Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

The stablecoin market currently accounts for 14.2% of the total $1.07 trillion crypto market.

However, 90% ($140.9 billion) of the entire stablecoin market is dominated by 3 fiat-backed centralized projects: USDT, USDC, and BUSD.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

https://defillama.com/stablecoins

In comparison, the other 63 smart contract-based DeFi stablecoins combined account for only 8.3% ($11.72 billion) of the total stablecoin market cap.

In April 2022, the market cap of the UST algorithmic stablecoin was higher than that of DAI, but due to a design flaw, UST collapsed. Terra’s UST debacle wiped out half of the market cap of decentralized stablecoins.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

So what’s next for DeFi stablecoins?

With Aave and Curve about to launch their own stablecoins, I ventured through 25+ decentralized stablecoin protocols to find out:

  • How do they work?
  • How do they stay hooked?
  • What are their main use cases and main risk factors?
  • How do they expand their supply?

Most importantly, what makes them different from each other?

A complete database and analysis of stablecoins is available on ignasdefi.notion.site.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

I analyzed these protocols by type, market cap, mechanism of operation, major use cases, governance token utility, and major risks.

Stable, Decentralized and Capital Efficient?

Stablecoins avoid cryptocurrency volatility by keeping their value stable.

However, decentralized stablecoins must have transparent operating mechanisms and contingency measures to avoid censorship. Decentralization is a key selling point for DeFi stablecoins.

The third key feature is capital efficiency: how to effectively meet growing demand and scale? In other words, how to create money cheaply?

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

The Holy Grail is implementing all 3 features, but every project has to compromise on one of them.

Maker’s DAI is decentralized and the peg is guaranteed to be stable through over-collateralization, so it cannot mint DAI cheaply.

Terra’s UST compromises on peg stability, and everyone who trusts its algorithmic mechanics pays for it.

There are at least 3 more algorithmic stablecoins you should know about: Tron’s USDD, Waves’ Neutrino USD, and Celo’s cUSD

Algorithmic Stablecoins: Maximize capital efficiency at your own risk.

In short, algorithmic stablecoins are created by depositing $1 worth of volatile assets to issue $1 stablecoins. In the case of UST, 1 USD worth of LUNA can be exchanged for 1 UST.

If the UST price falls below $1, anyone can buy and burn UST for $1 to mint LUNA and then sell the LUNA at a profit. This will stabilize the price.

The realization of capital efficiency is simple: as the demand for UST increases, it increases the demand and price of LUNA. When the price of LUNA increases, the cost of minting 1 UST decreases.

On the way down, the process reversed, ultimately leading to the death spiral of UST.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

There are currently 3 major projects still using this algorithmic model: Tron’s USDD, Waves’ Neutrino USD, and Celo’s cUSD.

They have some features:

  • All three are minted from $1 worth of governance tokens to mint 1 stablecoin, but Tron limits minting to 9 Tron DAO members, including Alameda Research, Wintermute, and others. Tron also does not have a clear redemption policy.
  • Tron and Celo claim their stablecoins are overcollateralized by DAO reserves such as BTC, USDT and USDC and ETH. But reserve assets cannot be minted. The “collateral” here is similar to the BTC buffer that Terra gets to use in the event of a decoupling. However, these reserves did not succeed in saving UST.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

CUSD can only be minted with CELO, but its reserves include other crypto assets.

  • Only 10.89% of Wave’s USDN is currently backed by WAVES. Just a week ago, it was 16%. USDN lost its peg several times, once extended to the vires.finance lending agreement, and investors lost $500 million.

To remedy the situation, WAVES issued the SURF token used to buy WAVES at a discount, but it was locked until the USDN support rate returned to 115%.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

Near’s USN was originally designed as an algorithmic design, but due to the collapse of UST, the USN is moving away from algorithmic design. The team announced USN V2, which is now backed by USDT and will eventually support a wider range of collateral.

Shiba Inu (SHI) and Thorchain (TOR) plan to release algorithmic models, but both projects are looking for ways to “avoid the problems found in other moonshots.”

Overall, purely algorithmic models are in crisis. USDD is the largest by market cap, but it suffers from a lack of transparency and is centralized as its minting process is limited to a few entities.

Overcollateralization: Sacrificing capital efficiency for peg stability

Promoted by Maker’s DAI, 12 of the 28 secured stablecoin projects use overcollateralization to secure pegs.

Maker requires more than $1 worth of collateral to open a Collateralized Debt Position (CDP) to mint 1 DAI. Launched in 2017, Maker initially only supported ETH collateral to mint DAI.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

https://hackernoon.com/whats-makerdao-and-what-s-going-on-with-it-explained-with-pictures-f7ebf774e9c2

As demand for DAI grows, limiting it to ETH hinders growth. Added more types of collateral assets. It now accepts wBTC, Lido’s stETH, Curve and Uniswap LP tokens, real world assets, and most controversially USDC.

Maker DAO added USDC to keep DAI price stable, and DAI has been trading above $1 since then.

USDC is becoming a liability to Maker after Tornado Cash sanctions freeze USDC addresses. At the time of writing, 55% of the collateral is USDC. To avoid potential peg collapse and censorship, Maker founder Rune recommends staying away from USDC.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

“I think we should seriously think about preparing to decouple from the dollar…it’s almost inevitable and only realistic if there’s a lot of preparation.” — Rune Christensen

Nonetheless, Maker’s model has proven successful in maintaining the peg to the dollar over the years.

However, some projects dare to challenge Maker in two areas: capital efficiency and/or governance models

Abracadabra’s MIM

Abracadabra’s MIM uses a wide range of complex collateral, including interest-bearing tokens such as Stargate’s USDC.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

Collateral for Abracadabra

Accepting different collateral assets is more capital efficient, but more risky. MIM has backed UST before, but while it managed to stay pegged, its market cap has fallen from $4.6 billion to its current $220 million.

Nonetheless, MIM remains the fifth-largest DeFi stablecoin thanks to diverse collateral, liquidity mining, and an attractive SPELL staking mechanism that accumulates protocol fees for token holders.

Liquidity’s LUSD

Liquity’s LUSD is like Maker Lite.

ETH is the only accepted collateral. It eschews the cumbersome Maker governance model and offers 0% interest rate lending with a collateralization rate of only 110%.

Smart contracts are immutable (cannot be upgraded or changed) and minting fees are adjusted algorithmically.

LUSD has a stable pool that acts as a source of liquidity to repay the debt of liquidated positions. Liquity even offers LQTY incentives for running front-end websites to avoid censorship.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

LUST is probably the most decentralized stablecoin on the market. It won’t be the number one stablecoin by market cap due to only accepting ETH collateral, but it has a clear product market fit for a specific DeFi user group.

What’s special about Tron’s JUST, Kava’s USDX, and Mai Finance MAI?

The Tron DeFi ecosystem has two stablecoins: USDD and JUST.

JUST launched first. It uses Maker’s CDP model, but only accepts one and only TRX as collateral.

It makes sense for Tron to back USDD as it doesn’t need to be over-collateralized. Tron can mint more USDD than the same amount of TRX.

Kava’s USDX supports BUSD, BNB, BTCB, XRP collateral and previously accepted UST. USDX fell to $0.65 after Terra crashed. The high yield of BUSD is the main selling point of USDX right now.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

https://app.kava.io/earn/busd

MAI pushes the limits with the widest range of collateralized tokens: supporting 60 assets on 10 chains to mint MAI at 0% lending and borrowing rates.

Overcollateralization Innovation Beyond Maker

A number of stablecoins have brought innovations focused on capital efficiency or returns:

  • Synthetix’s sUSD is minted when SNX holders pledge their SNX as collateral at a 400% collateralization rate. SNX stakers receive weekly staking rewards in exchange for managing their staking rate and debt.
  • Yeti Finance’s YUSD accepts not one, but several income-generating assets. A user can mint YUSD with all of his portfolio assets, which should reduce liquidation risk.
  • Inverse Finance’s DOLA is borrowed against various collaterals in the currency market for which it is borrowed. Mortgage lending increases capital efficiency by renting out assets for income.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

  • Venus is a lending marketplace that allows VAI to be minted on lent collateral.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

https://alchemix.fi/

It appears that Aave’s GHO will fall into this category, with an emphasis on capital efficiency. GHO will mint on the provided collateral, but Aave eventually plans to back Real World Assets and Delta-Neutra positions (see UXD below).

Algorithmic stablecoins are more capital efficient but prove to be unstable. Overcollateralized stablecoins, on the other hand, have a hard peg mechanism, but are expensive to issue ($1 of stablecoin requires more than $1 of collateral).

There are some stablecoins that are trying to find the perfect middle.

Frax

Frax is a partly algorithmic stablecoin: partly backed by collateral and partly algorithmically stable.

It started 100% collateralized by USDC, but as the protocol entered partial state, some of the value that entered the system during minting became FXS (and then burned). At the time of writing, 9.5% of FRAX’s supply is algorithmic.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

https://messari.io/report/frax-a-fractional-algorithmic-stablecoin

For example, at a 90% collateral ratio, each minting FRAX requires $0.9 in collateral and burns $0.1 in FXS. At a 95% collateral ratio, each minting FRAX requires $0.95 in collateral and burns $0.05 in FXS, and so on.

CR decreases when FRAX is at $1.01. If the price of FRAX falls to $0.99, CR will increase.

Frax is the second largest DeFi stablecoin after DAI. Like DAI, FRAX is also at risk of USDC censorship, although the team plans to support more diverse collateral and issue other asset-pegged assets such as frxETH.

Frax’s economy currently consists of two stablecoins (FRAX and FPI, indexed to inflation), a native AMM (Fraxswap), and a lending facility (Fraxlend).

This model is more capital efficient and allows flexibility to increase FRAX supply. However, the most interesting innovation to improve Frax’s supply and capital efficiency is automating market operations, which I’ll cover later.

UXD

Few people have heard of the UXD stablecoin (UXD) as its market cap is only $21 million. Still, it uses a simple and interesting model for decentralization, capital efficiency, and stability.

As the only DeFi stablecoin native to Solana, UXD is pegged to the US dollar using a delta neutral position derivative.

Users can issue 1 UXD with $1 worth of SOL without over-collateralization.

Hedging the deposit of SOL collateral by opening a corresponding short position on the Mango market. Therefore, the long exposure of spot SOL is hedged by the short position, so the price movements of SOL are balanced against each other. This is called a delta neutral position.

Funding rates for delta-neutral short positions are generated and automatically assigned to stakers of the UXD protocol.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

Interestingly, the “delta neutral” position appears in Aave’s GHO proposal. Will it use something like UXD? We’ll have to wait and see.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

Hedge Fund Stablecoins

Thanks to yield farming, stablecoin holders can earn higher yields than any traditional bank can offer. At least during a bull market.

Yield farming is an active investment strategy. To maximize returns, farming farmers need to find the highest returns while reducing risk, taking into account gas and time opportunity costs.

Origin Dollar (OUSD) and mStable (MUSD) were launched to address these pain points. Both of these stablecoins are backed by other stablecoins such as USDT, USDC, and DAI. mUSDT also includes sUSD and allows the exchange of one stablecoin for another.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

These protocols function as hedge funds, using pooled funds and employing different strategies to earn returns for their investors.

Users deposit any supported stablecoin and get OUSD or MUSD. The protocol then deploys these stablecoins to Aave, Curve, or whatever else yields the highest yields, taking the risk into account. Gas costs are minimized and users do not need to actively manage yield farming positions.

Reserve’s RSV stablecoin also supports other stablecoins: 1/3 USDC, 1/3 TUSD, and 1/3 PAX. However, no active farming strategies were employed.

Finally, I would put FEI in the “hedge fund stablecoin” category. Fei is overcollateralized by various crypto assets, but in contrast to Maker, these assets are “owned” by the protocol. The user “sells” any supported asset for FEI, and the “sold” asset is included in the Protocol Control Value (PCV).

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

https://morioh.com/p/10612295506e

PCV is deployed into a strategy to secure pegs, yield farms and create utility for FEI and its governance token, TRIBE.

The “hedge fund” model is struggling. As DeFi yields fall and risks increase, FEI announces closure. MUSD, OUSD and RSV are also low market cap stablecoins.

To be fair, most stablecoins in this research focus on yield generation through different strategies, but the most popular is through automated market operations (AMOs)

AMO does more than just generate revenue, though.

Automating market operations: when stablecoins are constantly being minted

Central banks conduct “open market operations” by minting their own currency to buy securities, lend to banks, etc., thereby influencing the money supply and manipulating interest rates.

Buying securities adds money to the system, and loans are easier to obtain due to lower interest rates. But it devalues ​​the currency, leading to inflation.

Crypto enthusiasts have a lot of backlash against this kind of money printing, but there are several stablecoins that have learned from the Federal Reserve.

Frax’s v2 monetary policy can issue new FRAX as long as it does not change the FRAX’s peg price. Protocols can mint FRAX and deposit it in Curve, Aave, or anywhere else the DAO deems beneficial.

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

These Automated Market Operations (AMOs) have the following effects:

  • Minting FRAX and depositing it in a lending protocol reduces lending rates, making FRAX more attractive for lending than other stablecoins.
  • Curve AMO provides excess collateral and FRAX from the Frax protocol to the FRAX3CRV pool to ensure deep liquidity and strengthen the USD peg.
  • Generate income from borrowing, swap fees, yield farming, etc., and distribute to veFRX holders.
  • Go beyond Frax v1 partial algorithm models to improve FRAX supply and capital efficiency.

Unlike central banks, smart contracts allow algorithmic recovery of AMO if FRAX falls below the peg. The withdrawn FRAX reduced its supply and restored confidence.

This approach increases capital efficiency and partially solves the stablecoin trilemma.

To understand the relationship between capital efficiency and AMO, I recommend reading the FRAX founder’s tweet below.

Frax is not alone in brrrrrrrrrrr (minting) their own stablecoin. The following protocols do the same:

  • Maker launches D3M (Direct Deposit Module) in 2021 for minting and direct deposit of DAI on Aave. The operation appears to have been suspended, which may encourage Aave to issue its own stablecoin, GHO.
  • Synthetix proposes to create a sUSD direct deposit module to deposit 50-100 million additional sUSD into Aave.
  • Angle’s algorithmic market operations deposit agEUR into Euler Finance to channel agEUR liquidity, reduce borrowing rates and generate revenue for the protocol.
  • MAI: Provide MAI directly to the currency market, such as Market.xyz. More AMOs are in the works.
  • DOLA by Inverse Finance: Whales can extract value to lend themselves DOLA and exchange it for other assets to farm elsewhere. It can also mint DOLA without collateral and deposit into other protocols.
  • Alchemix: Use Elixir AMO (Automated Market Operations) to get additional funding and improve yields on Curve/Convex.
  • FEI performed several operations. Integrate with Ondo to match FEI with another project’s tokens (liquidity is a service provided to other DAOs). It also provides FEI to Rari Capital’s Fuse and the entire DeFi lending market, bootstrapping the market and adding liquidity to FEI.

These operations are complex, take a look at the Elixir AMO from Alchemix below:

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

https://alchemixfi.medium.com/elixir-the-alchemix-algorithmic-market-operator-2e4c8ad04569

In short, AMOs increase capital efficiency by creating money cheaply or for free, while generating revenue for the protocol.

This also explains why Aave and Curve launched their own stablecoins.

Aave and Curve need liquidity to generate revenue. Currently, they attract liquidity through liquidity mining, but by issuing their own stablecoins, they increase the capital efficiency of liquidity providers (LPs).

Analysis of the status quo of decentralized stablecoins: How are these 25 stablecoin projects performing?

While their tokens require collateral, AMO will allow Aave and Curve to mint stablecoins for free and increase revenue generation outside of their own protocols.

As more and more stablecoin protocols implement AMOs, stablecoin yields will continue to decline. Even for USDT, BUSD, and USDC (and other cryptoassets), lending rates will drop as they will be used as collateral to borrow FRAX, DAI, etc. at low rates to farm elsewhere.

This could start a new bull market as leverage will become cheap and liquidity plentiful.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/analysis-of-the-status-quo-of-decentralized-stablecoins-how-are-these-25-stablecoin-projects-performing/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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