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Entering a Golden Age of Decentralized Stablecoins: What's New?
Discussing major shifts in the DeFi stablecoin landscape, examining a spectrum of innovative projects and their impacts.
Note: For those in a hurry, the key information is highlighted in bold for quick reference.
Do you hold any stablecoins? If so, which ones, and what do you do with them? Do you farm them for maximum yield or simply hold them to buy the dip?
Perhaps you've converted your stablecoins to fiat to avoid the risks associated with them. It's hard to blame you, especially when even USDC briefly lost its peg. Or maybe you've chosen fiat because it now offers higher yields than lending on blue-chip DeFi protocols.
Combined with an overall bearish crypto market, it's no surprise that the total stablecoin market cap has declined from an all-time high of $200B to the current $126B.
Fear not. The stablecoin market is growing more fascinating, with the founder of Synthetix suggesting that we're entering a golden age of decentralized stablecoins.
Curious about what he's referring to? Let’s unpack.
I hope you haven't forgotten about the popular protocol for asymmetric yield distribution generated from ETH staking – Asymetrix!
In its three months of operation, the protocol has shown impressive results, attracting a significant Total Value Locked (TVL) and managing to maintain it after the initial hype. By all measures, the project's launch can be considered successful.
During its operation, the protocol has had no bugs, and all users who won in the weekly draws received rewards that significantly exceeded the standard profitability from liquid staking.
A major update will impact the core mechanics of the protocol. The key highlights include:
• Boosted ODDS in the weekly draws;
• Boosted distribution of the project token;
• Depositing to mini-pools.
With these improvements available for LP providers, the protocol is set to become even more appealing to new users, providing an opportunity for participants to earn, even with a relatively small deposit.
Mirror, Mirror on the Wall: Which Stablecoin is the Safest of Them All?
This is the most important question because you don’t want to wake up one day with your stablecoin down 50%.
Luckily, just this week a non-profit organization Bluechip released an economic safety ratings for top stablecoins. The Safety Score takes into account a wholistic view and provides information on Stability (S), Management (M), Implementation (I), Decentralization (D), Governance (G) and Externals (E).
And the safest stablecoins are…
… BUSD, PAXG, GUSD, and Liquity’s LUSD. This makes LUSD the economically the safest decentralized stablecoin to hold. Safer than USDC.
It's not surprising, though. LUSD served as a safe haven during the severe USDC depegging event in March.
Interestingly, other DeFi stablecoins are within the full spectrum of evaluation with Dai and Rai receiving B+ and USDD and F for Fail.
Tron's USDD received an F because its reserves consist of TRX (69%), BTC (29%), and TUSD (2%). However, Bluechip does not consider TRX for collateralization ratios. The collapse of Terra/Luna illustrates how endogenous collateral can rapidly lose value.
If you are curious about the findings, here's a brief summary of the report on selected stablecoins:
Binance USD ERC-20 (Grade: A): This stablecoin is issued by Paxos and is considered safe for general public use. Despite halting issuance in 2023 by NYDFS, the backing of BUSD remains unaffected.
Liquity USD (Grade: A): LUSD, a part of the Liquity Protocol, is highly decentralized. It is considered safe and is especially suitable for users who prefer code over human control. Note the smart contract and oracle risks and caution against buying LUSD above $1.
USD Coin (Grade: B+): USDC is one of the safest stablecoins, its reserves comprise short-dated US Treasuries and cash deposits. It's widely suitable and can improve its rating by proving its bankruptcy-remote reserves and including redemption timelines in its Terms of Service.
Dai (Grade: B+): DAI, the oldest on-chain stablecoin, is backed mostly by centralized assets. Despite this, it's seen as safe and ideal for users seeking permissionless protocols.
Rai Reflex Index (Grade: B+): RAI is a decentralized stablecoin with a floating price and not pegged to any fiat currency. Despite its experimental nature, it has proven to be a reliable low-volatility alternative to conventional stablecoins. It's backed by ETH collateral and is ideal for sophisticated users who want a decentralized, censorship-resistant stablecoin.
Tether (Grade: D): Despite being the oldest and largest stablecoin, USDT has transparency issues and varied reserves. Best suited for institutional users, high net worth individuals, and advanced traders with direct access to the redemption mechanism.
Frax (Grade: D): FRAX has a tight peg and good performance during market stress, but its partial collateralization and reliance on centralized assets raises concerns. It's suited for risk-seeking yield farmers and liquidity providers who can handle the protocol's complexity.
USDD (Grade: F): USDD is managed by Tron DAO Reserve and is similar to the failed UST stablecoin. With only 50% of its supply backed by non-TRX collateral, primarily Bitcoin, its use is strongly discouraged due to concerns of asset commingling.
You might be wondering, what does this safety ranking have to do with the golden age of decentralized stablecoins?
This is relevant because the following content will include experimental DeFi stablecoins that could either become the next big thing or collapse altogether.
For instance, just a year ago, I wrote about USDD, USDN, and CUSD algo stablecoins. A few months later, USDN lost its peg once more and rebranded to another VOLATILE token.
Now, keeping in mind that the safety of funds is of utmost importance, let's see what makes the DeFi stablecoin industry so exciting right now
Lybra - A Challenger to LUSD
Take a look at the top 10 stablecoins by market cap. What strikes you the most?
Firstly, there's the astonishing 66% dominance of USDT - a stablecoin that received a 'D' for being unsafe from Bluechip. Secondly, only two stablecoins, USDT and LUSD, have seen an increase in market cap this month. All others have experienced a decrease, with some seeing significant drops.
Just below the top 10, however, is eUSD, a stablecoin by Lybra Finance.
Interestingly, Lybra, a fork of Liquity, sets itself apart by accepting stETH as collateral, unlike Liquity, which only accepts ETH. Thanks to stETH, holders of eUSD earn an APY of approximately 7.2%.
One potential issue is the depeg of stETH, because Lybra uses Liquity’s ETH:USD price feed. Fingers crossed 🤞
Another issue with eUSD is that the yield is distributed with rebase, meaning that you get more of the eUSD token at the rate of the APY. To address this and other issues, Lybra is now launching the v2 with another stablecoin - peUSD.
The main upgrades are:
Omnichain Functionality: peUSD, an omnichain version (LayerZero) of eUSD, allows holders to use their stablecoin across different chains
Minting via Various Collaterals: peUSD can be minted directly using Non-Rebase LSTs like Rocket Pool’s rETH, Binance’s WBETH, or Swell’s swETH. The yield accrues via the underlying LST, which increases in value even as peUSD is spent
Continued Earnings: When eUSD is converted to peUSD, users continue to earn interest on their underlying eUSD collateral even while they spend their peUSD
Use in DeFi Activities: peUSD is not a rebase token so it can be used more widely within the crypto ecosystem.
But Liquity has something under the sleeve to fight back.
Liquity V2 - Won’t Stay Still
The beauty of Liquity is in simplicity. You can mint LUSD at 0% interest rate with ETH as collateral. There’s a one-time borrowing fee of 0.5%.
Liquity first emerged as an alternative to a governance heavy Dai. LUSD has minimal governance, and its smart contracts are immutable (non-upgradable) - features that are great for economic security, but not necessary for growth.
To keep up with the competitors, Liquity is launching a v2 with LST support as well. But instead of an upgrade, the ‘condename v2’ will be a completely new and different product.
Liquity V2 aims to solve the "stablecoin trilemma" of decentralization, stability, and scalability with the following features with a reserve backed delta-neutral hedged model with principal protection.
It’s complicated, but here’s the simplified version on how it works:
Say Alice has 1 ETH worth $2000. She can deposit it into Liquity v2 and receive 2000 v2 LUSD. Now, Liquity holds her ETH, and Alice has 2000 v2 LUSD. If ETH's price falls below $2000, Alice's v2 LUSD is no longer fully backed, risking a price spiral.
To tackle this, Liquity v2 introduces:
Principal Protected Leverage: Users can take leveraged positions (bets on future price) where they only risk the premium they pay, not their principal amount. This should increase demand, helping to back v2 LUSD.
Secondary Market: Users can sell these principal-protected positions to others. If a position isn't being bought, Liquity will subsidize it, ensuring all positions are bought and subsidies stay in the system.
The implications of this are multiple, but the goal is to offer a bit of everything to DeFi users: Principal protected leverage, yield opportunities for farmers, and trading opportunities for speculators in the secondary market.
The v2 is expected to launch in 2024.
Synthetix sUSD - Going V3
Wonder why Kain, the founder of Synthetix, is bullish on decentralized stablecoins?
It's because of Synthetix V3, which is gradually being rolled out. The timing is great, because, despite growing trading volumes on Kwenta, sUSD has been declining to a current $98M USD.
Things might turn around thanks to the V3.
Synthetix is one of the more complex DeFi protocols out there. However, at the core of the Synthetix ecosystem is the sUSD stablecoin, which is backed by SNX.
You can read a comprehensive review on how V3 will impact DeFi by Thor Hartvigsen, but there are two key pain points that V3 is solving for sUSD minters:
Multi-Collateral Staking: V3 is collateral agnostic, allowing to support any collateral to back synthetic assets. The V2 only allowed SNX. This will increase sUSD liquidity and the markets supported by Synthetix.
Synthetix Loans: Users can now provide collateral to the system to generate sUSD without being exposed to debt pool risk, as well as without incurring any interest or issuance fees.
If you have tried minting sUSD, you’ll know how important these changes are!
sUSD now has a potential to compete with other established stablecoins like FRAX, LUSD, or DAI.
Speaking of which…
MakerDAO - The Revenue Machine
Maker is now in its Endgame stage. If you follow me, you might be tired of me repeating this. Otherwise, check out my thread to understand what it's all about. One key point to remember is that Dai might even abandon the USD peg if the regulatory environment necessitates it.
For now, Maker seems to be in a frenzy:
MKR has increased by 66% over a 30-day period, with the founder of Maker continuously purchasing MKR.
DAI is yielding a 3.49% return to its holders due to the reactivated Dai Savings Rate.
Spark protocol, a fork of Aave with a focus on DAI, reached $75m TVL.
Maker has reduced its reliance on USDC from 65% in March to 17% today.
Maker is now 3rd by revenue generation: higher than Lido, Synthetix, and Metamask.
Not everything is coming up roses. A consumer electronics firm defaulted on $2.1 million in debt. However, with a high B+ ranking from Bluechip, a 3.49% DSR, and increasing revenue, Maker's Dai is experiencing a significant revival following a disastrous USDC depegging a few months ago.
Frax V3 - Ditching USDC?
Frax received a D (Unsafe) in the bluechip rankings. According to the report, FRAX is risky due to its partial collateralization by the volatile FXS token, heavy reliance on centralized assets (USDC), and significant control by the core team over voting power and monetary policy.
It's suited for risk-seeking yield farmers and liquidity providers who can handle the protocol's complexity
Like DAI, FRAX has lost the USD peg during the USDC depegging, and it seems the lesson has been learned.
The Frax founder Sam Kazemian shared in the Telegram chat that the V3 is expected to be launched within 30 days.
The details on the V3 are scarce, but DeFi Cheetah reported that the v3 will be “a totally different system and not rely on fiatcoins” including USDC.
A bombshell. If that’s true, than the v3 is a massive 180 degree turn from the v2.
Sam has previously shared that their long-term goal is to receive a Fed Master Account, that would allow holding dollars and transacting with the Federal Reserve directly, making FRAX the closest thing to a risk-free dollar.
This would enable FRAX to ditch USDC collateral and scale to a market cap of hundreds of billions of dollars.
I recommend following DeFi Cheetah for the up-to-date details on Frax.
GHO - The New Toy in Town
Even though there was a lot of hype leading up to the launch, the growth has been steady but slower than I expected. While Aave boasts a substantial Total Value Locked (TVL) of $5.8B, the GHO market cap has reached a modest $8M USD.
Two three things to consider here. First, GHO has launched just 11 days ago, so it’s still early. Secondly, integrating GHO into several DeFi protocols will take some time, but growth can accelerate soon after. Third, it’s a bear market.
They key points to know about how GHO works:
Uses overcollateralization to maintain a stable value.
Is minted/burnt only by approved Facilitators, (like Aave protocol itself, but could be more) each with a limited capacity.
Accrues interest when supplied to liquidity protocols, with rates set by Aave governance (currently 1.51%).
Can't be supplied to the Aave Ethereum Market. Quite important for security.
Is returned and burned upon repayment or liquidation, with the interest going to the Aave DAO treasury.
Has interest rates adjusted by Aave Governance rather than supply/demand dynamics.
Offers a borrow discount model to stkAave holders (30% discount on interest for 100 GHO).
Maintains price stability at $1, set by Aave protocol (no oracle), creating arbitrage opportunities when the price deviates from $1.
GHO presents a fresh revenue stream for Aave DAO. With the current borrow rate set at 1.5% and considering a market cap comparable to that of LUSD, GHO could potentially yield an additional $4.4M USD in fees for the DAO.
You can delve deeper into its workings in this thread by Moonshot21. However, what truly piques my interest about GHO is its potential for expansion.
Aave DAO has the option to introduce other Facilitators for GHO minting using collateral such as Real-World-Assets, Treasuries, or even incorporate a partially algorithmic approach similar to the current FRAX model.
The potential for GHO is immense, but its practical execution remains to be seen.
crvUSD - Stablecoin for real DeFi Pros
I think crvUSD is the most difficult stablecoin to wrap one’s head around. Liquity v2 seems to be another one.
crvUSD unique features include LLAMA, soft liquidations, and deliquidations. Here’s a brief summary for you:
The unique aspect of crvUSD is its use of a special AMM algorithm known as the Lending Liquidation AMM Algorithm (LLAMA) for a soft liquidation mechanism.
In typical DeFi lending/borrowing protocols, if the value of a borrower's collateral falls below a certain threshold, it is hard liquidated, which could lead to substantial losses for the borrower due to liquidation fees.
LLAMA, on the other hand, gradually converts depreciating collateral into crvUSD, thus performing a soft liquidation, which helps to maintain the peg of crvUSD and protects the borrower from losing their entire collateral during a severe market downturn.
However, if the price of the collateral continues to fall drastically and the soft liquidation cannot cover the loss, then a hard liquidation takes place. This is a risk that comes with crvUSD.
If the collateral's price recovers, LLAMA reverses the action by converting crvUSD back into the original collateral, a process referred to as 'deliquidating'.
To maintain the peg of crvUSD, Curve employs PegKeeper contracts, which have the capability to mint and burn crvUSD tokens as necessary, ensuring the price stays around $1.
The above mechanisms make crvUSD unique in the DeFi by offering a more resilient approach to handle collateral liquidation events, offering a new interesting way to sell the top.
Here’s how the game theory works:
Borrowing crvUSD with ETH or LST
ETH Price Increase: If ETH value rises, your collateral grows, possibly allowing more crvUSD borrowing.
ETH Price Decrease: If ETH price drops, LLAMA converts your ETH collateral to crvUSD gradually, maintaining a safe collateralization ratio.
Hard Liquidation: In case of extreme ETH price drop, hard liquidation occurs. However, you'll still hold some crvUSD due to the soft liquidation phase.
Lower Liquidation Fees: crvUSD's soft liquidation mechanism may offer lower liquidation fees compared to other protocols.
This is more efficient way to sell the top than borrowing on other lending protocols due to lower fees and gradual liquidation. Just hope the crvUSD peg holds.
Final thoughts: The Golden Age of Decentralized Stablecoins?
The innovation does not stop with the above mentioned stablecoins. There are quite a few innovative approach offered by lower market cap projects:
Beanstalk: Unique stablecoin that uses credit, not collateral, to maintain its $1 peg, dynamically adjusting its Bean supply, Soil supply (available lending capacity), and maximum interest rate (Temperature) with its proprietary Sun, Silo, and Field mechanisms. Learn more in this thread.
Reserve Protocol: allows permissionless creation of asset-backed, yield-bearing & overcollateralized stablecoins. Anyone can create a stablecoin backed by baskets of ERC20 tokens, which includes eUSD backed by stablecoins deposited on Aave and Compound v2.
Reflexer’s RAI: Received a B+ safety rating by Bluechip. RAI is a flexible, whose value is dictated by supply and demand and continually adjusted by its issuing protocol. Unlike traditional stablecoins, RAI's target exchange rate shifts based on market conditions, creating a balance between those who generate RAI and those who hold it.
Will the recent changes usher in a new golden age for DeFi stablecoins?
DeFi stablecoins first took a reputation hit when UST collapsed, followed by USDC's deppegging, which exposed DAI’s, FRAX’s, and all of DeFi’s reliance on USDC.
However, Maker's recent changes to gradually shift away from USDC towards more censorship-resistant stablecoins, along with the potential shift in Frax’s V3 from USDC to more decentralized collateral, can be seen as steps in the right direction.
Moreover, Liquity’s V2 could offer a solution to scale a stablecoin by addressing the blockchain trilemma, as the current LUSD design compromises on scalability.
The upgrades in Synthetix’s sUSD V3 will also enhance the usefulness of sUSD outside of the Synthetix ecosystem, as it will be minted with multiple collaterals, and sUSD minters will no longer be exposed to the debt pool.
Finally, the introduction of crvUSD & GHO presents new strategies for maximizing DeFi yields to surpass TradFi yields and even assisting DeFi enthusiasts in selling at the top during the next bull run.
Individually, these changes might appear small, but when considered collectively within the broader DeFi context, they indeed fuel hope for a genuine golden age of decentralized stablecoins.
Are you feeling bullish?
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