The US Department of Commerce’s National Institute of Standards and Technology (NIST) in its draft recommendations highlighted security considerations about the architecture and implementation of stablecoins. The non-regulatory agency based its study on the top 20 stablecoins over the past year.
It established that the top five coins – Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI), and Frax (FRAX) – that retained their peg represented 87% of the total top 20 market capitalization. These stablecoins are also pegged to the US dollar and sported a minimum value of $0.9934 (-0.66%), and a maximum value of $.9871 (-1.29%) over the duration of the study.
NIST showed the death spiral of TerraUSD (UST) which lost its peg in May 2022. The report raised concerns about unauthorized or arbitrary minting, collateral theft, smart contract vulnerabilities, data oracles, and exploiting the underlying blockchain. The NIST believes that creators, maintainers, and managers of stablecoin systems could use their privileged status to be deceptive or malicious towards investors and holders. It found that two stablecoins that function almost identically in third-party markets and enable the buying and selling of goods with coins at a pegged price can have vastly different risk profiles.
Centralized finance architectures, according to the agency, are more vulnerable to trust issues due to a greater reliance on human trustworthiness, while DeFi is typically more vulnerable to security issues because of increasing smart contract code complexity and critical functionality.