Stablecoin landscape: centralized, overcollateralized and algorithmic designs
Thread989 words
Maps stablecoin designs by the trilemma of peg stability, capital efficiency and decentralization: fiat-backed, CDP-based, algorithmic and fractional-algorithmic, with market caps and post-UST risk lessons.
Key claims
Stablecoin market cap above $150bn, USDT 44% at $68bn, USDC $51bn, BUSD $20bn
CDP stablecoins typically require 120% to 150% overcollateralization
MIM fell from over $4.5bn to about $200m after UST collapsed
0/ stablecoin liquidity is a core element of a flourishing, decentralized financial system
let's explore the #stablecoin landscape & have a look at the largest & most innovative stablecoins out there
featuring $USDT, $DAI, $FRAX, $UXD & more
mega-🧵 on stablecoins (0/50)✨👇
1/ stablecoins are #cryptocurrencies the value of which is pegged, or tied, to that of another currency, commodity or financial instrument
2/ most #stablecoins use the the U.S. dollar as their “stable” reserve asset. Stablecoins are designed to reduce volatility relative to unpegged #cryptocurrencies like Bitcoin and bridge the worlds of crypto & fiat currencies
3/ combining traditional-asset stability with digital-asset flexibility has proven to be a very popular idea in the #crypto space and billions of dollars have flowed into #stablecoins as they’ve become one of the most popular ways to store and trade value in the crypto ecosystem
4/ today, stablecoin market cap stands at >150bn USD with $USDT dominating the market cap at 44%
top 3 USD #stablecoins by mcap:
- $USDT at $68bn
- $USDC at $51bn
- $BUSD at $20bn
5/ while the top 3 stablecoins are all based on a centralized issuance model (@tether, @circlepay, @binance) & are collateralized by 100% USD (or other liquid real-world assets), there are also other approaches to building stablecoins
6/ similar to the better known blockchain trilemma (in the context of scaling), #stablecoins face a trilemma between three desirable features, out of which only two can be achieved at once
7/ while algorithmic #stablecoins like the collapsed $UST made sacrifices on peg stability by prioritizing capital efficiency & decentralization, the above-mentioned centralized stablecoins go for peg stability & capital efficiency
8/ but lets have a more comprehensive look at the types of #stablecoins that exist:
- centralized & fully collateralized (USD & RWA)
- decentralized & overcollateralized (crypto)
- decentralized & algorithmic
- decentralized & fractional-algorithmic
9/ in order to better understand the differences between the various #stablecoin models, let's explore the stablecoin landscape in more detail
10/ centralized & fully collateralized (in USD):
- $USDT by @tether
- $USDC by @circlepay
- $BUSD by @binance & @PaxosGlobal
these stablecoins all prioritize peg stability & capital efficiency (no over-collateralization) but sacrifice decentralization
11/ $USDT is a USD-pegged stablecoin that is centrally issued by @tether and collateralized 100% by mainly USD & cash equivalents, but also other assets (see below image). It is the largest stablecoin with a market cap of $68bn
12/ $USDC, the second largest stablecoin is also USD-pegged and collateralized at 100% (see screenshot below). It differentiates itself from @tether with a stronger focus on regulatory compliance and currently stands at $51bn market cap
13/ finally, we have $BUSD, another fiat-collateralized USD stablecoin launched in collaboration btwn @binance & @PaxosGlobal. $BUSD is issued by Paxos, a NY-regulated financial institution & each $BUSD token is collateralized 1:1 by USD held in Paxos-owned US bank accounts
14/ decentralized & over-collateralized (in crypto):
- $DAI by @MakerDAO
- $LUSD by @LiquityProtocol
- $USDJ by @defi_just
- $USDX by @kava_platform
- $MAI by @QiDaoProtocol
- $GHO by @AaveAave (not live)
- $crvUSD by @CurveFinance (not live)
- $MIM by @MIM_Spell
15/ all of these stablecoins are based on a system of collateralized debt positions (CDPs) pioneered by @MakerDao. Users deposit collateral into a vault & can subsequently mint $DAI. If the minimum collateral ratio is breached, $DAI borrowers face liquidation of collateral
16/ which types of crypto-collateral are eligible for opening vaults depends on the protocol. However, over-collateralization ratios are similar across protocols and range from 120% to 150%
17/ in @MakerDAO's case, backing is mainly made up by $USDC and $ETH (see below image)
18/ however, while the over-collateralization brings security, it also means that in order to try to achieve peg stability & decentralization, protocols must sacrifice on capital efficiency
19/ but some protocols like @AaveAave with its upcoming $GHO stablecoin have come up with approaches to improve capital efficiency of the CDP model. In $GHO's case, by using productive assets generating interest (aTokens) as collateral in the CDPs
governance.aave.com/t/introducing-gho/8730
20/ why does @AaveAave want its own stablecoin you ask?
easy:
x.com/tokenterminal/status/1566458893382942722
21/ @CurveFinance's $crvUSD which was announced in July, will also be based on a CDP model. It will definitely be interesting to see what design opportunities #stablecoin issuance by a major DEX will create, as this is the first time we see this
22/ it is for example likely that LP tokens will be integrated into the collateral system, increasing capital efficiency similar to how $GHO makes use of aTokens
www.coindesk.com/tech/2022/09/07/defi-platform-curve-finance-takes-first-steps-toward-crvusd-stablecoin/
23/ while there have been a couple of projects that tried to challenge Maker in the past, #Maker's safety & stability orientied approach remains king in the decentralized #stablecoin space
24/ ambitious projects like #Abracadabra's $MIM using a wide range and complex collateral such as interest-bearing tokens, have often miscalculated risks
when $UST collapsed, $MIM for example suffered from $UST collateral & its mcap subsequently dropped from >$4.5bn to ∼$200m
25/ decentralized & algorithmic:
- $UST by @terra_money
- $USDD by @trondao
- $USDN by @wavesprotocol
- $CUSD by @CeloOrg
while $UST has been a painful reminder of the risks that come with algorithmic stablecoins, there are still stablecoins relying on algorithmic models
26/ $UST has famously collapsed in May. I won't cover $UST in more detail here
for more info, see:
x.com/expctchaos/status/1524795622775263235
27/ the three algo #stablecoins that you should be aware of are the following:
- $USDD: minting is centralized & limited to 9 TronDAO members
- $USDN: current collateral ratio is only 11%
- $CUSD: Minted only by $CEL but more transparent than others
28/ @DefiIgnas has written a great thread on those:
x.com/DefiIgnas/status/1559857905524174848
29/ decentralized & fractional-algorithmic stablecoins:
- $FRAX by @fraxfinance
- $UXD by @UXDProtocol
- $FEI by @feiprotocol
30/ since the Tribe DAO that controls $FEI is planning to shut down, $FEI won't be covered in this thread
for more info, see:
- x.com/DefiIgnas/status/1560794521977626624
- x.com/samkazemian/status/1560922661387001856
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