The decoupling of USDf has raised questions, and DWF Labs CEO promises to disclose details of the $630 million reserve funds.

DWF Labs CEO Andrei Grachev, who has been at the center of controversy, promised to reveal more details about the $630 million in encryption assets backing the USDf stablecoin. USDf is a stablecoin designed to be pegged to the US dollar, but it fell to $0.992 on July 7th, failing to maintain its fixed Exchange Rate of $1.

As of July 10, the USDf is currently reported at 0.9973 USD, still not fully restored to its peg.

Background of USDf

USDf is the 15th largest stablecoin in the world, with a market value of approximately 550 million USD, issued by Falcon Finance, a subsidiary of the cryptocurrency trading company DWF Labs. Falcon refers to USDf as "synthetic dollar," a term promoted last year by Ethena. Ethena launched USDe, which is pegged to the US dollar, but abandoned the label of "stablecoin" due to the significant risks associated with its innovative design.

Unlike most stablecoins pegged to the USD, Ethena and Falcon Finance utilize encryption assets and complex trading strategies to maintain the token's anchoring.

The collateral and underlying controversy of USDf

Falcon claims on its website that the total value of the collateralized encryption assets for USDf is $630 million, but currently, only 550 million USDf are in circulation. Nevertheless, critics on social media question whether the token is truly fully backed.

To quell these criticisms, Grachev stated that he will announce the specific composition of the encryption assets supporting USDf next week. Grachev mentioned that Falcon has approximately 89% of its reserve funds (i.e., $565 million) stored in stablecoins and Bitcoin, with the remaining 11% (i.e., $67 million) stored in various other coins.

"Basically, we can accept any assets that can be hedged through perpetual contracts (perps)," Grachev said.

Transparency issues of reserve assets

According to Grachev, of the $630 million in encryption assets, only $25 million (about 4%) is stored on-chain, while the remaining $607 million is held by four custodians, including Fireblocks, Ceffu, and ChainUp. This ratio means that 96% of the reserve assets cannot be independently verified by anyone with an internet connection.

The accounting firm Harris & Trotter based in London publishes a "Reserve Report" daily, but the report only shows the dollar amount of assets held by each custodian and does not disclose the specific composition of off-chain assets. Falcon has not made detailed information about off-chain assets public.

Future Plans

Grachev stated: "Next week we will update the transparency page, and you will see a detailed asset breakdown, including locked Bitcoin, stablecoins, and other altcoins." Additionally, Falcon also mentioned that Harris & Trotter is conducting an "ISAE 3000 (the highest audit level)" audit for it, although the International Auditing and Assurance Standards Board considers that ISAE mainly relates to "assurance services other than the audit or review of historical financial information."

Grachev's explanation and market reaction

Grachev stated that Falcon makes money through various trading strategies, including basis trading, arbitrage, and staking rewards. He also mentioned that the trading strategies used by Falcon are market-neutral, which helps to eliminate risk during market falls.

He further explained: "Each minted USDf must be backed by stablecoins or hedged assets, representing the value of the US dollar, and there is no directional risk."

Nevertheless, critics on social media have questioned Falcon, suggesting that Falcon's synthetic dollar may be backed by illiquid assets whose value could plummet, especially when Falcon has to sell these assets to meet the redemption requests of USDf holders.

Competition risks and historical controversies

The crypto risk management company LlamaRisk identified design issues with USDf in a report released in May. The report stated, "The Falcon team has unilateral control over the operational management of reserve assets. Mismanagement or failure of underlying strategies could lead to bankruptcy." LlamaRisk also pointed out that USDf could use various alternative cryptocurrencies with limited supply as collateral for minting, including tokens with lower market capitalization, such as the Dolomite project, which has a market cap of $16 million.

This is not the first time Grachev's company has faced controversy. DWF has been accused of making over $300 million in profit through wash trading, and additionally, DWF was forced to fire one of its partners due to allegations of persecution against women.

(Source: DL News)