Stablecoin Risks

The increasing adoption of stablecoins presents significant opportunities for enterprises. However, it is crucial to understand and evaluate the inherent risks associated with their use. While not all risks will apply to every situation, awareness is essential for informed decision-making.

While we maintain a positive outlook on the potential of stablecoins, it is essential to acknowledge and address their risks and limitations to facilitate broader adoption. For enterprises considering or currently using stablecoins, understanding these risks is vital for making well-informed decisions

Stables (Stablecoins) are simply tokens that represent USD on a blockchain. The idea is that one stablecoin will always equal one dollar.  They can be deployed on one or multiple blockchains. The biggest by issuance are USDT from Tether and USDC from Circle. Stables are not a native blockchain token, instead they are deployed on existing blockchains as a subtoken.

Today I will simply list and briefly describe the risks. I will do a longer writeup on each of them.

Let’s get into risks:

1. Finality risk: The time it takes for transactions to be irreversible. Finality can take somewhere from a few seconds to a few dozen minutes.

2. Token smart contract risks: What token is being used? Can it be frozen or clawed back?

3. Token Risk - what is the token backed by. Is it an IOU?

4. Counterparty risk: If you are holding a significant amount of stables and the issuer for whatever reason ceases to exist, are your funds safe?

5. Bridge Risks: is any bridge part of the transaction? Bridges can fail or be hacked.

6. Wallet hacking risk: if your enterprise is keeping stables are the private keys to the wallets secure?

7. Blockchain governance risks: can the blockchain be rewound? Remember the DAO Hack of almost a decade ago?

8. Redemption risks: is there a mechanism by which to redeem the tokens? Or do they need to be resold?

9. Swap risks: how costly is it to switch from fiat to stables and then back again.

10. Blockchain outage risks: while not common in mature blockchains, they can still exist.

11. Blockchain second layer risks: these have not been extensively tested for enterprise purposes.

12. Regulatory risks: if your enterprise or your clients are regulated entities, do regulators have a say on your usage of stables

13. Political risks, this is more of a global issue, but I can see how it could affect even most democratic countries.

By understanding and mitigating these risks, an enterprise can confidently leverage the benefits of stablecoins while ensuring the security and stability of its operations.