Update (May 12th 2022): please refer to our terms to understand how stablecoin risks are exactly handled.
The digital protocols we offer customers to earn interest with all make use of stablecoins, which we deposit and withdraw funds in.
The main stablecoins we use are USDC (USD Coin) and UST (Terra USD).
While stablecoins generally are stable, in times of high market volatility (e.g. if a lot of one specific stablecoin is sold at the same time) there is a risk the stablecoin's peg deviates from the dollar. This means at a certain point the value of the stablecoin actually differs from $1.00 (e.g. it could be trading at $0.98).
Stablecoins have two types of mechanisms for restoring their peg back to $1.00 in such cases. One is full reserve backing, which is used by USDC. This means that for every 1 USDC in supply, $1.00 of real USD is kept in reserve. The other mechanism is algorithmic, used by UST. With this method, 1 UST can always be purchased and sold for $1.00 worth of another specific crypto asset.
Nonetheless, there could be times in which the value of a stablecoin we manage does not temporarily equal $1.00. We deal with this risk in two ways:
We only use the most trusted and tested stablecoins.
In extreme cases we might be forced to increase the withdrawal time to allow more time for the peg to stabilize.
There is a non-zero risk that the peg does not recover to 100%. Our terms further discuss this scenario.