Reserves, redemption, and the run

Graduate · enrolled learners

This lesson opens with Real USD (USDR), October 2023.

What happened

USDR was a dollar stablecoin whose reserves were a mix: a tranche of liquid stablecoins like DAI, and a larger tranche of tokenized real estate. On paper it was over-backed, its total reserves exceeding the tokens outstanding. On 11 October 2023 a wave of redemptions drained the liquid tranche, on the order of a few tens of millions of dollars, and once the liquid dollars were gone the only thing left backing the token was real estate, which cannot be sold in an afternoon to pay a redeemer. With no liquid reserve left to honor redemptions, the price broke, falling from a dollar to roughly 0.53 within hours, and holders who needed out took the loss. The issuer said holders would be made whole over time as the property was liquidated, and much was later recovered, but the run had already repriced the token. The reserves were real and sufficient in total; they were not liquid enough to meet a run, and that distinction is the whole lesson.

The decision point

A stablecoin's peg is defended by redemption, and redemption in a run is paid out of the reserves that can actually be turned into dollars right now, not out of the total reserve figure on the attestation. USDR is the case that separates the two: it was over-backed in total and still broke, because its backing was mostly real estate that could not be sold fast enough, so when redemptions surged the small liquid tranche emptied and there was nothing left to pay the next redeemer at par. The size of run a stablecoin can survive is set by its liquid reserves, the cash and cash-equivalents redeemable on demand, not by the headline number that includes illiquid assets. So the decision when judging a stablecoin's reserves is to look past the total to the liquidity: what fraction can meet redemption immediately, how fast the rest can be converted, and therefore how large a redemption wave the coin can absorb before the liquid tranche is gone. A reserve that is sufficient but illiquid is a reserve that is there in an audit and absent in a run, which is exactly the position USDR holders found themselves in.

Recorded loss

$45,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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