Stablecoins are one of the greatest innovations in the crypto space. But how will the overall landscape change after a host of new stablecoins are released?
Stablecoins can be used to attract users to DEFI, and can also attract liquidity to the native protocol of stablecoins. In fact, in order to increase the revenue of the protocol (and perhaps increase the price of the token), it may be crucial to achieve dominance of the transaction volume of the native stablecoin.
｜Current pattern
As @RZinovyev pointed out on DuneAnalytics, fiat-collateralized stablecoins are by far the most widely used compared to over-collateralized and algorithmic stablecoins.
But despite this, you can see the bear market hitting them in the chart below.
More specifically, while BUSD has seen considerable growth in 2022, while USDT and USDC have seen a downward trend, the recent FUD against Binance has caused BUSD to lose billions of its total supply. About 92% of USD-pegged stablecoins are backed by centralized entities.
After the Luna debacle, both decentralized and algorithmic stablecoins took a big hit in terms of trust. While their market caps can’t really match the centralized ones, tokens like Dai, Lusd, Frax, and Min are having a hard time keeping up.
And let’s not forget other examples that have failed or almost failed, such as Waves ’ USDN, Near Protocol’s USN, and Tron ’s USDD.
｜New player — AAVE’s stable token $GHO
Last summer, AAVE announced that it would issue an over-collateralized stablecoin $GHO, in which the collateralized tokens are determined by governance. AAVE is one of DEFI's blue blood infrastructures. Even in the bear market phase, its TVL reached $5.86 billion.
Facilitators, chosen by AAVE governance, will be able to mint and burn $GHO. Additionally, users who stake AAVE tokens can also mint $GHO at a discounted rate.
The protocol will use the arbitrage mechanism to keep the price of $GHO stable. Therefore, it does not rely on external price oracles. After the debacle of UST, this mechanism may sound a bit scary, but the two are completely different. UST's arbitrage is based on the protocol's own balanced volatility asset (LUNA), while GHO is over-collateralized by a basket of tokens.
— Curve’s stablecoin $crvUSD
The Curve protocol is another milestone for the crypto ecosystem. In terms of trading volume, it ranks second among all DEFI exchanges, reaching $1.36 billion within 7 days, accounting for 22% of the total market.
Similar to AAVE, Curve announced a new stablecoin offering, $crvUSD, last summer.
The founders confirmed that $crvUSD will be an over-collateralized stablecoin. Among them, the Curve team has two impressive innovations. One has been announced in its white paper, and the other has not yet been officially announced.
LLAMA (Lending-Liquidation AMM Algorithm)
LP as collateral
- LLAMA (Lending-Liquidation AMM Algorithm)
This innovation will enable a continuous liquidation mechanism for debt positions (stablecoins). This means that, unlike Dai, collateral positions will be gradually liquidated in the event of a shock event. This smoothing process protects against losses from market volatility.
- LP as collateral
In addition, tricrypto2 and 3pool are used as overcollateralized CrvUSD, which is just speculation, but there are more and more rumors about $crvUSD will be supported by Curve liquidity pool.
These specifically may be:
tricrypto2: composed of USDT, WBTC and ETH;
3pool: composed of Dai, USDC and USDT;
— Redacted Cartel’s stablecoin $Dinero
The Redacted Cartel team announced a few months ago that they would be issuing the first stablecoin with only Ethereum as overcollateralization. It will be rolled out in phases, the first phase will be rolled out in 1Q23.
The Redacted ecosystem brings on-chain liquidity, governance, and cashflow to DeFi protocols. So perhaps incentives will be the key to stability.
Anyway, in the next few days, Dinero's white paper should come out. Only then will we know more about its design.
— Dopex’s stablecoin $dpxUSD
Dopex is one of the most interesting options protocols in the crypto world. It's deployed on Arbitrum and never stops innovating. Although the exact timing is unknown, the team announced that dpxUSD will be launched soon.
The $dpxUSD collateral will consist of 75% USDC and 25% rDpx. The stable currency will be created through the combination of rDpx and USDC, and its minting will be rewarded in the form of a discount.
But what happens if there is a decoupling event?
There are three possible strategies:
- Protocol removes dpxUSD from LP, forcing the pool to rebalance its peg;
- Whales will intervene by acquiring dpxUSD, although this will be based on trust;
- In the event of an extreme event, dpxUSD will be redeemed at a certain discount (0.75USDC+0.25rDpx) of the underlying asset.
This last strategy will allow for arbitrage opportunities as the underlying collateral has been earning yields and should be valued above its USD value for $dpxUsd.
Here is a detailed analysis by @DegenSensei.
https://degensensei.substack.com/p/the-dopex-stablecoin-part-1-programmed
The above is an overview of the upcoming stablecoins. But there are also projects already on the market, such as Frax Finance (FRAX) and Liquidity (Lusd).
Frax is a stable currency composed of collateral + algorithm
Lusd is collateralized by Ethereum
｜Summary
In summary, history tells us that decentralized stablecoins often fail or have to change their mechanics. The second scenario is what happened after MakerDAO went bankrupt with DAI in the March 2020 crash. That's why they convert 100% of ETH collateral into roughly 50% USDC.
While some of these protocols have a "long" history of deploying incredible solutions for DeFi, we should always remember that innovation is never without risk. And, in the coming years, regulation of this asset class is on the way.
All the protocols mentioned above try to fundamentally innovate cryptocurrencies. We’ve never seen a stablecoin with billions of dollars in TVL (at launch) issued by a mainstream exchange or lending dApp before. All of these are trying to change the industry.
We are used to Curve wars for liquidity and voting rights. But the stablecoin war could be the next battle for market share and real-world utility.
Excited!
