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Stablecoin Savings Accounts: A Viable Alternative to Fiat Banks?

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March 30, 2023

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Recently the Silicon Valley Bank imploded and with it the price of USDC sank to $0.87. Thankfully, it’s bounced back closer to it’s $1 peg, but this teaches us the risks of fiat financial institutions.

Risk-Analysis of Crypto Stablecoins

All stablecoins come with risks. We’ve talked extensively on this Medium about how over-collateralized stablecoins are much less risky than algorithmic stablecoins. Now, double-clicking on over-collateralized stablecoins, we see that both crypto and fiat over-collateralized stablecoins have distinct risks of their own.

With crypto-collateralized stablecoins, the risks lie primarily in their smart contract code. Is it safe and protected against black swan events or is it hackable? The strength of the code is directly proportional to the security of the protocol. That being said, many deem over-collateralized stablecoins as more secure because of the fact that all of the collateral lies on chain.

On the other hand, fiat over-collateralized stablecoins have entirely separate risks — primarily counterparty risk. You’re trusting the organization (like Circle) to hold the collateralized funds safely in the bank. Furthermore, we’re learning from Silicon Valley Bank that insolvency is a risk of fiat-collateralized stablecoins. If the on-shore bank collapses, then the stablecoin collateral could be at risk as well.

Stablecoin Savings Accounts

Although crypto-collateralized stablecoins have their risk, they’re gaining traction as a viable alternative to fiat banks. Many people whom believe in the future of cryptocurrency (or distrust fiat financial institutions), are converting portions of their savings into crypto stablecoin savings accounts. This market trend is speeding up dueto the recent news of the Silicon Valley Bank collapse.

That being said, investors are called to diversify and do proper risk-management on where they’re holding their savings. Many DeFi investors are allocating their savings to a portion DAI, USDC, FRAX and other collateralized stablecoins. DUSD is another such MATIC backed crypto-collateralized stablecoin that is sustainable and has a competitive yield mechanism built into the protocol itself.

Weathering the Crypto Winter

Amidst the prolonged crypto winter, we are witnessing a process of natural selection in the industry that is separating the wheat from the chaff. The harsh conditions of the market are putting blockchain projects to the test, revealing which ones have what it takes to weather the storm and which ones crumble under the pressure. However, it is important to note that this downturn in the market is not a sign of the crypto industry's demise, but rather an opportunity to solidify the foundations of the sector and to weed out the scams and unstable tokenomic models that have plagued the market in the past. By doing so, we can lay the groundwork for a more sustainable and mature crypto ecosystem that can withstand the challenges that lie ahead.

Conclusion

The recent implosion of Silicon Valley Bank caused the price of USDC stablecoin to drop to $0.87, highlighting the risks of fiat-collateralized stablecoins. While over-collateralized stablecoins are generally less risky than algorithmic stablecoins, both crypto and fiat over-collateralized stablecoins have their own distinct risks. Crypto-collateralized stablecoins are primarily at risk from smart contract code, while fiat-collateralized stablecoins have counterparty risk and the risk of insolvency from the bank holding the collateralized funds. Despite these risks, crypto-collateralized stablecoins are gaining traction as an alternative to fiat banks, and investors are diversifying their savings by allocating them to various stablecoins. The sustained crypto winter is separating strong projects from weak ones and testing the resilience of the crypto industry.

Davos protocol is a crypto-overcollateralized stable asset with sustainable yield on the Polygon chain. Learn more at Davos.xyz