Chaos in Crypto: The USDR Stablecoin Collapse Explained

What Went Down with USDR?

On October 11, a real estate-backed stablecoin called Real USD (USDR) faced a staggering crisis. In a dramatic turn of events, a trader swapped a whopping 131,350 USDR for 0 USD Coin (USDC), marking a complete loss of investment. Talk about hitting rock bottom!

The Mechanics Behind the Collapse

As blockchain analytics firm Lookonchain reported on October 12, this swap took place on the BNB Chain via the decentralized exchange (DEX) OpenOcean. The timing was crucial, as USDR depegged from its par value by nearly 50% due to overwhelming demand for redemptions during a liquidity crunch.

Meet the MEV Bot

In the midst of this chaos, a maximal extractable value (MEV) bot swooped in to capitalize on the pricing discrepancy. This savvy bot managed to snag a total profit of $107,002 through an opportunistic arbitrage trade. Quite the windfall for a digital assistant!

Slippage Saga

When liquidity runs dry, decentralized exchanges can experience slippage rates as high as 100%. Similar disasters have unfolded in the past. Remember September 2022? A trader tried to sell $1.8 million in Compound USD (cUSDC) through Uniswap v2 and ended up with a measly $500.

Why Did USDR Collapse?

Despite being touted as 100% backed, USDR faced challenges rooted in its asset backing. A staggering 50% of its backing came from stablecoins, while the remainder was tied to illiquid tokenized real estate assets. This created a perfect storm for disaster. When redemptions spiked—over 10 million stablecoins were requested—the liquidity cushion simply wasn’t there.

Tokenized Real Estate Problems

Tom Wan, an esteemed analyst, pointed out that the tokenized assets were minted on the ERC-721 standard. This baffling choice meant they couldn’t be fractionalized to create quick liquidity for investors seeking redemptions. Unsurprisingly, the treasury couldn’t meet the surge in withdrawal requests, vaporizing investor confidence.

Building Trust in Stablecoins

How can these mishaps be avoided in the future? A critical analysis of liquidity sources and asset types used to back stablecoins can go a long way. Stablecoins must ensure they have ample liquid assets, especially during turbulent times.