Thread by @expctchaos

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_to, @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_to

- $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_to 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_to 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-…

20/ why does @AaveAave want its own stablecoin you ask?

easy:

https://twitter.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

coindesk.com/tech/2022/09/0…

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:

https://twitter.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:

https://twitter.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:

-

https://twitter.com/DefiIgnas/status/1560794521977626624

-

https://twitter.com/samkazemian/status/1560922661387001856

31/ focus in this thread will be on $FRAX & $UXD, which probably have the most innovative #stablecoin models

32/ $FRAX is a fractional-algorithmic stablecoin that is partially backed by collateral & partially stabilized algorithmically

$FRAX started at 100% collateralization in USDC. However, some of the value that enters into the system during minting becomes $FXS (which is burned)

33/ also, unlike in purely over-collateralized models ($DAI) where the debt minted is owned by the owner of the CDP, the protocol owns the debt in $FRAX's fractional-algorithmic model

hence, the protocol must simply ensure that it can honor redemptions by guaranteeing collateral

34/ This brings us to the probably most important innovation in #DeFi stablecoins: automated market operations

as outlined below, the federal reserve engages in open market operations, thereby influencing money supply & manipulating interest rates

#DeFi has learned from the fed

35/ automated market operations (AMOs) enable #DeFi protocols (@fraxfinane) to

- increase $FRAX supply
- decrease borrowing rates on lending markets (e.g. $AAVE)
- improve capital efficiency by creating cheap money
- generate revenue for the protocol

literally what the fed does

36/ initially, $FRAX started out with four #AMO strategies:

- Investor AMO (e.g. yield farming on @iearnfinance)
- $CRV AMO (providing #Curve liquidity)
- Lending AMO (mint $FRAX into $COMP & $AAVE)
- Liquidity AMO (LPing on Uniswap v3)

37/ however, there are more strategies in the pipeline:

- $FRAX Base Pools (3CRV competitors)
- FraxSwap (own constant product AMM)
- FraxLend ($FEI/$RARI competitor, lending market)
- FxsETH (liquid staking)

38/ how much $FRAX is available to deploy in these #AMO strategies depends on the collateral ratio (CR) of the protocol

in the case of $FRAX, its basically the market that sets the CR. When $FRAX is $1.01 the CR lowers. When the price of FRAX is $0.99 the CR increases

39/ when demand for $FRAX is high & price is $1.01, @fraxfinance uses this excess value as input to lower the CR by minting more $FRAX. Seigniorage, fees & excess collateral accrues to the governance token $FXS that is also minted to increase the CR when $FRAX is $0.99

40/ this concept basically allows the protocol to ask the market how much supply of money is okay to be unbacked. The market responds collectively through the $FRAX price

41/ after $FRAX v2 introduced the concept of algorithmic market operations introduced above, the protocol can basically do anything with new $FRAX & collateral as long as the market doesn't respond by pricing FRAX below 1$

42/ in summary, AMOs increase capital efficiency by allowing protocols to create money very cheaply. Simultaneously, it generates revenue for the protocol

43/ $FRAX has already become the second largest decentralized stablecoin (behind $DAI) at a market cap of $1.5bn

$DAI has a market cap of $6.4bn

44/ At least partially, this also explains why $AAVE & $CRV are launching their own stablecoins

both $AAVE & $CRV need liquidity to generate revenue, which they currently attract through liquidity mining programs

own stablecoins will likely increase capital efficiency for LPs

45/ interestingly, while their tokens will require collateral (CDPs), the #stablecoin implementations will also allow $AAVE & $CRV to mint #stablecoins at little cost & generate revenues through AMOs

46/ finally, another interesting stablecoin project is @UXDProtocol. With a market cap of only $20m, the #Solana-based project has gone largely unnoticed so far

@UXDProtocol uses delta-neutral derivates position to keep the peg

47/ when 1 $SOL is deposited into the protocol, a corresponding short positions is opened on @mangomarkets, enabling the protocol to earn funding rate, which is subsequently distributed to UXD holders

48/ #stablecoins play a key role in overall #DeFi ecosystem. It is therefore definitely worth keeping an eye on the space stay on top of the most promising concepts. Fractional-algorithmic stablecoins & AMOs are likely to reshape the stablecoin space

49/ however, (especially algorithmic) #stablecoins will likely face increased regulatory headwinds in the upcoming months

@HubbleProtocol has recently posted an insightful thread on stablecoin regulation:

https://twitter.com/HubbleProtocol/status/1560926328030986240

50/ thanks for reading if you made it until the end! If you liked this thread, please support me by following & sharing the first post of the thread 🥰✨