This is my personal view of the PSM situation and DC limits;
We wish to diversify USDC counterparty risk with other similar products. This risk can be divided between willingness to serve obligations and ability to serve obligations.
In terms of willingness to serve, I doubt CENTRE/Circle (USDC) would “attack” MakerDAO with restricting our use of USDC reserves freely; this would mean that USDC is not suited for any kind of permissionless protocol and would lose its current dominance of CEX stablecoin in DeFi. Other, smaller stablecoins we are considering here in my opinion increase our exposure towards this specific risk (willingness to serve), as there is a higher probability that a non dominant product tries to do something scathy, as they have less to lose in the first place.
Ability to serve obligations can be further divided to financial restrictions; insolvent or illiquid organisation - and legal restrictions; change in the legal system these companies operate in leads to inability to continue serving their obligations.
Comparison of companies involved with relevant stablecoins and regulatory status;
- USDC; Governed by CENTRE (Founded by Coinbase & Circle (Several different investors, from large crypto focused VCs, DCG to Goldman Sachs and Bitman)), incorporated in the US. Currently the only issuer of USDC is Circle, but they plan to have more potential issuers in the future. Circle is regulated by FinCEN as a Money Services Business in the US. Beyond the US, Circle is regulated as an Electronic Money Institute by the FCA (UK). Circle accounts are held with FDIC insured depository institutions.
- GUSD; Operated by Gemini Trust Company, LLC (Owned by Winklevoss twins via their holding), incorporated in the US. Gemini is regulated by New York Department of Financial Services (NYSDF) and their reserves are eligible for Federal Deposit Insurance Corporation (FDIC) insurance up to $250k per user.
- PAX & BUSD; Operated by Paxos Technology Solutions LLC, assets are custodied by Paxos Trust Company LLC (Several investors, including DCG and few individuals), incorporated in the US. Paxos is also regulated by NYDFS and customers are eligible for up to $250k FDIC insurance for funds held at Paxos Wallet account.
- PAX & BUSD are issued and custodied by Paxos, they are interchangeable between each other within Paxos platform and the US dollar (USD:BUSD:PAX).
All of these companies are incorporated in the US and are thus subject to the same risk of change in the legal system which could have a negative impact on their ability to serve obligations. In my opinion, if a situation arises where a regulator or some other authority decides to combat or restrict these products, it will be done in a systematic manner which means there is very little diversification benefit (legal reasons). Note that FDIC insurance probably does not help in our case, as the DAO is not a legal entity.
Comparison of reserves management and financial institutions involved;
- USDC; I couldn’t find information about which exact financial institutions they are using (reserves are in the form of US dollars), while their monthly reserves audits (April example) are published by an independent accounting firm Grant Thornton LLP.
- GUSD; Reserves are custodied by State Street Bank and Trust (reserves are in the form of US dollars), while their monthly reserves audits (April example) are published by an independent accounting firm BMP & CO. LLP.
- PAX & BUSD; I couldn’t find information about which exact financial institutions they are using (reserves are in the form of US dollars and US treasuries), while their monthly reserves audits (April example) are published by independent accounting firm WithumSmith+Brown, PC (“Withum”), which confirms that on the specific date and time, assets held in “Reserve Accounts” exceeded or were equal to amount of issued tokens.
It seems that issuers of relevant stablecoins use different financial institutions as counterparties which do offer some risk diversification benefits (financial reasons).
The analysis of counterparties here in regards to their legal structures, financial institutions they operate with and asset reserves is based on information on their websites and other public databases such as Crunchbase, etc. More in depth analysis would require much more time investment and is in my opinion out of the scope of current PSM reserve asset concerns.
In regards to the DC for relevant stablecoins;
We have to understand that all other USD nominated coins are in some relation to USDC and also USDT due to how these assets are paired across different AMM markets in regards to their prices. USDC is currently the largest CEX stablecoin paired with DAI and has much higher supply than other considered stablecoins and as supply of USDC increases in general, so does allocation of it across AMM markets which means we will be forced to further increase USDC PSM reserves DC inevitably of other stablecoin PSMs if we want to maintain the USD:DAI peg.
Current supply of USDC is 24.276b, GUSD - 203m, PAX - 789m, BUSD - 9.412b. Due to how unproportionally higher the supply of USDC is compared to other coins, the only considered stablecoin which can make a difference at current time is BUSD. Because PAX and BUSD are basically almost the same asset (managed by same entity and interchangeable between each other inside Paxos platform) and additionally the actual usage of PAX in DeFi is much smaller than BUSD, I think PAX PSM is not really needed or will be effective for arbitraging dai premium. Furthermore, GUSD is currently small, but based on some information, they are planning to significantly increase their effort to increase usage inside DeFi so it is worth adding.
We are currently exposed to more than 10.8% of total USDC supply across PSM-USDC and different vaults; hopefully with new PSMs we will be able to lower this exposure. In my opinion, there isn’t a perfect initial or final DC for each stablecoin we should aim for, there is the effectiveness factor for arbitraging and realistically we will need to increase these DCs as supply of foreign stablecoins (USDC, GUSD, BUSD, etc) increases on Ethereum.
Further on, we will increase the DC based on usage and effectiveness of these coins to arbitrage the dai peg.
Stablecoins which are directly paired with DAI in highly liquid markets are the most effective. This only leaves us with one serious additional option available other than USDC, which is the notorious USDT. This is not a recommendation to include USDT, but merely an explanation, that all other stablecoins are much less effective for arbitraging the dai premium.