by Vincent Muthee
USDF, a stablecoin backed by DWF Labs, lost its peg to the U.S. dollar earlier today making the coin drop to as low as $0.943. This incident follows USDF’s market cap surge to more than $540 million in just four months. Following this loss of parity, investors beg critical questions regarding USDF’s reserves and transparency.
DWF Labs has worked its way into the the political-crypto sphere, especially as a liquidity provider to Donald Trump crypto projects. But the recent incident adds to its troubles. The firm has had a problematic history with the USDF depegging revealing more vulnerabilities in the projects it backs.
USDF’s Brief Depeg Pushes the Price Below $1
On July 8, the USDF stablecoin depegged dropping below $1 as shared on X by Protos. While Falcon Finance, the issuer of the USDF stablecoin, claims that the stablecoin is fully collateralized with 116% collateral (overcollateralized), the incident raised concerns across the crypto market.
https://twitter.com/Protos/status/1942593505114874019
Upon a closer examination of the project, the crypto community has identified discrepancies that have stirred suspicions across the market. Though Falcon Finance claims to have total reserves of $634 million, only circa $25 million can be proven to be on chain. Out of this, $609 million remains stagnant in undisclosed off-chain assets, and users or even independent researchers have little to no ability to determine the collateral nature or security.
Additionally, the firm Falcon has failed to disclose the assets that back the USDF stablecoin. The currently available audits do not identify particular tokens or types of assets. There is also no information regarding the liquidity, volatility, or liquidation risk. This secrecy is making investors uneasy. Especially, considering the previous failure of other stablecoins like Terra Luna.
“The “transparency” is laughable. $610M of the $635M backing is categorized as just “Stablecoins” (15%) and “Others” (85%). No mention of liquidity, volatility, or what happens if they need to liquidate,” Protos noted.
Although the company has promised a more accurate reserve report in the coming week, the investors confidence is already bruised. While the depeg was brief, it might have a long-term impact on the reputation of the stablecoin.
Criticism Mounts Around USDF Stablecoin and Falcon Finance
The USDF depeg incident only lasted less than an hour. However, the magnitude of the incident was fueled by the absence of instant communication and comprehensible data. Based on this, LlamaRisk, a decentralized financial (DeFi) risk platform, expressed their concern about Falcon Finance’s internal control over reserve management.
As specified in a recent post, the DeFi platform claims that Falcon is exclusively in control of USDF operational decisions. This includes the rebalancing of reserves and implementation of risk strategies. The report also cautioned against USDF’s backing claiming that it comprises assets at risk of centralized exchanges and high-risk DeFi strategies.
“Falcon team have unilateral authority over the operational management of the reserve assets. Insolvency may occur due to operational mismanagement or failure of underlying strategies which include exposure to CEX exchanges and DeFi strategies. As with analogous products, Falcon relies on off-exchange custodians to mitigate losses that may result from CEX insolvency,” LlamaRisk wrote.
Following the incident the community sentiment around USDF stablecoin has turned sharply negative. Critics point out that a supposedly over-collateralized stablecoin should not drop by over 5% under normal conditions. The event has led to demands for clear stablecoins regulation even as the U.S works to pass the GENIUS Act.
#blockchain #crypto, #decentralized, #distributed, #ledger
