Why Full Reserve Is a Dangerous Illusion for Stablecoins

Locking $1 in cash for every $1 of stablecoin is economically inefficient and creates a massive, unproductive liability. This capital cannot be lent or invested, forcing issuers to seek yield elsewhere, often in riskier off-balance-sheet activities.

• $160B+ in T-bills held by top issuers becomes a non-productive asset.
• Creates perverse incentives to engage in fractional reserve practices secretly.
• Offers zero protection against bank runs if underlying custodian fails.

Protocols like MakerDAO and Liquity prove stability doesn't require 1:1 fiat backing. They use crypto overcollateralization and algorithmic mechanisms to create robust, capital-efficient stablecoins.

• Maker's DAI: Backed by ~150%+ in volatile assets, generating yield for depositors.
• Liquity's LUSD: Non-custodial, immutable, and backed by 110% ETH collateral.
• Capital is productive, and stability is enforced by code, not a balance sheet.

Full-reserve is a marketing term for regulatory compliance, not technical security. The actual risk is concentrated at the custodian (e.g., Circle with BNY Mellon, Tether with various banks).

• Failure of a single custodian bank could freeze or seize the entire reserve.
• Regulators can blacklist addresses, censor transactions, and freeze funds.
• Creates a worse version of traditional finance: all the centralization, none of the yield.

The endgame is stable value that never leaves the chain. Systems like Ethena's USDe (delta-neutral synthetic) and intent-based settlement (e.g., UniswapX, CowSwap) abstract away the need for a centralized token.

• USDe: Creates a dollar derivative using stETH and short futures, offering native yield.
• Intent Architectures: Users express a desire for stable value output; protocols source liquidity dynamically without minting a permanent liability.
• Stability becomes a function of market structure, not a custodial promise.

The 'full reserve' is held by a bank or custodian, creating a single point of failure. This is a rehypothecation risk in a new wrapper.

• Tether's $4.2B settlement with NYAG over reserve misrepresentations.
• USDC's $3.3B SVB exposure demonstrated that segregated accounts aren't immune to bank runs.
• Legal seizure risk where assets can be frozen by regulators, breaking the 1:1 peg.

Reserves in slow-moving, low-yield assets (e.g., Treasury bills) cannot be liquidated instantly to meet mass redemptions during a crisis.

• A run triggers a fire sale, forcing losses and breaking the peg.
• Operational lag between redemption request and ACH/wire settlement creates arbitrage and panic.
• Contrast with MakerDAO's DAI, which uses on-chain, programmable collateral that can be liquidated in ~500ms.

Users must trust opaque, delayed attestations instead of real-time, on-chain verification. This is a data availability crisis.

• Monthly/quarterly reports provide a snapshot, not a live view.
• Off-chain reserves create a verification bottleneck, unlike AAVE's real-time loan-to-value checks.
• The solution is cryptographic proof, as pioneered by MakerDAO's Proof of Reserves module and Circle's CCTP, which use on-chain attestations.