A foundational overview of the key components and metrics used to assess the health and transparency of a stablecoin's backing assets.
LABS
A Beginner's Guide to Reading a Stablecoin Reserve Report
A technical guide to interpreting the composition, verification, and risk signals within stablecoin reserve disclosures.
Chainscore © 2025
Core Concepts in Reserve Reporting
Reserve Composition
Reserve Composition details the specific types of assets backing the stablecoin. It answers the critical question of 'what's in the vault.'
- Categories like cash, cash equivalents (e.g., Treasury bills), and corporate debt.
- Ratios showing the percentage held in each asset class, indicating liquidity and risk profile.
- For users, a high-quality composition with predominantly liquid, low-risk assets (like US Treasuries) provides greater confidence in the peg's stability and redemption ability.
Collateralization Ratio
The Collateralization Ratio is a core solvency metric, comparing the total value of reserve assets to the total stablecoins in circulation.
- Expressed as a percentage (e.g., 102%).
- A ratio above 100% indicates the stablecoin is over-collateralized, providing a safety buffer.
- This directly impacts user trust; a consistently high ratio assures holders that their tokens can be redeemed at full value, even if some assets lose value.
Attestation vs. Audit
Understanding the difference between an Attestation and a full Audit is crucial for evaluating verification rigor. An attestation is a review of management's assertions, while an audit provides independent verification of the assets themselves.
- Attestations are more common and frequent (monthly/quarterly) but offer limited assurance.
- Audits are comprehensive, annual examinations providing the highest level of assurance but are rarer.
- Users should prioritize projects with regular, transparent attestations from reputable firms as a minimum standard for trust.
Custody & Counterparty Risk
Custody refers to who holds the reserve assets, while Counterparty Risk is the risk that a holder or issuer fails to fulfill its obligations.
- Assets held with third-party custodians (e.g., banks) versus held on the issuer's own balance sheet.
- Risk examples include bank failure or a custodian's mismanagement of assets.
- For users, segregated accounts with reputable, regulated custodians significantly reduce the risk of loss and are a hallmark of a well-structured reserve.
Liquidity & Maturity
Liquidity measures how quickly assets can be converted to cash without significant loss, while Maturity refers to when debt instruments expire.
- High Liquidity: Assets like cash or short-term Treasuries can be sold instantly to meet redemption demands.
- Maturity Mismatch: Risk arises if liabilities (user redemptions) are due before assets mature.
- A reserve heavy in short-duration, liquid assets ensures the issuer can always meet withdrawal requests, maintaining the stablecoin's peg.
Anatomy of a Reserve Report
A step-by-step guide to understanding the composition, verification, and risks of a stablecoin's backing assets.
1
Locate and Identify the Core Reserve Composition
Find the summary section detailing the total assets and their breakdown.
Detailed Instructions
Begin by finding the Reserve Summary or Asset Composition section, typically at the report's start. Your primary goal is to identify the Total Reserve Value and the percentage breakdown by asset type. For a stablecoin like USDC, you should expect to see a high concentration in short-term U.S. Treasuries and cash deposits. For example, a report might state: "Total Assets: $32,541,870,432" with a pie chart showing 80% in Treasury Bills and 20% in cash at regulated banks.
- Sub-step 1: Verify the Report Date: Ensure the report is recent (e.g., monthly) and matches the stablecoin's publishing schedule.
- Sub-step 2: Check Asset Categories: Look for classifications like Cash & Cash Equivalents, Commercial Paper, Corporate Bonds, and others.
- Sub-step 3: Note the Custodians: Identify where the assets are held, such as "Bank of New York Mellon" or "BlackRock."
Tip: A high-quality report will have the total value closely matching or exceeding the stablecoin's circulating supply (e.g., 32.54B in reserves for 32.50B USDC in circulation).
2
Analyze the Quality and Liquidity of Assets
Assess the risk profile by examining the credit ratings and maturity dates of reserve holdings.
Detailed Instructions
Not all assets are equal. Credit Quality and Liquidity are critical for a stablecoin's ability to maintain its peg during market stress. Dive into the detailed asset listings. For Treasury holdings, check the weighted average maturity (WAM); a shorter WAM (e.g., under 30 days) indicates higher liquidity. For any commercial paper or corporate bonds, the report should list their credit ratings from agencies like Moody's (e.g., A1/P1) or S&P (e.g., A-1+).
- Sub-step 1: Examine Maturity Schedules: Look for a table showing the distribution of assets maturing in 0-30 days, 31-90 days, etc. A healthy reserve is heavily weighted towards the shortest durations.
- Sub-step 2: Scrutinize Credit Ratings: Ensure all non-cash assets are rated in the highest short-term categories. The absence of ratings is a major red flag.
- Sub-step 3: Calculate the Cash & Treasury Percentage: A strong reserve (like USDC's) often holds over 95% in these safest assets.
Tip: Use the provided data to calculate the percentage of assets that could be converted to cash within 24 hours. This is the true test of liquidity.
3
Verify Attestation and Third-Party Confirmation
Confirm the report is signed by a reputable auditing firm and understand the level of assurance provided.
Detailed Instructions
An unaudited report is just a claim. Look for the Attestation Letter from a major accounting firm like Grant Thornton or Deloitte. Crucially, understand the level of assurance. An Agreed-Upon Procedures (AUP) report is common but provides limited assurance—the auditor simply confirms the data provided by the issuer. A full Audit Opinion is stronger but rarer. Check the letter's scope: does it cover the entire reserve, and did the auditor physically verify custodial balances?
- Sub-step 1: Find the Auditor's Signature: The letter should be on the accounting firm's letterhead, dated, and signed.
- Sub-step 2: Read the Opinion Paragraph: Look for phrases like "...in all material respects..." for an audit, or "...we performed the following procedures..." for an AUP.
- Sub-step 3: Cross-Check Custodian Names and Balances: The auditor should list the specific bank accounts (e.g., Account #XXXX at Goldman Sachs) and the confirmed balance as of the report date.
Tip: Search for the auditor's name and the stablecoin issuer in news databases to see if there have been any controversies or changes in auditors, which can signal issues.
4
Cross-Reference On-Chain Proof and Liability Matching
Use blockchain explorers to verify circulating supply and check if reserves fully cover liabilities.
Detailed Instructions
The report exists off-chain; you must verify it against on-chain reality. First, find the stablecoin's total circulating supply from a trusted blockchain explorer. For Ethereum-based stablecoins like USDC or DAI, you can query this directly. Then, ensure the Total Reserve Value from Step 1 is equal to or greater than this liability.
code// Example: Check USDC total supply via Etherscan API // Contract Address: 0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48 // Use the `totalSupply()` function call.
- Sub-step 1: Query the Blockchain: Use Etherscan, Arbiscan, etc., for the stablecoin contract's
totalSupply()function. Convert the returned value (in wei/minor units) to standard units. - Sub-step 2: Perform the Coverage Check: Calculate (Total Reserve Value / Circulating Supply). A ratio below 1.0 indicates under-collateralization.
- Sub-step 3: Look for Mint/Burn Proofs: Some reports include cryptographic proofs (like Merkle roots) linking reserve holdings to on-chain tokens. Verify these if provided.
Tip: For algorithmic or crypto-collateralized stablecoins (e.g., DAI), this step involves checking the health of the collateral vaults and the stability fee, not just a simple 1:1 match.
Comparing Major Stablecoin Reserve Models
A comparison of key features from reserve reports of major USD-pegged stablecoins.
| Feature | USDC (Circle) | USDT (Tether) | DAI (MakerDAO) |
|---|---|---|---|
Primary Reserve Asset | Cash & Short-term U.S. Treasuries | Cash & Cash Equivalents | Other Crypto Assets & Real-World Assets |
Monthly Attestation Provider | Grant Thornton LLP | BDO Italia | MakerDAO Community (via Governance) |
Reserve Composition (Example) | ~80% Short-term Treasuries, ~20% Cash | U.S. Treasury Bills | USDC, Ethereum, RWA Vaults |
Regulatory Oversight | Regulated as a money transmitter in the U.S. | No direct federal U.S. banking regulator | Decentralized Autonomous Organization (DAO) |
Proof of Reserves Published | Monthly detailed attestation report | Monthly assurance opinion | Real-time Public Dashboard |
Direct Redemption for USD | Yes, for eligible institutions | Yes, for verified users | No, via secondary market or mint/burn |
Primary Risk Focus | Counterparty (bank/custodian) risk | Commercial paper portfolio quality (historically) | Collateral volatility & smart contract risk |
Analytical Frameworks
Understanding the Basics
A stablecoin reserve report is a financial statement that shows what assets back a stablecoin's value. Think of it as a public promise that for every 1 USDC you own, there is at least 1 US dollar or equivalent asset held securely. The primary goal is to verify collateralization—ensuring the stablecoin is fully backed and redeemable.
Key Analytical Questions
- What is the reserve composition? Are the assets cash, treasury bonds, or commercial paper? For example, USDC primarily holds cash and short-term U.S. Treasuries.
- Who is the custodian? Are assets held with a regulated bank like Bank of New York Mellon or a crypto-native custodian? This impacts security.
- Is there regular auditing? Look for attestations from firms like Grant Thornton to confirm the report's accuracy.
Practical First Step
Start by reading the monthly attestation report for Paxos Standard (PAX). Look for the total value of assets and compare it to the total stablecoins in circulation—they should match.
Key Risk Indicators to Monitor
Understanding a stablecoin's reserve report is crucial for assessing its safety. These key indicators help you evaluate the quality, liquidity, and transparency of the assets backing the stablecoin's value.
Reserve Composition
Asset Breakdown is the detailed list of what actually backs the stablecoin. It moves beyond the headline collateral ratio to show the specific types of assets held.
- Cash & Cash Equivalents: Highly liquid assets like Treasury bills and bank deposits. Example: USDC's holdings in U.S. Treasuries.
- Commercial Paper & Corporate Bonds: These carry higher credit and liquidity risk than government debt.
- Why this matters: A high concentration in riskier assets can threaten the peg during market stress, making this the first thing to check.
Collateralization Ratio
The Reserve-to-Token Ratio measures if the value of the held assets meets or exceeds the value of stablecoins in circulation. It's the primary gauge of solvency.
- Over-Collateralization: Assets worth more than the tokens issued, providing a safety buffer. Used by DAI.
- Under-Collateralization: A red flag indicating potential insolvency if assets cannot cover redemptions.
- Why this matters: A ratio consistently above 100% is essential for maintaining user confidence and the 1:1 peg.
Counterparty Risk
This assesses the risk that entities holding the reserves (e.g., banks, custodians) might fail. Custodial Concentration is a major factor.
- Single Point of Failure: If most assets are held at one bank, its failure could freeze reserves.
- Example: Monitoring the credit ratings and stability of banks like Silvergate or Signature, which have historically held crypto deposits.
- Why this matters: Diversification across reputable, regulated custodians mitigates the risk of losing access to the backing assets.
Liquidity & Maturity
Liquidity Profile examines how quickly reserves can be sold to meet redemption demands without significant loss. It's not just about asset value, but accessible value.
- Asset Maturity: Short-duration Treasuries (e.g., < 90 days) can be sold faster than long-term bonds.
- Market Depth: Even high-quality assets can be hard to sell in a crisis if the market is illiquid.
- Why this matters: A lack of immediate liquidity can cause a stablecoin to 'break the peg' during a bank run scenario.
Attestation vs. Audit
Understanding the Verification Method for the report is key. An Attestation verifies data at a point in time, while a full Audit provides a deeper, opinion-based examination.
- Attestation Frequency: Monthly is standard, but real-time on-chain proofs (like USDC's) are superior.
- Auditor Reputation: Reports from a 'Big Four' firm carry more weight than a lesser-known auditor.
- Why this matters: Regular, rigorous verification by a credible third party is the bedrock of transparency and trust.
Redemption Process
The Mint/Redeem Mechanism defines how users can exchange the stablecoin for its underlying assets. Its clarity and functionality are critical risk indicators.
- Direct Redemption: Ability to redeem 1:1 with the issuer, like with USDC through Circle.
- Fees & Minimums: High fees or large minimums can act as a barrier, reducing the stabilizing arbitrage mechanism.
- Why this matters: A smooth, accessible redemption process acts as the ultimate backstop, ensuring the peg is enforceable in practice.
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