BitUSD Stablecoin Depegged

Notice: This page is a freshly imported case study from the original repository. The original content was in a different format, and may not have relevant information for all sections. Please help restructure the content by moving information from the 'About' section to other sections, and add any missing information or sources you can find. If you are new here, please read General Tutorial on Wikis or Anatomy of a Case Study for help getting started.

Notice: This page contains sources which are not attributed to any text. The unattributed sources follow the initial description. Please assist by visiting each source, reviewing the content, and placing that reference next to any text it can be used to support. Feel free to add any information that you come across which isn't present already. Sources which don't contain any relevant information can be removed. Broken links can be replaced with versions from the Internet Archive. See General Tutorial on Wikis, Anatomy of a Case Study, and/or Citing Your Sources Guide for additional information. Thanks for your help!

BitUSD

BitUSD was one of the first stablecoins to ever launch in July 21st, 2014. It was backed by collateral of BitShares tokens, which was a decentralized autonomous organization. The peg was lost on November 25th, 2018 and has never recovered since. There appear to be few active markets for the token. Stablecoins did not gain popularity until 2020, so BitUSD was not highly popularized, however it has a historic significance in the space.

This is a global/international case not involving a specific country.

About BitUSD

"Launched in 2014, BitUSD was the first stablecoin ever created. It is a crypto-backed stablecoin issued on the BitShares blockchain. BitUSD itself functions as collateral for a range of other stablecoins pegged to local currencies such as stable.PHP, the Philippine peso stablecoin." "CoolWallet, in their Complete Guide to Stablecoins, notes that the world’s first stablecoin was BitUSD, and it was released back on July 21, 2014. It was issued as a token on the BitShares blockchain."

"BitUSD, but also other ‘BitAssets’ such as BitEUR, BitCNY, BitJPY, or even BitGold, are set up differently as they are created on the BitShares blockchain."

"Bitshares is a decentralised financial platform providing a high-performance asset exchange for trading cryptocurrencies without the need for any intermediaries or central authority. Bitshares has a utility token called BTS, functioing as a native medium-of-exchange within the ecosystem and can also be used as collaterals for loans. Bitshares is founded by Dan Larimer, a prominent figure in the blockchain space who invented the Delegated Proof-of-Stake consensus algorithm that is used by Bitshares. Dan also co-founded Steemit and EOS."

"[T]here is no central issuer that you’ll need to trust with your cash. In fact, BitUSD is not backed up by cash reserves at all. Instead, it is backed up by BitShares’ core token BTS, and locked away in a smart contract on the blockchain."

"This means that behind every BitUSD, there is an X amount of BTS that cannot be touched, traded, moved or spent. This collateral is only released again when the BitUSD is paid back to the network."

"The BitShares platform allows users to convert various cryptocurrencies into stable assets by converting them into tokens that are backed by real assets, such as the US dollar-denominated bitUSD. In the Bitshare ecosystem, this token is called “Smartcoins”, where the value of the token is algorithmically adjusted to that of the real assets; that can include major fiat currencies, precious metals or stocks of a company."

"To ensure that 1 BitUSD always equals 1 USD, the amount of BTS used as collateral should be at least 2x the value of 1 USD."

"This makes it sound very complicated, but just think of it like this: for every BitUSD, there are more than 2 USD worth of BTS locked away. If the value of BTS goes down — unless there are extreme market conditions — the collateral will still be enough."

"Once you’ve obtained BitUSD you have effectively entered the crypto market with fiat. Now, you can trade against other BitAssets — for example, you could buy into BitGold if you’re worried about the economy and believe the price of gold will rise."

"There does not appear to be a specific price stability mechanism in the BitUSD system. One can redeem and create BitUSD, however the price this transfer occurs at is determined by the BitUSD vs BitShares price in distributed exchange, which is not linked to “real USD”. In a way the price references itself. There is therefore no direct mechanism keeping the price of BitUSD at $1, but the argument put forward is “why would it trade at any other price?” In our view this logic is weak."

"Should the value of the collateral currency (BitShares) fall, any BitUSD holder can redeem the BitUSD and obtain $1 worth of BitShares, assuming the market price of BitUSD is still worth $1 and there is sufficient BitShares held in collateral."

"This stability mechanism protects the integrity of the system only in the event that the value of BitShares falls and the BitUSD market price remains at $1. It does not directly stabilize the price of BitUSD around $1, in our view. If the price of BitUSD deviates from $1, this mechanism may not help correct the price."

"In [BitMex's] view, it is important to draw the distinction between a mechanism designed to protect the value of collateral and that of a mechanism which directly causes the price of the stablecoin to converge."

"The technical challenges involved in creating such systems are often underestimated. Indeed constructing a distributed stablecoin system, which is robust enough to withstand cycles or the turbulence and volatility linked to financial markets may be almost impossible. For instance perhaps most forms of fiat money, even the US Dollar itself, have not even achieved that, with credit cycles putting US Dollar bank deposits at risk. A stablecoin system which builds on top of the US Dollar is therefore never going to be more reliable than traditional banking, in our view."

"BitShares was a new, untested and low value asset, and therefore its value was volatile. If the value of the token falls by 50% sharply, in a period spanned by one of the loans used to create BitUSD, there may be insufficient collateral and the peg could fail."

"[T]hese synthetic dollars are far less reliable than those created by more traditional banks, and can be considered as a whole new layer of risk, as they are even further away from base money. In addition to this, when obtaining a bank loan, the bank typically has a legal obligation to provide the customer physical cash should they demand it. While such an outcome for BitUSD holder is possible, its not a legal obligation for the creators of BitUSD. Although obviously banks typically do not have the cash in reserve to pay back their deposits, we think the fact they have a legal obligation to do so is an important distinction to draw when comparing BitUSD to US Dollar banking deposits."

"The volume of BitUSD in existence was a lot lower than many had hoped, in some periods there was only around $40,000 in issuance. At the same time liquidity was very low and the price stability was weak, as the below chart illustrates. The main architect of BitUSD went on to propose a new stablecoin SteemUSD in 2017, this time including a price feed system. Therefore we consider BitUSD as an interesting early experiment, it did not achieve what was hoped nor did it build a robust stablecoin."

"“BitUSD, the earliest mainstream stablecoin launched in July 2014, lost its peg with the US dollar in November 2018 and hasn’t recovered since." "However, BitUSD lost its 1 to 1 parity with the US dollar in 2018 and has been unable to recover since. BitMEX’s research brilliantly highlighted the stablecoin’s weakness in their detailed analysis of BitUSD. BitUSD was collateralized with an obscure, volatile, itself-unbacked asset, BitShares."

"On Nov. 25 2018, BitUSD triggered an emergency procedure called 'global settlement' because bitUSD was too under-collateralized by BitShares. The event caused a disablement of BitUSD borrowing and the price of BitUSD subsequently collapsed. The circulating supply has also been nearly cut in half in the last four months."

"#BitUSD dipped to $0.70 recently - now it is $1.04 - "not so stable coins""

"In the event of a fall in the price of BitShares, a single BitUSD can be used to purchase more of Bitshares and thereby encourage mass arbitrage similar to traders of traditional asset classes. However, the opposite was not guaranteed. There was only an implied pile of reserves from BitShares alone. Therefore, BitUSD operated much more like a volatile security than a stablecoin." "Yet it did succeed in putting the concept of pegged stablecoins on the radar." "[S]tablecoins didn’t reach mass adoption until the summer of 2020."

"The live price of bitUSD is $ 0.823315 per (BITUSD / USD) today with a current market cap of $ 1.61M USD. 24-hour trading volume is $ 0 USD. BITUSD to USD price is updated in real-time. bitUSD is +0% in the last 24 hours. It has a circulating supply of 1.96M USD."

This is a global/international case not involving a specific country.

The background of the exchange platform, service, or individuals involved, as it would have been seen or understood at the time of the events.

Include:

• Known history of when and how the service was started.
• What problems does the company or service claim to solve?
• What marketing materials were used by the firm or business?
• Audits performed, and excerpts that may have been included.
• Business registration documents shown (fake or legitimate).
• How were people recruited to participate?
• Public warnings and announcements prior to the event.

Don't Include:

• Any wording which directly states or implies that the business is/was illegitimate, or that a vulnerability existed.
• Anything that wasn't reasonably knowable at the time of the event.

There could be more than one section here. If the same platform is involved with multiple incidents, then it can be linked to a main article page.

The Reality

This sections is included if a case involved deception or information that was unknown at the time. Examples include:

• When the service was actually started (if different than the "official story").
• Who actually ran a service and their own personal history.
• How the service was structured behind the scenes. (For example, there was no "trading bot".)
• Details of what audits reported and how vulnerabilities were missed during auditing.

What Happened

The specific events of the loss and how it came about. What actually happened to cause the loss and some of the events leading up to it.

Key Event Timeline - BitUSD Stablecoin Depegged

Date	Event	Description
November 6th, 2019 12:00:00 AM	Main Event	Expand this into a brief description of what happened and the impact. If multiple lines are necessary, add them here.

Total Amount Lost

The total amount at risk has been estimated at $1,962,000 USD. The total amount lost is unknown.

How much was lost and how was it calculated? If there are conflicting reports, which are accurate and where does the discrepancy lie?

Immediate Reactions

How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed?

Ultimate Outcome

What was the end result? Was any investigation done? Were any individuals prosecuted? Was there a lawsuit? Was any tracing done?

Total Amount Recovered

There do not appear to have been any funds recovered in this case.

What funds were recovered? What funds were reimbursed for those affected users?

Ongoing Developments

What parts of this case are still remaining to be concluded?

Prevention Policies

The issue was that the token which was used for collateral ran out of liquidity. It would be prevented by backing the token by collateral with much greater liquidity.