Stablecoins play a vital role in transactions, payments, and savings in the crypto industry. As of now, the market value of stablecoins is about 200 billion US dollars, accounting for the entire stablecoin market. The leading stablecoin Tether (USDT) currently has a market value of 138 billion US dollars. In the past year, the market has seen a number of highly-watched stablecoin protocols that provide returns to stablecoin holders through real-world U.S. Treasury bonds or hedging strategies.
Previously, Beosin has analyzed mainstream centralized stablecoins and launched Stablecoin Monitoring in August this year to help stablecoin issuers and regulators monitor the stablecoin ecosystem. This article will help users understand their operating mechanisms, audit points, and compliance challenges through case studies of relevant stablecoin protocols.
Ethena - USDe
Ethena is currently the fastest growing stablecoin protocol, with a market value of USDe of 5.5 billion, surpassing DAI to become the third largest stablecoin. Currently, users holding sUSDe (pledged USDe) can obtain an annualized return of about 30%, which has attracted much attention from the market.
Protocol Principle
Ethena tokenizes arbitrage transactions of mainstream assets such as ETH on centralized exchanges by issuing stablecoins representing the value of Delta neutral positions.
Take ETH as an example. If Ethena holds 1 ETH spot, it will hedge by "shorting" a perpetual contract with a position of 1 ETH, and obtain funding rate income through spot-futures arbitrage. In addition, Ethena actually uses stETH as margin for ETHUSD and ETHUSDT perpetual positions on centralized exchanges.
Therefore, the income of USDe comes from two parts: the staking income of mainstream assets (such as ETH) and the funding rate income of futures-spot arbitrage. Every week, Ethena sends revenue to the StakingRewardsDistributor contract (0xf2fa332bD83149c66b09B45670bCe64746C6b439) through sUSDe Yield Distributions (0x71E4f98e8f20C88112489de3DDEd4489802a3A87): https://etherscan.io/address/0x71e4f98e8f20c88112489de3DDEd4489802a3A87 StakingRewardsDistributor is the core contract of the Ethena protocol. There are two roles in the contract: Owner and Operator. The Owner has the authority to update the contract configuration and modify the Operator. The Operator is a role authorized by the Owner to mint USDe and send USDe earnings to the staking contract. The Operator transfers USDe to the staking contract. Currently, the Owner address of the contract is 0x3B0AAf6e6fCd4a7cEEf8c92C32DFeA9E64dC1862, which is controlled by a 4/8 multi-signature wallet.
Security Risks
1. Centralization Risk
The main security issues of Ethena stem from the custody method of centralized exchanges for spot arbitrage and over-the-counter settlement. Currently, Ethena uses companies such as Cobo, Ceffu and Fireblocks as custody and over-the-counter service providers, and about 98% of the collateral is concentrated in three major exchanges: Binance, OKX and Bybit. Once the custodian or exchange fails to operate normally (due to operational or technical problems), it may endanger the stability of USDe.
Although Ethena has implemented a fund verification service (similar to Proof of Reserve), which can verify all collateral in the protocol, the service is not currently open to ordinary users.
2. Market Risk
USDe's revenue mechanism may encounter a continuously negative funding rate, which may cause the return of the futures-to-spot arbitrage in Ethena's revenue design to become negative. Although historical data shows that such negative return periods are relatively short (less than two weeks), it is necessary to consider the long-term adverse conditions that may arise in the future. Therefore, Ethena should prepare sufficient reserve funds to cope with this difficult period.
In addition, since Ethena uses stETH as collateral, although stETH has sufficient liquidity and the price difference between stETH and ETH does not exceed 0.3% since the Ethereum Shanghai upgrade stETH can be queued for withdrawal as ETH, in extreme cases, the possible negative premium of stETH will cause the value of Ethena's collateral on the exchange to decline, which may cause its futures hedging positions to be liquidated.
In addition to Ethena, there are many similar stablecoin protocols in the market, such as BNB Chain's USDX Money and Avalanche's Avant Protocol. Their operating mechanisms and security risks are very similar to Ethena, so I will not go into details.
Usual Money - USD0
The USD0 launched by Usual Money is a stablecoin backed 1:1 by real-world assets (U.S. Treasury bonds). Its innovation lies in the combination of RWA and token economy.
Protocol Principle
Before Usual Money, there have been several stablecoin protocols with U.S. Treasury bonds as collateral, the largest of which is Ondo Finance and its stablecoin USDY. USDY's underlying assets are short-term U.S. Treasury bonds and bank deposits, which are managed by Ankura Trust Company and provide USDY holders with a yield of about 5%.
Unlike protocols such as Ondo, Usual Money has three tokens: USD0, a stablecoin issued 1:1 with RWA assets as reserves; USD0++, a liquid bond certificate designed by the protocol; and $USUAL, its governance token. Holding USD0 does not generate any income. Users can only capture income after converting USD0 to USD0++. Income can be selected from one of the following two methods:
1. $USUAL income per block: Holders of USD0++ receive their income per block in the form of $USUAL tokens. 2. Locking up 6 months of income: USD0++ holders are guaranteed to receive at least the same income as USD0 collateral, i.e., government bonds (risk-free income). Users must lock up their USD0++ for a specified period of time (currently designed to be 6 months). After 6 months, users can choose to receive income in the form of $USUAL tokens or USD0. All the income earned by USD0++ from government bonds will go into the protocol treasury, making the token value of $USUAL linked to the protocol income. From the above two ways of receiving income, we can also see that the income obtained by USD0++ holders is actually related to $USUAL tokens. In addition, the governance of the protocol needs to be decided by voting on $USUAL tokens, and proposals related to income will attract more token holders, which provides room for game play for the price of $USUAL tokens.
Usual Money has the following key contracts:
1. SwapperEngine
Used to convert USDC to USD0. Users deposit USDC to create orders, and USD0 providers match these orders and convert users' USDC to USD0.
https://etherscan.io/address/0x9a46646c3974aa0004f4844b5fcd9c41b2337a7f#code
2. Classical Oracle
Aggregate existing oracle quotes, the core function is _latestRoundData(), responsible for obtaining the latest token price and verifying price data:
https://etherscan.io/address/0xdec568b8b19ba18af4f48863ef096a383c0ed8fd#code
3. DaoCollateral
This contract is mainly responsible for the exchange of USD0 and RWA Token (currently USYC, a US compliant interest-bearing stablecoin with Treasury bonds as collateral), and sets up a Counter Bank Run (CBR) mechanism to deal with liquidity risks. The CBR mechanism is currently closed.
Convert RWA Token to USD0
Convert USD0 to RWA Token
Security Risk
In the bond market, longer duration is usually compensated by higher yields, but the potential yield of USD0++ is only at the level of short-term US Treasury bonds, and the risk and return levels are not equal. At present, the United States has entered a cycle of interest rate cuts, and the yield of USD0++ will only get lower and lower, and the capital efficiency of its holders is not high.
There are more than $700 million USD0++ in the market, but the USD0-USD0++ liquidity on Curve is only $140 million, and the USD0++ available for withdrawal accounts for about 20%, which may lead to the depegging of USD0++ in the event of a run.
Compliance and Supervision
The rapid expansion of the stablecoin market is accompanied by increasingly severe regulatory pressure around the world, especially in anti-money laundering (AML) and counter-terrorism financing (CFT). The challenges faced by stablecoin issuers are becoming increasingly complex. How to ensure the security of stablecoin liquidity and meet compliance requirements around the world has become a key problem in the industry.
Take Hong Kong as an example. On December 6, the Hong Kong government announced the highly anticipated "Stablecoin Bill". The legislation provides a detailed regulatory framework for issuers of Fiat-Referenced Stablecoins (FRS). The following are some of the key requirements for stablecoin issuers:
Reserve Assets
a. A separate reserve asset portfolio must be established for each stablecoin to ensure that its market value is equal to or exceeds the face value of the unredeemed stablecoin.
b. Reserve assets must be managed independently of other institutional assets.
c. Investments should give priority to high-quality, highly liquid, and low-risk projects.
d. A sound risk management and audit procedure must be established.
e. Public disclosure of reserve asset management, risk control, and audit results is required.
Stablecoin Redemption Mechanism
a. Licensees must ensure the unconditional redemption of stablecoins and shall not impose unreasonable restrictions.
b. Redemption requests must be processed promptly and paid in the form of agreed assets after deducting reasonable expenses.
c. In the event of bankruptcy, stablecoin holders should have the right to redeem on a pro rata basis.
Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)
a. Licensees must implement money laundering and terrorist financing prevention measures involving stablecoins.
b. Compliance with the Anti-Money Laundering and Terrorist Financing Regulations and related measures is mandatory.
Interest-free policy
a. Licensed institutions are prohibited from paying interest on stablecoins or assisting in any form of interest payments.
There are currently no clear and specific regulatory provisions for interest-bearing stablecoin protocols pegged to fiat currencies in Hong Kong.
The current regulatory framework in Hong Kong aims to ensure the stability, security and transparency of the fiat-pegged stablecoin ecosystem while protecting the rights and interests of relevant stakeholders. The Bill is scheduled to be reviewed for the first time in the Legislative Council on December 18.
In the United States, the stablecoins USDY and USYC, which are backed by the U.S. Treasury, are interest-bearing stablecoins that provide returns directly to holders through tokenized U.S. Treasury bonds. USYC is regulated by the Commodity Futures Trading Commission of the United States, and the collateral of the Usual Money Agreement in this article is USYC.
However, due to the more complex market risks faced by interest-bearing stablecoins based on DeFi or centralized exchange trading strategies, how to protect the rights and interests of corresponding stablecoin holders is still a difficult problem faced by regulators in various regions.
Beosin has previously completed the security audit of multiple stablecoin protocols, such as the leading stablecoin project Aqua Protocol in the TON ecosystem, Hope Money in the Ethereum ecosystem, and BitSmiley, a star stablecoin project in the BTC ecosystem. The audit content covers the security of smart contract code, the correctness of business implementation logic, gas optimization of contract code, discovery of potential vulnerabilities and vulnerability repair, etc., to help the safe development of the protocol.
Summary
In this article, we analyzed the principles, core contract codes and risk points of the interest-bearing stablecoin protocol. Project parties still need to pay attention to the security of project operations and contract business logic, especially in terms of permission management. At the same time, stablecoin protocols need to respond to extreme market conditions through good risk management and sufficient capital reserves to ensure that the value of their stablecoins is not affected.
Miyuki
