Re-observation of collateralized stablecoins

The subject of this research is collateralized stablecoins. Together with algorithmic stablecoins, these digital currencies are attracting the attention of investors and create new use cases for users through increasingly efficient protocols, greatly innovating the DeFi world. The study considered the pros and cons of 6 projects and their stabilization strategies. In this article, we will introduce the internal functions of these protocols, as well as the framework we use to obtain and analyze data.

What is a collateralized stablecoin?

A collateralized stablecoin is a fungible token that is fully or almost completely backed by the collateral held in the reserve of the agreement that issued the token. Each analyzed program has a mechanism to maintain the mortgage ratio even in the event of adverse events in the market. In fact, each protocol has implemented its own settlement algorithm, introducing a new method of digital currency that stabilizes prices and user needs.

Ecosystem and key players

This area is one of the last developed areas. Although stablecoins have been part of the crypto ecosystem for a long time, in the last period, smart currencies that have never broken away from their pegs and are trying to be as decentralized and stable as possible are being developed.

The main players in this field are Liquity, sUSD, Fei, Venus, MakerDAO and Alchemix. These are the protocols that we have selected for research, with the purpose of analyzing the functions and methods of the protocols that support stablecoins. Since DeFi is expanding, it is noted that the protocol analysis not only Ethernet Square, part of the ecosystem, but also includes other proven to be able to perform EVM and compatible chain.

Indicators and key areas to be analyzed

In previous studies, a framework for defining metrics was used, and some excellent results were achieved. The study of agreement indicators that are sometimes difficult to analyze may be the basic part because it defines the general aspects involved in all projects.

The framework is divided into three macro reference areas:

  • Market design,
  • Mechanism design,
  • The design of the token.

These indicators are considered the most important because they affect the robustness of the design of such mortgage stablecoins. It should also be noted that the study is limited to the on-chain data from January 1, 2021 to May 24, 2021 to ensure that the time period used is consistent and eliminate any market shocks in different time periods.

Market design: an ecosystem where participants conduct transactions and tokens exist. Restricting the digital environment is important because market design defines structural constraints on the effectiveness of mechanisms.

Mechanism design: The mechanism design in the protocol defines the basic rules for managing the interaction between users and the protocol. Generally speaking, these indicators refer to how the agreement manages the volatility of the underlying asset to maintain a constant exchange rate over a period of time.

Token design: Token design defines the rules for managing project tokens. They include different indicators that define behavior, incentives, and stability indexes. Among these indicators, we also found an analysis of how the secondary token works and its role in the stability and rules of the protocol.

Go deep

Once the various aspects of the agreement have been studied and their behavior in individual indicators has been analyzed, the research will go deep into the “discussion” section. The point is to understand which parts of the different designs have the greatest impact on the final scenario of the stablecoin algorithm in production. Like the previous part, the discussion here is also divided into several parts, trying to define some basic points and find insights from it.

The purpose of this research is to understand which parts of the different protocol designs have the greatest impact on the final scenario we see in the reserve-based stablecoin market. Specifically, the goal of stablecoins is to optimize stability. To this end, we divide the discussion into 6 categories: network effects, demand, governance, stability, incentives, and secondary tokens.

Network effect: A decentralized network spreads transaction information through multiple channels instead of relying on a single point of contact. The number of links between each transaction determines the degree of centrality score.

Demand: The demand for stablecoins is determined by the number of transfers in circulation. Generally speaking, a higher percentage means higher availability of stablecoins. Ideally, we want a stable coin with high monthly transaction volume and rapid growth, with transaction volume growing faster than supply growth.

Governance: Governance can be divided into hard governance and soft governance. Hard governance includes rules, mechanisms, and ecosystem policies that are completely embedded in the code. Soft governance means that the regulatory agency can change the parameters of the ecosystem, such as changing interest rates, inflation rates, or redemption rates.

Stability: Since stability is the main aspect of these currencies, it is difficult to define it, so its definition and its identity are divided into several points, such as price frequency distribution, speed, efficiency and stability mechanisms.

Incentives: We have identified two main methods to analyze the incentives surrounding collateralized stablecoins. Of course, one of the focuses is the recurring theme and pivot of this research: stability. The second category contains “pure” incentives, which will not contribute to or help the stability of the agreement, but only rely on economic benefits.

Secondary tokens: Secondary tokens can cover a variety of different use cases. Some noteworthy examples may be: governance, risk redistribution, incentives, and protocol use cases associated with game theory mechanisms.


MakerDao is a decentralized lending platform that uses encrypted collateral to issue a crypto-backed stablecoin called $ DAI , which allows different types of collateral and is managed by Maker ($ MKR ) holders. In fact, it seems to be the most decentralized protocol, in which secondary tokens have the greatest utility and are used by holders.

Re-observation of collateralized stablecoins

in conclusion

Mortgage stablecoins are one of the most interesting parts of DeFi, and its influence in the entire ecosystem is increasing day by day. The basis of a perfect agreement is to allow tokens and currencies to best respond to external events through stability and robustness. Many basic problems found in the research should be used as clues to improve the status quo.

As mentioned earlier, the agreement we are talking about is still young, but potentially destructive. This research should be viewed as a personal opinion to better understand the current state of work, but it should never be determined as final or complete. DeFi, tokens, and stablecoins are a fast-growing field, and every month may subvert ideas and dynamics that were previously taken for granted.

Although this seems to be a very distant field from the mainstream, considering the steady and unstoppable growth of the digital economy, mortgage stablecoins have the opportunity to enter anyone’s wallet. Given the investment, developers, and enthusiasm in this field, it’s hard not to think that this field has a bright future.

Posted by:CoinYuppie,Reprinted with attribution to:
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