The launch of $GHO and $crvUSD are imminent.
Are protocol-specific stablecoins the next big narrative?
🧵 and report by @WestieCapital.
Are protocol-specific stablecoins the next big narrative?
🧵 and report by @WestieCapital.
1/ Stablecoins continue to have the greatest product-market fit of any token crypto, as they allow dollar exposure in DeFi to either trade, make payments, store value, or earn yield.
The market cap of all stablecoins has grown to over $150B dollars amongst the largest players.
The market cap of all stablecoins has grown to over $150B dollars amongst the largest players.
2/ Given the immense adoption of stablecoins, and the desire for protocols to innovate and provide value to their token holders and users, there has been a growing trend in protocol specific stablecoins.
Recently, both Aave and Curve have teased the launches of GHO and crvUSD.
Recently, both Aave and Curve have teased the launches of GHO and crvUSD.
3/ Why would a protocol look to create its own stablecoin? The first and primary reason would be to increase revenue.
In an overcollateralized model, the protocol accrues revenue based on the dollar amount of loans outstanding.
In an overcollateralized model, the protocol accrues revenue based on the dollar amount of loans outstanding.
4/ To give a sense of the revenue increase a protocol could obtain by creating its own stablecoin, we can project the increase for Aave as a result of launching GHO.
This assumes a stablecoin Reserve Factor of 10%, an optimal lending rate of 4%, and a GHO interest rate of 3%.
This assumes a stablecoin Reserve Factor of 10%, an optimal lending rate of 4%, and a GHO interest rate of 3%.
5/ This revenue is entirely kept by the protocol. As of now, ~$18M of Aave’s total interest of ~$150M is kept by the protocol and distributed to the DAO, so if GHO were to grow to a supply of around $700M it would double the amount of protocol revenue.
6/ Beyond revenue, protocols can also use the stablecoin as a way to increase value accrual and utility of the governance token.
For example, holders of stkAAVE will be able to mint GHO at a favorable rate to normal borrowers, giving users an incentive to buy and stake AAVE.
For example, holders of stkAAVE will be able to mint GHO at a favorable rate to normal borrowers, giving users an incentive to buy and stake AAVE.
7/ These protocols also have the ability to expand and contract the supply or use collateral for certain strategies.
For example, stablecoin issuers can set up direct deposit modules with other lending markets or deposit collateral into AMM LPs (e.g. Maker’s D3M and FRAX AMOs).
For example, stablecoin issuers can set up direct deposit modules with other lending markets or deposit collateral into AMM LPs (e.g. Maker’s D3M and FRAX AMOs).
8/ Ultimately, a protocol that is able to issue its own stablecoin increases its moat to competition and decreases susceptibility to a fork or vampire attack.
9/ This all sounds great, but what are the risks?
The primary risk is an increase in protocol complexity and therefore attack vectors. There have been plenty of stablecoin exploits in recent years (Cashio, Acala, Bean, etc.) that have led to complete protocol insolvency.
The primary risk is an increase in protocol complexity and therefore attack vectors. There have been plenty of stablecoin exploits in recent years (Cashio, Acala, Bean, etc.) that have led to complete protocol insolvency.
10/ There is also steep competition in the stablecoin space, with some decentralized stablecoins that have established large moats of on-chain liquidity and partnerships with other protocols (e.g. Frax and Curve).
Deep liquidity may be hard to bootstrap or very expensive.
Deep liquidity may be hard to bootstrap or very expensive.
11/ In addition, the ability to remain decentralized while also maintaining a strong peg is extremely difficult, as seen through Maker's PSM.
Regulation or OFAC sanctions could make protocol stablecoins very difficult to create and maintain.
Regulation or OFAC sanctions could make protocol stablecoins very difficult to create and maintain.
12/ Finally, a very important consideration is the process for liquidations. If they are not properly executed, the protocol could end up with large losses on its balance sheet.
crvUSD is specifically designed with a novel liquidation mechanism due to its importance.
crvUSD is specifically designed with a novel liquidation mechanism due to its importance.
13/ So, in a future where many protocol stablecoins exist, who wins?
Beyond those who successfully create a stablecoin of their own, the other beneficiaries are those who directly benefit from an increase in stablecoins and their desire for liquidity: Curve and Frax.
Beyond those who successfully create a stablecoin of their own, the other beneficiaries are those who directly benefit from an increase in stablecoins and their desire for liquidity: Curve and Frax.
14/ Any stablecoin issuer will need to use Curve in order to ensure sufficient on-chain liquidity, which leads to more revenue and TVL for Curve.
Frax is also integrated into the flywheel of Curve via CVX accumulation, and its FraxBP pool will be the primary pair for liquidity.
Frax is also integrated into the flywheel of Curve via CVX accumulation, and its FraxBP pool will be the primary pair for liquidity.
15/ Beyond Aave and Curve which projects are most likely to create their own stablecoin next?
The most likely candidates are projects that have already achieved strong product-market fit and a large amount of TVL or user deposits: Compound, Lido, and Uniswap.
The most likely candidates are projects that have already achieved strong product-market fit and a large amount of TVL or user deposits: Compound, Lido, and Uniswap.
16/ To learn more about protocol-specific stablecoins and their potential, read our free report by @WestieCapital.
blockworksresearch.com/research/proto…
blockworksresearch.com/research/proto…
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