“The significance of stablecoins issued by ETH as collateral to ETH has been greatly underestimated.”
To this day, many ETH believers, including me, firmly believe that the value of ETH comes mainly from its positioning as a programmable currency, rather than the so-called "ultrasound" narrative.
BTC has successfully completed the narrative transformation from digital cash to digital gold, consolidating its position as the largest cryptocurrency. If ETH adopts the ultrasound currency narrative and focuses on earnings and valuation, it will severely limit its potential for growth and value appreciation. In the current landscape, Ethereum's earnings are far less than those of centralized stablecoins and exchanges, and are often even surpassed by application layer protocols. Should ETH's market value be compared with them?
ETH must break away from the ultrasound currency narrative to keep pace with BTC, or even surpass it in the future. Imagine if BTC gave up its digital gold positioning and moved to an income-based narrative — how much would it be worth? The path forward for ETH is already clear.
Objectively speaking, the peak of ETH as a currency occurred during the ICO boom in 2017. Although the speculative nature of ICOs made this peak unsustainable, it still demonstrated the power of ETH as a "medium of exchange" and "measure of value." However, as the market matures, the current reality is cruel, although many people are reluctant to face it. Putting aside the distant possibility of ETH becoming a "real world currency" to replace the US dollar, what is the current landscape like?
In fact, ETH’s role as programmable money has been largely replaced by USDT and USDC.
The unfortunate reality is that USDT and USDC are backed by real-world assets, which drives demand for those assets, not ETH.
Worse still, USDT and USDC are centralized, and their issuers have the power to censor and freeze anyone’s tokens. This goes directly against Ethereum’s core values and further undermines the decentralization of its ecosystem.
This essentially strips away some of ETH’s core identity (remember that the ETH token and Ethereum as a network are different roles), undercuts its intrinsic value, while taking advantage of Ethereum’s security and permissionless nature for massive scaling, and injecting an element of centralization. It’s a Trojan Horse in the Ethereum ecosystem.
But it is not fair to evaluate this situation one-sidedly. In the absence of better alternatives, the rise of USDT and USDC has objectively promoted the development of the crypto industry and demonstrated to people outside the crypto field the possibility of going beyond "token investment": safe, convenient, seamless, and global payments that do not rely on traditional banks. Therefore, from the perspective of market demand and its contribution to the entire industry, centralized stablecoins are not only necessary, but are also likely to exist for a long time and even dominate.
Even if most people agree that “centralized stablecoins are not only necessary but will continue to dominate in the long run”, few would disagree that “decentralized stablecoins are also essential”. Now I will analyze why decentralized stablecoins, especially those issued by ETH as collateral, are not only necessary but also crucial, and play an important role in shaping the value and positioning of ETH itself.
Restoring ETH’s value as programmable money
Compared to centralized stablecoins, decentralized stablecoins issued by ETH as collateral inject direct momentum into ETH, forming a positive feedback loop: the more stablecoins are issued, the higher the demand for ETH, which in turn pushes up the price and market value of ETH. As the market value of ETH increases, the potential for stablecoin supply also increases. This effectively converts a portion of ETH into stablecoins and keeps the value within ETH itself.
At this point, one might ask: if the opposite happens, wouldn’t that create a negative feedback loop, leading to a death spiral similar to LUNA? I want to clarify that this is a completely different situation.
Putting aside the defects of the algorithmic stablecoin mechanism itself, LUNA's stablecoin UST lacks real demand support and relies on Ponzi-style "super-high interest rates" to accumulate value. On the other hand, various stablecoins on Ethereum have been issued on a large scale and widely used in the real world, proving that the demand for stablecoins is real - USDT and USDC do not attract deposits through interest rates, and their supply is driven by market demand.
That is to say, Ethereum has built a huge ecosystem with real demand for stablecoins (currently totaling $82 billion). The next step is to explore how to recover some of the demand occupied by centralized stablecoins and return this value to ETH.
Exploration of decentralized stablecoin based on ETH
MakerDAO, the pioneer of decentralized stablecoins on Ethereum, initially relied solely on ETH as collateral to issue the stablecoin DAI. However, the limitations of CDP in funding efficiency soon became apparent, causing MakerDAO to gradually turn to centralization in pursuit of a larger market share. Now even the MakerDAO and DAI brands have been completely abandoned, which is truly regrettable.
Currently, the only remaining decentralized stablecoin with a certain scale issued by ETH is Liquity's LUSD, which is based on CDP like the original MakerDAO. However, its supply is only $70 million. Leading lending protocol Aave has a total locked value (TVL) of more than $10 billion, and its multi-asset collateralized stablecoin GHO has just exceeded $100 million in issuance due to CDP restrictions.
Since the limitations of CDP cannot be overcome, is there a better model? Yes - the Delta neutral hedging model is the key to solving the scalability problem. However, early attempts to apply this model to decentralized stablecoins failed, mainly due to the lack of suitable hedging venues or competitive perpetual contract products. Ethena took an unconventional approach to solve the hedging venue problem by hedging on centralized exchanges, quickly expanding to $3 billion. However, the inherent uncertainty of volatile funding rates and various centralized risks made it difficult to drive actual demand for its stablecoins, mainly attracting short-term arbitrage capital.
Pure.cash, through its "excess demand model", will become the first stablecoin protocol to solve the scalability problem of decentralized stablecoins issued with collateralized ETH. For the history of decentralized stablecoins and an analysis of the principles of Pure.cash, please refer to "The Road to the Holy Grail: Solving the Blockchain Trilemma Dilemma of Stablecoins" .
Pure.cash’s stablecoin supply potential
Pure.cash essentially separates the volatility of ETH, while satisfying the dual demands of zero-interest ETH long positions (LongOnly) and stablecoins (PUSD) issued by ETH as collateral. These two demands reinforce each other, ultimately increasing the demand for ETH. This interaction effectively drives the recovery of ETH's value while re-accumulating the value of programmable currency into ETH.
To achieve the "perfect" complementary driving force, scale is the key. Let's analyze the potential supply scale of PUSD.
Currently, open interest in ETH perpetual contracts is about $10 billion, and combined with leveraged long positions obtained through borrowing, ETH's total long exposure is estimated to be about $12 billion. The interest cost of perpetual contracts and leveraged loans severely suppresses additional long demand. In particular, the volatility and high cost of perpetual contract funding rates encourage high leverage and short-term positions, severely limiting long-term holding demand.
For example, without considering the funding cost, 1.2x leverage (equivalent to 0.2x coin-based leverage) can increase the return of long-term ETH holding by 20% with little risk of liquidation. While this is an excellent strategy to increase holding returns, the funding cost makes this strategy unfeasible. Pure.cash's zero-funding mechanism for long ETH, coupled with a transaction fee of only 0.07% (the average spot market rate), is very suitable for the needs of long-term holders and has the potential to unlock more potential demand and convert a large number of spot market users to LongOnly users.
In addition to the new demand mentioned above, LongOnly also offers up to 10x leverage while meeting the needs of most existing ETH long traders. We estimate that its open interest could reach $3-5 billion in the short term. As the market potential gradually unfolds, this scale may expand to $10-30 billion, supported by the continued growth of the crypto industry, and grow with the growth of ETH. The size of LongOnly's open interest corresponds to the potential supply of PUSD.
in conclusion
Based on the above analysis, Pure.cash is expected to create tens of billions of dollars in long-term demand for ETH by transferring part of the value of programmable currency back to ETH, becoming a powerful catalyst for the growth of ETH's value.
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