Etherscan, the blocked address has not made any transactions since receiving USDT.

Tether has not disclosed details about the reasons for blocking addresses, but says it is cooperating with law enforcement and following regulatory requirements. The company also states that blocking addresses does not affect the stability and liquidity of USDT.

The USDC token also has many examples of blocking.

Case: Blocking of $100,000 by Center consortium (06/16/20)
Circle also resorts to freezing addresses:

Thus, as of 12/15/23, Circle froze 211 addresses, which is not a very large figure compared to Tether.

According to transaction data provided by block explorer Etherscan, the function "blacklist (address investor)" was called on June 16, 2020. In this case, the address that called the function belongs to the Center consortium. Once blocked, this address will not be able to accept or send assets through the USD Coin smart contract. Additionally, all USDC stored in the wallet will become inaccessible. Interestingly, in the comments to the wallet associated with the blocked address, one of the Etherscan users also reported the theft of Loopring Coin (LRC) tokens worth about 750 euros.

You can view transaction blocking via explorer here.

Why blocking can be universal

Based on our practice, we can say with 100% confidence that almost no one is immune from blocking cases. For example, a user contacted us with the question: “why was my address blocked?”

Based on blockchain transactions, we noticed that the USDT tokens that the victim’s address received in two transactions from another user were blocked by Tether. In this case, the volume of dirty USDT tokens was about 10%, which originated 4 steps back.

In simple words, an unknown address holding a small amount of dirty tokens was transferred to the next one, this address to the next one, and so on. After 4 steps, these tokens fell into the hands of the victim of the blocking and, naturally, the victim did not commit any fraud. The remaining 90% of the tokens came from verified sources, but these 10 dirty% were enough to blacklist the entire address. Adding an address to a blacklist can be equated to losing tokens.

Fortunately, there are exceptions. If you have evidence, then there is a chance that the tokens can be unlocked. In our case, we were able to prove to Tether that the user was not involved in fraud and regain access to the funds.

If we talk about cryptocurrency in general, without being tied to stablecoins, then the situation could be much worse. For example, in our practice there was a case in which high-risk assets traveled from 7 to 14 mixing steps until they reached the centralized service. The situation developed in the same way that the user did not receive funds to the balance of his account on the exchange and all funds were blocked.

In such cases, the Btrace tool can protect you from blocking, since the calculations are based on an ML algorithm that calculates the volume of high-value assets at your address.

With the help of Btrace you can check your counterparty prematurely and draw conclusions about further interaction.

In cases where your address has been blocked or you have lost cryptocurrency as a result of fraud, we advise you to contact us. Our specialists are always ready to help you.