New Gen Stables

24 min readFeb 2, 2023

Reviewing New Stablecoins from Design to Strategy

Intro

Financial primitives allow many applications to build. Primitives grease the wheels of innovation by providing a fertile bedrock in money legos, to build on top of. Sometimes primitives come in the form of tokens, and others are Dapps attracting the first batch of early users and believers in the future of decentralised, financial technologies.

Stablecoins are one of those primitives that allow people to engage in DeFi, and whereas some would see it as the entrance to a casino where one exchanges their fiat for (stablecoin) chips, it certainly is the gateway a number of participants will pass through when using DeFi.

Stablecoins provide a valuable risk-off hedge to volatility and also downside risk protection, that is, preservation of capital — provided its participants are kept safe from any hackers’ attack vectors — allowing participants to stay longer and try new strategies.

The savvy DeFi investor should have 2 resources (among others we will touch on later) while he participates in this sector. One is a well-researched list of protocols with value propositions they understand and believe in. These serve as the go-to investing vehicles they’d use to multiply their portfolio when accumulation periods are identified. The other is a set of stablecoin yield farming strategies for risk-off environments to earn yield. This would maintain some capital efficiency while prices are trending lower. The benchmark for these strategies could be beating inflation.

However, for the latter to be viable, investors must be able to trust the stablecoin of their choosing in order to commit to a strategy that allows them to “Stake and Chill”.

The focus of this essay will be on the new stablecoins from Platypus, Aave, and Curve. We will assess their mechanism designs, risks to the ecosystem, and what’s important for stablecoins to gain adoption within DeFi.

Platypus

The value of stableswap protocols combined with ve-tokenomics created a synergy that founders took note of. Once an entire protocol was established for acquiring a governance token and creating a market out of it — Convex & Curve — the business model gained validation, with a synergy subsequently replicated on multiple chains. Now notoriously among wider consciousness, it wasn’t long before stableswaps appeared on several alt-L1 chains, including Avalanche, home of Platypus, the most sophisticated stablecoin liquidity market created outside Ethereum.

After ten months in operation, Platypus had accrued enough value and trust to launch their own liquidity-backed stablecoin, USP. Using Maker DAO’s DAI design and contracts as a foundation, a key differentiator is using LP tokens as the primary collateral.

Mechanism Design

Tapping its own native liquidity improves capital efficiency and gives LP’s the opportunity to potentially double or triple their yields. Although when investors have a chance to lever, they usually do, so the mitigating feature installed is a collateral factor that controls the amount of USP that can be minted against each collateral option. Both the collateral factor and available collaterals are decided by governance.

Moreover, once governance has decided on safe parameters through which collaterals are made available on its platform, the supply side is set. Everything procedurally done to prepare USP stablecoin minting into circulation is completed. What’s next? Well, investors and protocols must be sure that the stablecoin will maintain its peg, maintain its value, be sufficiently backed, and liquidate easily in order to mint i.e. the demand side.

In order for USP to maintain its value, first it should maintain its 1:1 peg to the Dollar. A three-pronged approach actively contributes to this while one measure is completely passive. The passive measure is live reporting of public balances, which is in the spirit of DeFi, but given the growth and size of USDC and USDT, it would seem the market prefers a superior product to one that has superior transparency. This philosophical debate can be had another day, our focus shifts to the 3 active stability mechanisms.

Peg Stability

An Autonomous Coverage Optimiser with multiple benefits supports peg maintenance functions; revenue accrued by the protocol would be converted into LP tokens, used to mint USP, then supplied to the main pool on Platypus. This would increase Platypus’ ownership of the pool, simultaneously accruing rewards from the corresponding deposits, and reducing inflationary emissions. Hard coverage is significant because it’s liquidity that Platypus claims they will never withdraw.

Platypus uses an Adaptive Peg Stabiliser, practically similar to Algorithmic Market Operations, to also support dollar parity. When USP is minted, a stability fee for increasing USP supply is charged to the borrower. The stability fee is a function of the coverage ratio of the main pool — the percentage of the pool composed of USP against the amount of USP liquidity provided. When the coverage ratio is high it means more USP is being sold into the pool for leverage. This signals excess supply and the stability fee will increase to disincentivise borrowing. As USP is removed from the pool, loans are paid back bringing the USP price up to $1, and the stability fee lowers. The contrary would occur when the coverage ratio is low. Less USP in the pool means less borrows and the stability fee will decrease to incentivise borrowing.

The phrase ‘standing on the shoulders of giants’ is used to describe one party’s benefit through the leverage of a more influential party. Platypus leverages the staked stablecoin liquidity on their platform to support parity with other higher market-cap stablecoins. While not quite standing on the shoulders of giants, rubbing shoulders with them is good enough for parity, and USP adoption.

Aave

With GHO, there are parallels with a certain stablecoin already in circulation. GHO is an overcollateralised DeStable* that innovates on MIM’s design. Using isolated markets, and creating value flow to the DAO, GHO redefines what stablecoins can be and takes a step in an ethical direction

*DeStable = Decentralised Stablecoin

Model

Aave’s model for GHO is an interesting design and one that leverages the “as-a-service” business model seen in other sectors and protocols today. GHO minting capabilities are strictly reserved for Facilitators, who are vetted and DAO-approved bodies, while borrowing is for the end user. The first primary Facilitator of GHO will be Aave on Ethereum, coinciding with increased availability on other chains and Layer 2 networks. To enact this development, Aave first needed to upgrade mainnet on Ethereum, to v3

Facilitators

Facilitators will be protocols or entities with pre-assigned (and alterable) bucket capacities to mint GHO to borrowers. They serve as an intermediary between Aave and borrowers, helping to manage the supply of GHO in the market. Different strategies can also be utilised by facilitators, in other words, they are not confined to the overcollateralised model employed by Aave. In the future, we could see facilitators approved to mint GHO using collateralisation of different assets or mechanisms altogether e.g. uncollateralised, delta-neutral, etc.

This is where GHO’s model becomes interesting. With the advent of Facilitators, Aave is essentially licensing out the right to mint GHO. This turns GHO from just a stablecoin product, into a Stablecoin-as-a-service, creating an additional revenue stream for suitable parties to become facilitators. It is Trident-esque (Sushi’s upcoming AMM design) in that it pre-empts demand from existing and future projects for an established use case. Creating a stablecoin and packaging that into a streamlined implementation for time-efficient programmability. Both Yeti finance and Notional have already expressed interest in becoming facilitators.

The criteria for Facilitator eligibility isn’t currently available, but what is sure is that there will be various strategies employed, meaning there will be different risk profiles for each facilitator. In short, it is possible for collateral risk to be contained to each facilitator and have some isolation during volatility events.

Minting Supply

Expansion and contraction of GHO supply in the market will be controlled by interest rates set by the DAO. Facilitators must abide by all final rate decisions. It remains to be seen how they will profit from offering GHO, besides liquidations, as any interest paid by borrowers accrues to the DAO.

Aave as a lending market is under threat from two significant risks that challenge debt issuers: bad debt and insolvency. To mitigate against this, the community are incentivised to contribute funds to a reserve pool used to pay lenders by staking the $AAVE token for $stkAAVE. In order to further incentivise deposits into this pool — with the added risk of GHO to the Aave product suite — $stkAAVE depositors enjoy a discounted borrowing rate for GHO. To clarify, market-wide GHO interest rates are decided on by the Aave DAO. While this interest rate is enforced, any user that holds $stkAAVE, is entitled to cheaper GHO if they mint. The discount is proportional to their share of the total $stkAAVE.

Buy $AAVE → Stake $AAVE for $stkAAVE → improve solvency in worst-case scenarios → Become eligible to mint $GHO at a special discount rate.

Curve

When rumours regarding Curve’s stablecoin began circulating, it quickly became a coveted interest of many DeFi power users, to say the least. The rumours were put to bed after Aave suffered a ‘highly profitable trading strategy’ leaving it with $1.6 million in CRV bad debt. In response to this event that tanked CRV’s price, Curve released a prototype whitepaper detailing the mechanism behind its stablecoin. The positive news propped up their token price.

Due to a lack of information surrounding crvUSD, we will cover what developments have been released and what’s known to be confirmed about the coin.

LLAMMA

Curve uses an overcollateralised model involving ETH as the primary collateral accepted to mint crvUSD. This is paired with a new AMM design called LLAMMA (Lending-Liquidating Automated Market Maker Algorithm) to orchestrate continuous liquidations and de-liquidations.

The term ‘De-liquidations’ explains part of the LLAMMA mechanism because the design converts collateral into crvUSD when the collateral price trends downwards, and converts crvUSD back into collateral as the collateral price trends back up. The conversions begin at upper and lower band limits set by the AMM depending on the collateral’s price. This saves users from liquidation and greatly reduces the risk of bad debt for Curve that either they or the community would have to pay for.

~For a deeper technical look at the mechanism, check their github or the #crvusd channel in their Discord. The team is always willing to answer questions~

Furthermore, the LLAMMA is also sandwich attack resistant so users can borrow free of risk from predatory bots. For open positions, borrowers will be able to experience the full upside of their collateral and have their downside capped while their collateral is managed autonomously.

Whereas the LLAMMA significantly reduces liquidation risk, potential users should note that the mechanism does not operate without costs. There’s no free lunch. When the collateral price passes an upper or lower band, the collateral becomes priced by the LLAMMA at a discount to incentivise arbitrageurs to profit from the collateral.

Collateral passes (lower) band → Position becomes undercollateralised → Portion of collateral (required to restore health factor) is quoted at a discount → Arbitrageurs purchase discounted collateral and sell on the open market.

The discount a crvUSD borrower’s collateral is quoted at leads to a realised loss by the borrower. Incremental levering and de-levering lead to reduced losses for borrowers between 1–5%, although this varies.

Also, it’s important to note that all interest payments on crvUSD will accrue to veCRV holders. There is also a possibility of veCRV holders receiving yields in crvUSD rather than CRV.

The PegKeeper contract ensures crvUSD remains stable. Using a crvUSD liquidity pairing as a reference stableswap pool, a smart contract directly mints and withdraws crvUSD from this pool to restore 1:1 parity depending on the deviation. Deviations above $1 trigger minting while deviations below trigger withdrawals.

Features

Liquidations

Liquidations are triggered when the collateral value falls to a level below the liquidation threshold. The asset backing a stablecoin mint is acquired by the protocol for sale to liquidators who purchase it for slightly cheaper than it’s worth. Liquidations are core mechanisms of lending markets and ensure fair value and operation for all platform users. If borrowers aren’t liquidated, it creates stress on the protocol as other users share in the losses.

One of the reasons FTX faced insolvency, besides total mismanagement of user funds, is because Alameda’s trading account was non-liquidatable. Meaning it could (and did) run up losses bigger than the margin allowed.

Efficient liquidation mechanisms are crucial in establishing solvency for stablecoins and hence, trust with borrowers. Platypus uses a similar model to Maker DAO in which time-based reverse auctions are carried out to sell liquidated collateral to bidders according to a price-time curve. Liquidators can purchase whole or partial collateral amounts until it is all sold.

If we imagine that the cost of liquidating is $10 and the collaterals market price is $120, then in this example, Liquidator 1 kicks off the auction with a $100 bid for a portion of the collateral. The auction continues with Liquidator 2 bidding on the remaining collateral for $95 and a total cost of $105, after which, the auction is completed so the remaining liquidators have lost their opportunity to make a profit. Liquidators that purchased discounted collateral are free to sell on the open market for $120 granted there are no sells that significantly move the price before they sell.

Aave’s process requires liquidators to know the exact details of the account (wallet address) they’d like to liquidate beforehand. This motivates liquidators to monitor all active loans and snipe liquidations when profitable for them. They’re incentivised for this process via a liquidation bonus paid.

Stability Mechanisms

Trust has already been mentioned as a mandatory incentive for stablecoins to survive in the market. An overarching factor of that trust is whether a stablecoin will maintain its peg. Peg stability is required because market forces (supply and demand) will put different pressures on a stablecoin’s price to push it above or below its peg. In volatility events when asset prices crash, the flight to safety for investors puts intense buy pressure on stablecoins and can raise their price above $1. In cases where investor confidence in a stablecoin wanes, or there is a significant uptick in redemptions due to indirect consequences, the price can drop below $1. The performance of stablecoins is important during these events and protocols would be tasked with deploying mechanisms to support their stables’ repricing rapidly.

A common feature that all stablecoins benefit from, is the protocol recognition of their native coin as $1, making arbitrage opportunities possible. Each protocol also primarily supports an overcollateralised model. Overcollateralisation theoretically implies that in the case of default, there is enough capital to pay off the debt unpaid by the borrower.

Central banks control monetary policies for the jurisdictions in which they operate. A main method they use to stimulate and contract their economies is by changing the cost of capital. They control the conditions in which their nation’s money supply is printed. At the time of writing, the federal funds rate is 4.5% — 4.75% compared to 0.5% 6 years ago. Mostly because the economy was overstimulated to >6% inflation.

The above is mentioned to show how important and influential interest rates are in controlling the money supply. Each protocol mentioned uses a stability fee when minting their stablecoin, which is essentially the interest charged on the stablecoin (money supply). Stability fees and money supply have an inverse relationship. When the fees (interest rates) are low, the money supply increases and vice versa. Protocols tether their stablecoins’ supply using interest rates that make it costlier or cheaper to borrow and thus, affect the leverage in the system.

However, the way these fees are controlled by each protocol differs. Platypus has the only algorithmically calculated fee based on key protocol indicators. For Platypus, the coverage ratio signals the amount of USP in the Main Pool. when there is too little USP in the pool, the pool becomes undercovered and the protocol will decrease the stability fee, making it cheap to mint USP and incentivise borrowing. A deeper look at the mechanism is in the “Peg Stability” section.

Aave’s fee will be charged as an interest rate set by their DAO. The DAO will come to a consensus on the rate Facilitators follow instead of coding algorithmic control. The DAO can benefit from decreased reflexivity in the event that circumstantial consideration is required. While Curve has not yet detailed how their stability fee will be calculated, what is confirmed is that the fee will be priced into the bands-set price range of the AMM-controlled collateral.

System Design

Since Terra’s blow-up, algorithmic stablecoins have been a thing of the past with the remaining protocols working on some variation of an actively managed stable, like UXD that mints stables against delta-neutral positions. An overcollateralised model helps all 3 protocols ensure borrowers pay back outstanding debts in full amounts.

In decentralised systems ‘code is law’ and there are no bodies to enforce obligations like the repayment of loans. Overcollateralised models guarantee a capital-efficient value transfer in case of liquidations. Furthermore, by locking in collateral valued higher than existing loans, increased solvency exists for the stablecoins leading to fewer price fluctuations.

Fees/ Revenue generation

Businesses must be profitable to stay alive and optimise sustainability. In rare cases, profit isn’t prioritised in favour of growth, but there are limited economies of scale available to DeFi protocols. Teams unaware of the effect of continuous unsustainable emissions, and hence, larger outflows than inflows, risk closing down prematurely. If a protocol isn’t generating more revenue than its costs, there needs to be a good reason for doing so.

Stablecoin projects can vary in their fee structures depending on their design. The balance is to not charge too much so borrowing is disincentivised but also not to grow too quickly for the liquidity available. Overcollateralisation does some justice in this regard, but protocols also compete on interest rates/stability fees, collaterals and their parameters, and liquidation fees.

Interest rates/stability fees have already been discussed. Stablecoin protocols can accept the same collaterals for minting, and generally would, due to consensus among the community for strong/hard assets. Assets like ETH and BTC would be found in all if not most lending markets because they are the most liquid digital assets. When two or more stablecoins can be minted through the same assets, the projects would compete on costs to the user. All things remaining equal, as a user, if I can mint 60% LTV on Platypus vs 70% on Aave, then I will choose GHO over USP.

Similarly, if the liquidation penalty is lower on Aave than Platypus, then Aave remains the better option because not only can I mint more, in the case I am liquidated, I pay less. If Platypus would offer the better rate then it is up to the user to calculate their risk profiles and what they are willing to endure. Liquidation fees also affect another party, the liquidator. Liquidators are looking for profit which is characterised by the highest liquidation fee possible.

with Curve, the LLAMMA will charge open borrowing positions when their collateral has to be managed. This surcharge amounts to the potential profit that incentivises arbitrageurs. The need to incentivise liquidators leads to a small loss for borrowers but this loss can be viewed as a payment for drastically reducing the liquidation risk of losing all assets.

Concerning liquidation fees, protocols must find a balance between, user costs, solvency (liquidators ensure solvency), and maintaining competition with other platforms.

Adoption

A key metric to gauge adoption for stablecoins is supply. Supply is dictated by utility and DeFi’s inherent composability offers several opportunities for integrations. Although composability powers decentralised networks, how did centralised stablecoins come to own the majority of the market share?

One can point to the level of security and familiarity-of-process as a reason. When Circle, Tether, or Binance issue stablecoins, they are taking fiat deposits and safekeeping them with regulation-compliant, reputable custodians. Stablecoin minters must trade-off between trusting the audits and regulatory checks these private entities undergo, and their profit-seeking bottom lines which inadvertently put users’ funds at some level of risk as they invest deposits for a return.

Institutional investors must also be wary of what is permitted in their jurisdictions so as not to upset regulatory bodies. But with the added scrutiny, it’s important to consider whether these investors are even interested in jumping through several hoops and self-custody of their own assets. Engaging with DeFi requires a know-how that many traditional investors lack. Addressing this gap, digital asset banks like Sygnum and Consensys’s institutional solutions alleviate some of these pain points, offering a smooth onboarding experience to DeFi that includes stablecoin acquisition, strategies, and general approved practices.

For DeStables, the situation could be seen as a philosophical one regarding the nature of security and trust, but to keep things empirical: Investors require stablecoins that won’t disappear overnight. To be clear, a stablecoin launched by a decentralised protocol is one that inherits the trust of the developers that wrote and iterated on the code, the auditors that criticised the code, and the DAO that approved its introduction to the market — if it’s not the primary product. If investors have a negative view of DeFi and don’t subscribe to that chain of trust then they will likely adopt a centralised solution.

I expanded on the point above just to show some of the risks involved when holding a stablecoin. On the whole, decentralised protocols are unregulated. Regulation is a stamp of approval that institutions can trust.

Focusing on the application layer, a deStable’s supply is usually a proxy of the following:

How long its been in circulation
How de-peg resistant it was during volatility events
If it can be used for leverage
What yield strategies can be run utilising it
How robust are its stability mechanisms (is it mostly kept at 1:1 dollar parity)

If a DeStable can perform well against some or all of these criteria then it should gain adoption. So far, we are yet to see a stablecoin that satisfies these parameters and hasn’t experienced growth. Over 2022 there were many events where investors were unable to withdraw their capital or were powerless as their risk-off hedge plummeted in value. With the various hacks that occurred in DeFi, investors question how safe it is to invest in DeFi and hold DeStables. However, the success of a few protocols shows why decentralisation is important and also why they could win in the future as they offer investors more flexibility.

First mover advantage supports Multi-collateral DAI as a decentralised alternative, but USDC is widely known with a supply that dwarfs DAI plus other prominent stables like Frax and LUSD.

Risks

A plethora of risks exist today that developers have to deal with. Most of these apply to stablecoins but one of the main risks that users would be concerned with is that of a bank run: What happens if we all want our money at the same time?

Historically, we can point to major volatility events to see how well deStables held up during sell-offs. Theoretically, the overcollateralised system means that redemptions should happen when required, and a bank run would only become a problem if the collateral used to borrow stables wasn’t there. On Decentralised networks, this shouldn’t happen because it would be outside of a smart contract’s encoded functionality. When users redeem, collateral is given.

Peg Maintenance

Part of the trust the market has in a stablecoin is trust that it will maintain its value, in other words, maintain its 1:1 peg with the dollar. Any deviations from this parity incentivises arbitrage traders to bring it back to $1, a useful market force supporting stablecoins. However, parity is also a function of liquidity and if liquidity is insufficient to support trades in one direction, then it is liable to a significant de-peg event which causes a bank run as investors lose confidence and solvency risks are made real. Therefore, it is advantageous to protocols to create organic, sustainable demand for their stablecoins and make them liquid. Bootstrapping liquidity isn’t out of the question, but this may come with added complications for the terms agreed upon if seeking out private liquidity providers. Threatening the trust structure of the ecosystem.

Bad Debt

Lending markets’ biggest risk across any jurisdiction is bad debt. Borrowers defaulting. If borrowed capital isn’t paid back the lender is down a specific amount of money. For a business that gives loans as a primary revenue driver, this needs to be mitigated as much as possible. In the real world, we have both retail and institutional credit scores to decipher the likelihood a borrower will pay back a loan in full — with interest — but in DeFi, we don’t have this ‘luxury’ even though some protocols are in development to facilitate uncollateralised loans using on-chain credit scores.

There are two types of bad debt: one occurs when it is unprofitable for liquidators to liquidate assets, and the other is when borrowed capital is never returned. Both cases incur heavy costs for a protocol and introduce a burden that has to be alleviated by the community. To reduce the risk of bad debt, protocols can gas-optimise their liquidation processes and limit liquidator overheads. The case where a protocol or community must pay for the debt is reflected in Aave’s $stkAAVE reserve pool, and also part of the reason for the $MKR token. In Aave, bad debt costs are absorbed by $stkAAVE holders

Lending Parameters

Protocols would usually have a documented governance procedure to onboard collateral options. When collaterals are discussed, a core tenet of the conversation is the trade-off between revenue and safety. Although new collaterals pose an opportunity for protocol revenue, they shouldn’t be introduced at the expense of the ecosystem. Moreover, parameters such as collateral factors, reserve factors, liquidation thresholds, and LTVs, serve to buffer market access to certain collaterals given their risk profile. Assets with typically low liquidity (and higher volatility) would be subject to low LTVs and more restrictive thresholds, leaving high liquidity ones with more leeway.

Example of data required to assess a collateral’s eligibility for Aave.

Here’s an example of a proposal on Aave to introduce cbETH.

Oracles

Other pertinent risks include hacks or malicious attacks at the smart contract level. Hacks would involve a bad actor acquiring access to the controls of the application to make some kind of self-benefiting change, which doesn’t happen too often in DeFi; ‘attack’ would be more fitting. Any attacks that have occurred in the past on lending markets have been through manipulating the prices retrieved by price oracles, as reported in these cases.

For Aave, Curve, or Platypus to have confidence in their collateral options and hence models, oracle risk is important to minimise because it can pose a risk to the system at large. Although it would still adversely affect Aave, their mechanism involves isolating the various lenders (facilitators) to a degree, helping contain any potential damage and reduce a contagion effect.

Brand Value

A core tenet of decentralised technologies includes distributed risk throughout the system so a single point of failure is evaded. As a result of such fundamentality, protocols are often touted as ‘trustless’ although, upon further analysis, this doesn’t seem to be the case. For cryptographic networks and applications, there’s a reallocation of trust from humans, to the code and hence the summation of a development team’s skillset.

Trust in humans shifts to trust in developers’ abilities to write sound, bug-free smart contracts, bug-free frontends, and to have all other technological pieces functioning in a safe manner. Once this has been carried out, trust is also allocated to the security companies that audit the code, and then depending on more meticulous details, there is trust allocated to integrated parts, e.g. multisigs implicitly trusted because a chainlink oracle is used.

When a company delivers on its promise or does exactly what it said it would do, we say it has a strong brand. A brand is representative of reputation and eventually leads to an expected level of qualities its customers can trust, helping establish it as an authority in the markets’ mind. In DeFi, a strong brand is synonymous with a functioning product that behaves as it is supposed to; It is also characteristic of a sophisticated governance process in which there is a continuous, healthy discourse, and depicts an active, welcoming community that makes it easy to integrate newcomers.

Aave, Curve, and Platypus all leverage the trust their brand has built up since their respective inceptions to release an important financial primitive, and give users optionality while they DeFi. All three outlined features are present in each protocol’s brand, with various sub-accounts spawning off their impetus. If stablecoins inherit the trust of the team behind them, then the three aforementioned protocols have created strong brands to help bootstrap demand for their new products. The psychological leap investors have to take to engage in their new product is relatively low due to their track record.

Each protocol has also managed $1b in TVL at some point in the past, with declining TVLs mostly affected by market sentiment. They do not have a history of malicious attacks and some have created initiatives to improve the DeFi ecosystem by onboarding users.

The Demand-Side

The supply-side and demand-side for stablecoins is imbalanced (in demand’s favour) due to four factors. Desire for:

A Crypto-native risk-off asset
A Safe, non-volatile on/off ramp
Low-risk investment strategies (yield strategies)
Leverage

The above factors combine to reduce friction in entering the ecosystem but also provide enough utility for capital to stick. If a user can acquire stablecoins smoothly and deposit them in a low-risk strategy — given they are comfortable with the level of smart contract/protocol risk — earning >5–10% yield, it’s likely that capital will stay in the ecosystem ready to pounce on the next bull narrative or profit opportunity.

Furthermore, Stablecoins offer the chance to widen the demographic of crypto users from speculative gamblers and institutional trading desks to long-term investors and economically-aware citizens looking to park their principal in a competent product. The idea of DeFi — in line with Bitcoins’ true vision of creating an alternative means of finance — is to provide sophisticated financial tooling that’s capable of onboarding the unbanked, or those with limited access to institution-grade financial applications, through an open network without a single point of failure.

BTC maxis may argue this isn’t part of Satoshi’s vision but to be pragmatic (-ally frank), if bitcoin grows to the levels of Gold and becomes the worlds reserve asset or an apparent and palpable alternative, a sophisticated financial network built around it is required. Whether that is built on bitcoin (Stacks), Ethereum, or a CeDeFi hybrid of some sort (Custodia bank) I don’t know, but I am confident it happens because we’re already moving towards it today. In spite of DCG’s woes, onset by FTX’s recklessness, Greyscale’s various trusts can be included in 401ks and Florida-based Milo offers crypto collateralised mortgages.

As stablecoin offerings benefit from the lindy effect, and UX across crypto improves, the supply of stablecoins will inevitably grow. With an increasing interest in digital assets over the course of 2022, there’s an ever-growing demand for stablecoins to enhance on-chain experiences. Stablecoins play a crucial role for investors that is also symbiotic. The more investors there are to use stablecoins, the more feedback can be gathered, and the quicker protocols can iterate based on rich data.

Summary

The stablecoin landscape is ripening. The behemoth protocols about to release are both validating the necessity of stablecoins, and contributing to the ecosystem by providing new ideas and perspectives. An interesting point to note is the timing of release for these products. During the bull run, there was an abundance of protocols attempting to release stablecoins but few lasted. Successful designs were already present with DAI a pioneer, but still, these established protocols chose to release them in the thick of a bear market.

The teams may have closely reviewed other protocols which informed a ground-up design process, which takes time, or they may be more examples of the tenet that releasing products in a bear is better. Shipping in bear markets is known by OGs as a bold but highly necessary move. bear markets are when statistics deflate to real levels as most of the speculative and seasonal users have left the ecosystem. DeFi TVL is down from a $240 billion dollar peak, to $48 billion representing an 80% decrease at the time of writing. The people left are likely genuine users of protocols looking for real value and those unfazed by fear-inducing reporting. Also, quite simply, products are built because they’re useful, not because another bull market is going to come. This is akin to saying tomorrow is promised to us all.

Build now. Build well. Build more.

To maximise the performance of their new products, protocols will compete on the various factors previously mentioned and once they’re released, more will be revealed about their strategies to gain traction and evaluate their effectiveness. Important insights can be gleaned by monitoring data and the respective governance forums, which could indicate how other protocols may develop on top of the new designs. although some competition will arise, the models are very different and growth is about what makes sense for each protocol. However, I have no doubt that numerous growth opportunities will present themselves for each protocol.

I wouldn’t be surprised if there are already teams prototyping yield strategies or protocols with nuances in Curve’s, Aave’s, or Platypus’s designs in mind.

Thanks for reading.

~ Psaul

References

Frax AMO Explained — https://medium.com/r/?url=https%3A%2F%2Fdocs.frax.finance%2Famo%2Foverview

Platypus Yellow Paper — https://cdn.platypus.finance/Platypus_Stablecoin_Yellow_Paper.pdf

Defiant: Platypus Launches Native Stabelcoin USP — https://thedefiant.io/platypus-launches-native-stablecoin-usp

Daily Hodl: Platypus Launches Native Stablecoin USP — https://thedefiant.io/platypus-launches-native-stablecoin-usp

Decrypt: Aave’s Stani Kulechov — What Sets Our GHO stablecoin apart — https://decrypt.co/113295/aaves-stani-kulechov-what-sets-our-gho-stablecoin-apart

Aave Governance Forum — https://governance.aave.com/t/gho-development-update/10267

Consensys: Introducing GHO &Situating in the Stablecoin Ecosystem — https://consensys.net/blog/cryptoeconomic-research/tokenomic-research-introducing-gho-and-situating-it-in-the-stablecoin-ecosystem/

Curve Github — https://github.com/curvefi/curve-stablecoin/blob/master/doc/curve-stablecoin.pdf

Crv.mktcap video on leaked chats about crvUSD — https://www.youtube.com/watch?v=4PeVp2y9gEQ