Is the Market Success of Dominant Stablecoins Justified by Their Collateral and Concentration Risks?

This paper analyzes the mechanisms that govern the price stability of stablecoins and aims to assess their collateral risk. Additionally, the research investigates the concentration risk of stablecoins that stems from the distribution of their supply across holders. The study focuses on the five most dominant stablecoins in terms of market capitalization and trading volume: Tether, USD Coin, Binance USD, DAI, and True USD. Their risks are compared to those of TerraUSD, which collapsed in May 2022. The study aims to answer the question of whether the market success of the top stablecoins is justified by their collateral and concentration risks. The research reveals that collateral risk appears to be material albeit substantially differentiated across the most popular tokens. This risk is particularly high for crypto-backed DAI but lower for fiat-backed stablecoins. In addition, the concentration risk for the most dominant tokens is significant, with the top 100 entities holding nearly half the market supply. This is particularly evident for smaller stablecoins, such as True USD or Binance USD. In turn, the largest tokens—Tether and USD Coin—exhibit the least concentration, which potentially decreases the risk of market manipulation. Last but not least, the price stabilization mechanisms for the top stablecoins seem to be more secure than those for the algorithmic TerraUSD. This finding is reflected in negligible peg deviations. The study points to the need to standardize reserve reporting for asset-backed stablecoins, ensure periodic audit procedures by reliable entities, and address the high market concentration.