Detailed Instructions

Begin by identifying the official sources of truth for the stablecoin's collateral attestations and reserve reports. For centralized stablecoins like USDC, this is typically a monthly attestation from a registered accounting firm. For decentralized or algorithmic variants, you must locate the smart contracts holding the assets.

• Sub-step 1: Visit the project's official transparency page. For example, Circle's USDC page provides direct links to attestation reports.
• Sub-step 2: For on-chain reserves, find the canonical custody or vault addresses. For DAI, you would examine the MakerDAO Vat core contract to see locked collateral types and amounts.
• Sub-step 3: Use a blockchain explorer like Etherscan to verify the holdings of the identified addresses. Check for recent, large inflows or outflows that may indicate minting/burning activity or potential issues.

Tip: Bookmark the relevant Etherscan addresses and attestation URLs for regular monitoring. Be wary of projects that do not provide easily accessible, frequent, and detailed reserve reports.

Detailed Instructions

Scrutinize the asset breakdown within the reserves. High-quality reserves are predominantly composed of cash and cash equivalents (e.g., U.S. Treasury bills) held in regulated institutions. Assess the percentage of riskier assets like commercial paper, corporate bonds, or other cryptocurrencies.

• Sub-step 1: From the attestation report, extract the exact percentages for each asset class. For instance, a report might show "U.S. Treasury Bills: 80%," "Commercial Paper: 15%," "Cash in FDIC-insured banks: 5%."
• Sub-step 2: Evaluate the credit ratings of any debt instruments. Commercial paper should be A-1/P-1 rated. Use resources from Moody's or S&P.
• Sub-step 3: For crypto-backed stablecoins, analyze the collateralization ratio and the volatility of the backing assets. A 150% ratio in ETH is riskier than the same ratio in a basket of blue-chip tokens.

Tip: A high concentration in a single, risky asset class (e.g., >20% in unsecured commercial paper) is a major red flag for de-peg risk.

Detailed Instructions

For stablecoins with on-chain components, you must verify the smart contract logic and any proof-of-reserve mechanisms. This involves checking that the circulating supply matches the collateral locked in verifiable contracts.

• Sub-step 1: Obtain the total supply from the stablecoin's contract. For USDT on Ethereum, you would query the totalSupply() function of the Tether token contract (0xdAC17F958D2ee523a2206206994597C13D831ec7).

codeCopy
// Example call to get totalSupply via web3.js
const supply = await usdtContract.methods.totalSupply().call();
console.log('Total USDT Supply:', supply);

• Sub-step 2: Cross-reference this with the sum of assets in the published reserve addresses. A significant and persistent discrepancy is a critical warning sign.
• Sub-step 3: Review audit reports from firms like Trail of Bits or OpenZeppelin for the core smart contracts. Check if the code is open-source and if there is a bug bounty program.

Tip: Use tools like DeFi Llama's stablecoin pages, which often aggregate this on-chain data and highlight supply/collateral mismatches automatically.

Detailed Instructions

The safety of the reserves is only as strong as the custodians and issuing entities holding them. This step focuses on counterparty risk and legal structure.

• Sub-step 1: Identify the bank(s) and financial institutions holding the cash and securities. Are they systemically important, well-capitalized banks (e.g., BNY Mellon, State Street) or smaller, less-regulated entities?
• Sub-step 2: Research the legal claims token holders have on the underlying assets. Does the terms of service grant you a direct claim, or are you an unsecured creditor? For example, USDC's terms explicitly state that holders have a proprietary claim to the underlying assets.
• Sub-step 3: Monitor the regulatory stance in the issuer's jurisdiction. Has the issuer received a money transmitter license or similar approval? Are they facing any ongoing litigation or enforcement actions from bodies like the SEC or CFTC?

Tip: The collapse of TerraUSD (UST) highlighted that regulatory scrutiny is often a lagging indicator. Proactive analysis of the issuing entity's transparency and legal commitments is paramount.

Detailed Instructions

First, determine the collateral type: is it fiat-backed, crypto-backed, algorithmic, or a hybrid? For fiat-backed coins like USDC, verify the attestation reports from independent auditors (e.g., Grant Thornton) which detail the reserve composition. For crypto-backed models like DAI, analyze the collateralization ratio and the types of accepted assets on the protocol's dashboard.

• Sub-step 1: Locate the official reserve reports or smart contract addresses holding collateral. For example, check the USDC reserve attestation at https://www.centre.io/usdc-transparency.
• Sub-step 2: Assess the risk concentration. If over 50% of collateral is in a single asset (e.g., US Treasury bills), consider the liquidity and credit risk of that asset.
• Sub-step 3: For on-chain collateral, use a block explorer to verify holdings. Query the total locked value (TVL) in a Maker Vault:

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// Example using ethers.js to get a vault's collateral
const collateral = await vaultContract.collateral();
const debt = await vaultContract.debt();
const ratio = (collateral / debt) * 100;
console.log(`Collateralization Ratio: ${ratio}%`);

Tip: A healthy, diversified reserve with high-quality, liquid assets significantly reduces peg-breaking risk during market stress.

Detailed Instructions

The mint/redeem mechanism is the primary arbitrage loop that corrects price deviations. You must test the process's accessibility, cost, and speed. A slow or expensive process weakens peg defense. For fiat-backed coins, this involves traditional banking rails; for crypto-backed, it's a smart contract function.

• Sub-step 1: Document the exact steps and requirements to mint 1 stablecoin. For Tether (USDT), this typically requires KYC with a partner and a minimum deposit of $100,000.
• Sub-step 2: Test the redemption process. Note any fees, minimums, and settlement times. For LUSD, redemption is permissionless with a 0.5% fee when LUSD is above peg.
• Sub-step 3: Verify the smart contract logic for minting. Examine the mint and redeem functions in the protocol's source code. Ensure there are no admin functions that can arbitrarily pause redemptions.

solidityCopy
// Simplified view of a redeem function
function redeem(uint256 stablecoinAmount) external {
    require(stablecoinAmount >= 1e18, "Min 1.0");
    uint256 collateralAmount = stablecoinAmount * oraclePrice();
    require(collateralAmount <= collateralBalance, "Insufficient reserves");
    _burn(msg.sender, stablecoinAmount);
    safeTransfer(collateralAsset, msg.sender, collateralAmount);
}

Tip: A robust mechanism offers permissionless, 24/7 redemptions at a predictable, low cost, creating a strong incentive for arbitrageurs to correct peg deviations.

Detailed Instructions

The oracle system provides the definitive price of the stablecoin and its collateral to the protocol. A manipulation or lag here can cause unjust liquidations or incorrect minting. Identify the oracle source (e.g., Chainlink, Uniswap V3 TWAP, internal keeper network) and its security assumptions.

• Sub-step 1: Find the oracle address used by the protocol. For MakerDAO's DAI, the ETH/USD price comes from a medianizer contract aggregating multiple feeds.
• Sub-step 2: Assess oracle robustness. Check the number of independent reporters, update frequency (e.g., every block vs. hourly), and the deviation threshold that triggers an update.
• Sub-step 3: Simulate a potential attack. Calculate the cost to manipulate the price on the underlying DEX for a duration longer than the oracle's heartbeat. For a Uniswap V3 TWAP with a 30-minute window, this requires significant capital.

bashCopy
# Example: Querying a Chainlink price feed on Ethereum mainnet
cast call 0x5f4eC3Df9cbd43714FE2740f5E3616155c5b8419 \
  "latestAnswer()(int256)" --rpc-url $MAINNET_RPC
# Returns the latest ETH/USD price in 8 decimals

Tip: Prefer protocols using decentralized, time-weighted (TWAP) oracles with multiple fallback sources. A single-point-of-failure oracle is a high-severity risk.

Detailed Instructions

Understand the economic incentives that align various actors (holders, arbitrageurs, liquidity providers, keepers) to defend the peg. Also, examine the contingency plans or "circuit breakers" for extreme scenarios. This involves analyzing governance parameters and on-chain data.

• Sub-step 1: Identify the profit opportunity for arbitrage. Calculate the spread needed to make redemption profitable after gas fees. For example, if redeeming 100,000 USDC costs $50 in gas, a 0.05% premium is the minimum arbitrage trigger.
• Sub-step 2: Review governance-controlled stability parameters. In MakerDAO, these include the Stability Fee (SF), Debt Ceiling, and Liquidation Ratio. Note who can change them and the voting delay.
• Sub-step 3: Locate and understand the emergency shutdown or pause function. Determine the trigger (e.g., governance vote, multisig) and the process for final settlement. For example, in a shutdown, DAI holders can claim collateral pro-rata.

Tip: A stablecoin with clear, slow-changing parameters and a transparent, multi-sig guarded emergency process is more predictable and secure than one reliant on rapid, discretionary governance.