Stablecoin Flippers Wreak Havoc On Paxos After Gemini Discount

Gemini, a major exchange, seems to have caused trouble in the trading world by offering investors a good deal on stablecoins. As originally reported on TheBlockCrypto, the exchange offered a 2% discount on its own Gemini dollar (GUSD) by selling the coin at $0.98 instead of at $1.00. This deal involved a few exchanges, including Huobi, which holds most of the GUSD supply.

The seemingly innocuous rebate wrought havoc on another major stablecoin. Apparently, investors took advantage of Gemini’s discount in order to buy GUSD, and then immediately sold it for another stablecoin called Paxos (PAX), gaining a $0.02 profit on every dollar invested.

All in all, not a bad deal, assuming that one is trading substantial amounts of crypto. This is a common strategy called arbitrage, but the practice could have had major effects on the stablecoin market because of the scale it occurred on. Fortunately, the problem was stopped in its tracks by Paxos.

Paxos Stops the Problem

Investors who tried to take advantage of the deal weren’t necessarily able to cash out their earnings. In order to redeem their PAX tokens, investors had to go through Paxos, not through an exchange. It is not clear exactly what amount of money was at stake during the crisis, but Paxos claims that it was flooded with attempted withdrawals:

“After Huobi recently instated $10k PAX withdrawal limits, some customers began structuring withdrawals to get around them; they were creating [fake] accounts… to withdraw more PAX than the $10k limit — as many as 30 accounts in the same day.”

As a result, it was up to Paxos — not Gemini or Huobi — to solve the problem. The company’s compliance team noticed suspicious activity and was able to discover fake accounts and gain admissions of guilt from some users. This seems to have stopped some (but not all) investors from exploiting the problem: Paxos claims that it “honored redemptions” for some users “but can’t allow it to happen again.”

Suggested Reading : Learn how Gemini compares to Coinbase.

Why Did Gemini Play With Prices?

The Paxos crisis raises the question of why Gemini was willing to play with prices in the first place. Typically, stablecoins maintain parity with the US Dollar by adjusting the amount of money stored in a reserve and by minting and destroying tokens.  However, there is some leeway, and few if any stablecoins maintain true parity. Gemini’s discount seems to have been an attempt to gain adoption based on that leeway—and apparently, Paxos does exactly the same thing.

Nevertheless, stablecoins are usually less volatile than regular cryptocurrencies—stablecoins are merely not as stable as they promise. Furthermore, it seems that the price of the PAX token remained more or less stable throughout the crisis, although it is not known whether Paxos made any adjustments to the PAX token’s supply or price. It is still not entirely clear whether the issue was an administrative one, or an issue that could have had major effects on stablecoin prices.