A Closer Look at Stablecoins: USDR Depeg & Design Mechanics

The $USDR Stablecoin

Depegging Event

USDR, a real estate-backed stablecoin issued by the Tangible protocol, encountered a significant depegging event on October 11, 2023. During which, a sudden rush to redeem the liquid DAI from USDR’s treasury triggered a selling panic. The price of USDR plummeted to a low of $0.5040 per coin, down nearly 50% from the $1.00 peg it targets. Despite the team's commitment to resolving the situation, this incident highlighted a major vulnerability of their stablecoin’s design.

Why USDR's Design is Vulnerable to Price Swings

USDR's design relies on users being able to redeem liquid assets (like $DAI) which partially back its value. Real estate holdings make up the rest of the collateral. While this combination does offer a degree of stability, it remains susceptible to abrupt liquidity crises, as evidenced by the depegging. USDR's reliance on maintaining sufficient reserves to meet redemption demands becomes a weakness when these reserves are depleted, leading to major price fluctuations.

Other Stablecoins

$USDC

Even one of the most liquid and most trusted stablecoins across DeFi, $USDC, fell victim to a bank run in April of this year. The stablecoin depegged as far down as $0.87 (a new all-time-low) during the frenzy.

Many users simply had to hold their rapidly depreciating tokens due to network congestion or being away from their wallets. These vulnerabilities may be “a cost of doing business” to some, but DeFi needs a reliable option that doesn't require accepting the possibility of a bank run.

The $OD Stablecoin

A Superior Design

Open Dollar’s $OD takes advantage of a contrasting design. While always maintaining an over-collateralized ratio of at least 135%, the $OD stablecoin doesn’t rely on liquid reserve redemption to hold its peg. The Open Dollar protocol operates using a dynamic control system, similar to a PID controller. This system continuously adjusts the protocol’s redemption rate to maintain the peg at $1.00, enhancing its resilience to market volatility.

Continuous Stability

When the market price of $OD deviates from the reference set point of $1.00, the system reacts by modifying the redemption rate up or down depending on the market price. This incentivizes market participants to take actions that restore the peg, ensuring continuous stability.

Incentive Design

Open Dollar's mechanism generates arbitrage opportunities when the market price deviates from the redemption price. This incentivizes users to buy or sell $OD, capitalizing on these opportunities for individual profit while aligning the market price with the redemption price at the same time.

Decentralization

Open Dollar's design eliminates dependence on centralized custodians, reducing risks associated with centralized assets. The decentralized nature of the system empowers the community to actively contribute to $OD’s stability without having to worry about the safety of their assets.

Conclusion

Stablecoin depegging events across DeFi emphasize the vulnerability of designs that rely on asset backing & liquid collateral for redemption. Being susceptible to significant price swings when confronted with demand for liquidity is not ideal for long-term confidence. This is precisely why $OD exists: For seamless adjustment to ever-changing market conditions.

We're building the the next generation of DeFi, giving the world access to robust financial tools for lending, productive collateral, and resilient stablecoins.

Join our community as we build toward that goal: https://opendollar.com/discord