The launch of $GHO and $crvUSD is just around the corner, so are protocol-specific stablecoins the next big narrative?
Of all the cryptocurrency types, stablecoins still have the greatest product-market fit.
This is because they allow investors to use USD exposure in DeFi to trade, make payments, store value, or earn yield.
Today, the market cap of all stablecoins has grown to over $150 billion.
Given the massive adoption of stablecoins, and the desire to innovate the protocol and provide value to its token holders and users, protocol-specific stablecoins are beginning to emerge.
Recently, both Aave and Curve planned to launch stablecoins GHO and crvUSD .
Why would protocols seek to create their own stablecoins?
The first major reason is to increase revenue . In the overcollateralized model, the protocol calculates revenue based on the dollar amount of the loan outstanding.
To give an idea of how stablecoins are helping the protocol gain revenue, we can predict that Aave’s growth is due to the launch of GHO.
Suppose the stablecoin has a reserve factor of 10%, the optimal lending rate is 4%, and the GHO rate is 3%.
This income is kept entirely by the agreement. Of the roughly $150 million in Aave’s total interest to date, about $18 million is reserved by the protocol and distributed to the DAO. So if GHO’s supply grows to about $700 million, it will double the protocol’s revenue.
In addition to revenue, protocols can use stablecoins as a way to increase the value accumulation and utility of governance tokens . For example, holders of stkAAVE will be able to mint GHO at interest rates favorable to ordinary borrowers, giving users an incentive to buy and stake AAVE.
These protocols also have the ability to expand and contract the supply or use of collateral for certain strategies . For example, stablecoin issuers can build direct deposit modules with other lending markets, or deposit collateral with AMM LPs (e.g., Maker’s D3M and FRAX AMO).
Ultimately, a protocol capable of issuing its own stablecoin increases its competitive moat and reduces susceptibility to forks or vampire attacks .
This all sounds great, but where are the risks?
The main risk is the increased complexity of the protocol, so this is also a vector for attacks . There have been many bugs in stablecoins in recent years (Cashio, Acala, Bean, etc.) that have led to the complete bankruptcy of the protocol.
Competition in the stablecoin space is also fierce, with some decentralized stablecoins building huge moats on on-chain liquidity and cooperation with other protocols (such as Frax and Curve).
Protocol stablecoins may struggle to obtain deep liquidity, or be prohibitively expensive .
Additionally, as seen through Maker’s PSM, maintaining a strong peg while maintaining decentralization is extremely difficult, and regulatory or OFAC sanctions can make the creation and maintenance of protocol stablecoins extremely difficult.
Finally, a very important consideration is the liquidation procedure . If they are not properly enforced, the agreement could end up with massive losses on its balance sheet. crvUSD has also specially designed a novel liquidation mechanism due to its importance.
So, in a future of multi-protocol stablecoins, who will be the winner?
Besides those who have successfully created their own stablecoins, other beneficiaries are those projects that directly benefit from the increase in stablecoins and the demand for liquidity provided: Curve and Frax .
- Any stablecoin issuer will need to use Curve to ensure there is sufficient liquidity on-chain – which will generate more revenue and TVL for Curve.
- Frax is also integrated into Curve’s flywheel through CVX accumulation, and its FraxBP pool will be the primary pair for liquidity.
Outside of Aave and Curve, which projects will follow to build their own stablecoins?
The most likely projects are those that have achieved strong product-market fit and accumulated large TVL or user deposits: Compound, Lido, and Uniswap.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/why-are-protocols-such-as-aave-and-curve-creating-their-own-stablecoins/
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