Thread by @0xngmi

Something usually overlooked for stablecoins like UST, alUSD, MIM or FRAX is that what matters the most for their success is people wanting to hold the stable.

If nobody is willing to hold them, that puts a cap on their growth and impairs long term viability.

A thread 👇

Let's take a look at alUSD, if someone wants to use alchemix they'll mint 100 alUSD, but they can't use that anywhere, so they'll swap it for USDT, which they can use freely.

This swap lowers the price of alUSD, slightly depegging it.

What keeps alUSD in peg is that someone that minted alUSD before will buy it back and burn it to repay their position at a discount. But this makes the system shrink by 100$, which combined with the 100$ growth, cancel themselves out: system can't grow

To grow there needs to be someone that is willing to hold these newly minted coins and absorb the supply expansion.

Atm alchemix is solving that by heavily incentivizing the alUSD curve pool: 97% all alUSD is held there. The people holding alUSD are farmers.

But this comes with two problems:
- It puts a cap on alchemix's growth
- It's not sustainable long term because it's based on ALCX inflation

Growth cap: With ALCX emissions they've attracted 600M in liquidity to the pool, but that's as much money people are willing to put there.

If alUSD expands, pool won't expand along with it (pool expansion is only linked to emissions), so alUSD will need to shrink (no growth).

Sustainability: for alchemix to work there needs to be alUSD holders, and these are atm only incentivized by farming, so alchemix needs to keep emissions high for it to continue working.

None of these concerns can be solved with protocol-owned liquidity, the only solution is to create organic demand for the stablecoin.

This can happen in two ways:
- Create demand through protocols integrations (eg: MIM in TIME)
- Convince people to hold it as a stablecoin

Integrations: Create opportunities that require your stablecoin so people hold it to participate in these.

UST is doing that by being the base of all protocols on terra (almost all pairs on terraswap are against UST, anchor uses it...)

MIM/FRAX are used on TIME and TEMPLE...

Stablecoin usage: Convince people that want to hold stablecoins (to lower volatility) to hold your stablecoin instead of others.

This is what MIM is doing by memeing DAI as heavily backed by USDC and presenting MIM as a decentralized alternative.

DAI has a massive headstart there, it's already integrated in all curve pools through 3crv, used in plenty of defi protocols, and people hold it as a decentralized stable.

But nothing is forever, it will be interesting to see how these new stables drive demand to themselves.