Stablecoin Evaluation Framework

The contemporary landscape is marked by a proliferation of stablecoins within the market, each leveraging diverse protocols to peg their value and uphold stability against specific fiat currencies, such as the US Dollar (USD). In practice, the efficacy of a stablecoin transcends the mere formulation of its protocol and mechanics; it is contingent upon the meticulous execution and operationalization of the protocol to confer genuine value to the stablecoin.

In our observation, numerous projects exhibit theoretical frameworks and algorithmic sophistication in their protocols; however, the execution of these protocols often unveils uncontrollable risks, as exemplified by the case of UST. Consequently, we have instituted precise, lucid, and objective standards to comprehensively assess theoretical underpinnings and operational modalities before sanctioning stablecoins as collateral for VNST.

These standards encompass four distinct categories:

  1. Financial

  2. Management

  3. Security

  4. Legal

Financial

  1. Reserves

  • Collateral Assets: Scrutiny of both on-chain and off-chain collateral assets. On-chain assets conventionally comprise virtual currencies or other digital assets directly stored on the blockchain, whereas off-chain assets typically entail physical assets like legal tender, commodities, or bonds.

  • Collateral Ratio: Assessment of the ratio between collateral asset value and stablecoin value. A higher collateral ratio enhances reliability, signifying a surplus of assets to fortify value, with this ratio contingent on collateral asset volatility.

  • Quality of Collateral Assets: Evaluation of collateral asset quality based on volatility and liquidity.

  • Mint Mechanism: Examination of the process for issuing additional stablecoins to maintain value at the maximum stable level (typically 1 USD). Emphasis on Minting requirements, procedural nuances, and potential associated fees.

  • Redeem Mechanism: The process of converting stablecoins into underlying collateral to sustain value at the minimum stable level (typically 1 USD). The evaluation process mirrors that of the Minting mechanism.

  1. Liquidity:

  • Relative Liquidity: Quality assessment based on stablecoin liquidity during significant market fluctuations.

  • Sustainability: Evaluation of sustainable practices, considering reliance on fund injections and potential fund reduction during user withdrawals.

  1. Longevity & Market History:

  • Supply Source: Elevated market capitalization instills greater trust in terms of security. Furthermore, abundant market capitalization often incentivizes vulnerability discovery, enhancing stablecoin security.

  • Operating Time: The duration of a stablecoin's existence serves as a barometer of security and resilience. The "Cindy Effect" suggests that longer existence correlates with greater reliability and security, as projects must navigate market fluctuations, hacker attacks, and legal challenges.

Management

  1. Transparency:

    • Asset Management Process: Transparent delineation of asset management processes, facilitating a comprehensive understanding of how the stablecoin manages and allocates assets.

    • Ownership Wallets: Transparency regarding significant ownership addresses of stablecoins, specifying the owning organization or individual and the purpose thereof.

  2. Risk Management:

    • Identification: Transparent identification of individuals and organizations controlling the stablecoin.

    • Risk Management: Assessment of how the project manages potential risks, whether decentralized or centralized.

Security & Audit

  1. Audit:

    • Audit Companies: Identification of audit companies that have reviewed the source code and the timing thereof. Consideration of whether audits are continuous or conducted on a one-time basis.

  2. Smart Contracts:

    • Source Code: Determination of the source code in use and the percentage that can be reused from audited protocols.

    • Bug Bounties: Presence of bug bounty programs and associated rewards for vulnerability discoveries.

Legal Terms

  1. Decentralization:

    • Auditability: Determining whether the stablecoin is controlled by a centralized organization or operates autonomously based on its source code.

    • Audit Possibility: Examination of whether the stablecoin can be audited at will and whether assets can be frozen.

    • Privacy: Scrutiny of how the coin provides privacy and whether it can be employed for illicit activities such as money laundering.

    • History: Evaluation of whether the stablecoin has encountered legal pressures previously, to what extent (e.g., lawsuits and settlements).

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