foreword
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forewordThe demand for early stablecoins mainly comes from the solution of the following two problems:
The value anchoring problem of virtual assets:At first, the value of virtual assets fluctuated greatly and was difficult to stabilize, which brought uncertainty and risk to the cryptocurrency market. Stablecoins solve this problem by pegging to a stable asset, such as the U.S. dollar or gold, to stabilize its value.
Deposit and withdrawal issues under supervision:
Due to the imperfect supervision of the cryptocurrency market, there are certain risks and uncertainties in the deposit and withdrawal of cryptocurrency, which brings troubles to traders. Stablecoins avoid regulatory deposit and withdrawal issues by providing a stable asset that allows traders to use an asset similar to fiat currency in the cryptocurrency market.
The emergence of USDT provides an additional storage location for virtual assets, and currency-to-currency transactions have therefore replaced legal currency on-site transactions as the mainstream, which makes stablecoins a means of payment, and then plays the role of its value measure. As an emerging and closed system, the early encryption market needs the injection of external energy to increase the internal liquidity and value stability of the market. Centralized stablecoins have become an important channel for traditional funds to enter the encryption market. Since centralized stablecoins rely on the issuance and management of central institutions, there are financial and regulatory risks of the issuer. Since centralized stablecoins occupy an absolute dominant position in the stablecoin market, these risks may lead to a serious decline in the value of centralized stablecoins, or even collapse, thereby bringing unpredictable chaos and risks to the entire cryptocurrency market.
Most of the known native stablecoins to be launched in 2023 are based on existing protocols, such as Curve’s crvUSD, AAVE’s GHO, Dopex’s dpxUSDSD, etc. In addition, there are stablecoins that will track BTC and ETH prices and achieve excess reserves in stages, such as the stablecoin HOPE. The launch of these new native stablecoins shows that the stablecoin market is constantly evolving and innovating. By utilizing existing protocols and technologies, they hope to achieve more efficient, safer, and more stable stablecoin issuance and management. The launch of these stablecoins is expected to further promote the development of the cryptocurrency market, providing investors with more choices and a better experience.
This article will summarize the model and development trend of native stablecoins, cold start strategy, and flywheel effect mechanism, and compare the four native stablecoins that will be launched in 2023 from these three perspectives.
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01 The model and development trend of encrypted native stable currencyCrypto-native stablecoins are divided into two types:
Overcollateralized Stablecoins:
These stablecoins are backed by other cryptocurrencies such as Bitcoin or Ethereum as collateral and can be exchanged for collateralized cryptocurrencies with parameters adjusted to balance supply and demand. Examples include Dai (DAI), sUSD (SUSD), and BitUSD (BITUSD).Taking DAI as an example, its stability mechanism depends on its collateral and stable fee rate. Users deposit BTC, ETH and other collateral into smart contracts, and then lend DAI in a certain proportion. The contract adjusts the risk parameter of stable fee rate. , to balance the supply and demand of Dai. DAI is different from the centralized stablecoin. It is a new dollar that is truly created, while MakerDAO acts as a decentralized central bank, managing the issuance and stability of the stablecoin system. Compared with centralized stablecoins, DAI is more decentralized and open, making it more risk-resistant and decentralized. However, this stablecoin model also has certain risks, such as collateral value fluctuations and system security, etc., which need to be continuously improved and strengthened.
Algorithmic stablecoins:
Algorithmic stablecoins are not backed by any assets or not fully mortgaged, and the value stability depends on the operation of the algorithm mechanism and the supply and demand relationship of market demand. Examples include UST, Ampleforth (AMPL), Terra (LUNA), and Reserve Rights (RSR). Decentralized non-full pledge can be understood as the realization of the demand side management that does not have the pledge of underlying assets regulated by the algorithm mechanism, that is, the algorithmic stable currency.
Native stablecoins do not rely on external assets as collateral. Native stablecoins can achieve self-regulation and self-strengthening through mechanism design to improve stability. Due to the collapse of UST, the markets confidence in algorithmic stablecoins has been severely hit. Therefore, the current main development direction of the stablecoin market is the over-collateralization model. There are four main development trends of the over-collateralization model:
When the demand (and thus price) of an algorithmic stablecoin increases, new stablecoins are created to bring the price down to the desired level. Conversely, when demand is low (lower price), stablecoins are purchased from the market to reduce the circulating supply. The supply and demand relationship of algorithmic stablecoins is different from the logic of the traditional currency market. This logic seems irrational, but there are still many Suan stable projects appearing because of the extremely high seigniorage tax of Suan stable. Robert Sams wrote a paper in 2014 called A Note on Cryptocurrency Stabilization: Seigniorage Shares, which is also the source of the design framework for many stablecoins. This design framework is realized by issuing two tokens at the same time: one as a stable currency, and the other as a share token linked to it to regulate stability. In this case, the algorithmic stable currency can continuously absorb all the funds flowing into the system as seigniorage, that is, it creates liquidity internally. The advantage of this stable currency model is that it is more flexible and open, but there are also certain risks, such as insufficient market liquidity and algorithmic mechanism failure.
Lower mortgage rate to release collateral liquidity
In the stablecoin market, Liquity has emerged as a serious competitor to MakerDAO. Liquity adopts an efficient liquidation mechanism, so that the mortgage rate is only 110%, and HOPE also sets the same target mortgage rate. Compared with MakerDAOs 150%, this move can release more liquidity. The biggest innovation of Curves stablecoin crvUSD is to use AMM to replace the traditional lending and liquidation process. When the liquidation conditions are met, the liquidation process will be carried out smoothly through continuous liquidation instead of a one-time occurrence. This mechanism can reduce liquidation risk and prevent losses caused by market fluctuations. The specific mortgage rate of crvUSD has not yet been announced.
Improve stablecoin liquidity
Newly listed stablecoins generally face the problem of lack of usage scenarios, so it is necessary to provide direct or indirect incentives to users who provide liquidity. The indirect method is generally to cooperate with other stablecoins to build sufficient liquidity to increase the confidence of holders and increase the demand for stablecoins. For example, FRAX was launched in December 2020. In February 2021, the FRAX-3 Pool asset pool was constructed by providing FXS liquidity rewards on Curve, and the CRV incentives obtained by the FRAX fund pool were increased through Curve Gauge, and then further cooperation with Convex The incentives and governance rights for the FRAX-3 Pool asset pool have been improved, thereby building sufficient liquidity for FRAX. The direct incentive method uses the tokens in the ecosystem to motivate the liquidity of stablecoins. HOPE adopts this method to provide incentives for the governance token LT to users who pledge HOPE, thereby improving the liquidity of HOPE; in addition, HOPE The liquidity of HOPE is provided by a dedicated market maker. On the one hand, it ensures that HOPE has sufficient liquidity so that holders can withdraw at any time; on the other hand, it tracks the price of the reserve pool through arbitrage between casting and the market.
Fei Protocol uses a special way to achieve this goal. It proposes a Protocol Controlled Value (PCV) model. The assets stored in the contract by the user will be directly owned by the agreement, and the user cannot withdraw these assets. The agreement These assets can be used more flexibly to maintain FEIs liquidity and achieve FEI price stability.
Innovation of price anchoring mechanism
Rich usage scenarios
Issuing stablecoins not only needs to provide minting and issuance, but also needs to create usage scenarios for stablecoins. By building usage scenarios to increase the demand for stablecoins and expand their scale, the main forms are lending, trading, and providing liquidity incentives for trading pairs. Terra provides a wide range of uses for its stablecoin UST, such as payment (CHAI), savings (ANCHOR) and investment (MIRROR). HOPE will also provide users with rich usage scenarios by applying multiple protocols in its ecology. Among them, the HOPE Swap protocol supports transactions; the HOPE Lend protocol supports lending business; and the HOPE Connect protocol is an on-chain custody and settlement tool that can realize the connection between real assets and on-chain assets. Together, these protocols build a complete ecosystem and provide users with comprehensive blockchain services.
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02 Analysis of the cold start path of native stablecoins
Stablecoins have a self-reinforcing effect. The larger the scale, the higher the stability of its exchange rate, thereby attracting more users and capital to enter the market, further expanding the market size, and forming a virtuous circle. Taking the first native encrypted stablecoin DAI as an example, the price volatility of DAI in the early stage was very high, but as the scale grew, the volatility tended to be stable. For native stablecoins, the cold start stage is crucial. If the scale cannot be established, they will face insufficient competitiveness in terms of holders confidence and risk resistance.
Summary of cold start paths for some native stablecoins:
As the issuance and management platform of UST, the Terra public chain plays a vital role in the cold start phase of UST. As a public chain with the goal of commercial landing, the Terra ecosystem has integrated stable coins, synthetic assets, smart pools, offline payment and other scenarios in the early stage, bringing rich application scenarios to UST. For example, it has cooperated with Mirror Protocol to launch synthetic assets, and cooperated with Anchor Protocol to launch a lending agreement. Users can mortgage their assets on Anchor to borrow UST, and Anchor also provides UST with 20% fixed deposit interest and so on. These cooperations have promoted the promotion and use of UST, rapidly stimulated the demand for UST during the cold start period, and further increased the user groups and usage scenarios of UST.
After the V2 update, FRAX launched the algorithmic market-making module - AMO, which can automatically transfer collateral or FRAX to places with higher capital efficiency according to the mortgage rate, further promoting the growth of FRAX. The launch of AMO has rapidly increased the supply of FRAX from less than $500 million to $2.65 billion.
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Analysis of the cold start path of potential native stablecoins in 2023
crvUSD cold start path
As a stablecoin-based DEX platform, Curves unique advantage is that crvUSD can form trading pairs with various collaterals, forming a rich usage scenario for asset exchange. After the Curve War, the Curve team obtained a large amount of veCRV, which will directly help crvUSD gain development advantages in terms of liquidity and incentives.
GHOs cold start path
As a lending platform, Aave has the natural advantage of issuing stablecoins. Users loans and collaterals are centrally managed by a unified fund pool, which effectively reduces costs and improves efficiency, making the issuance of stablecoins more efficient and convenient. Therefore, creating a DAO-native stablecoin is a natural development and should also reduce costs for borrowers.
Cold start path for dpxUSD
dpxUSD is created by combining rDPX with the USDC liquidity pool, and minting dpxUSD by incentivizing users with discounts.
HOPEs cold start path
The planning of the HOPE stablecoin is different from other stablecoins. In the early development stage, the reserve price of HOPE will start from 0.5 USD. The funds raised by the issuance will be converted into BTC and ETH and deposited in the HOPE Reserve Pool (“HRP”). Users can mint HOPE during the initial release through the official protocol, or purchase HOPE thereafter through specific market makers or the HopeSwap protocol. As the cryptocurrency market recovers, the market cap of HOPE will gradually reach $1 (up to 100% of face value, peg event).
The liquidity of HOPE is provided by a dedicated market maker. On the one hand, it ensures that HOPE has sufficient liquidity so that holders can withdraw at any time; on the other hand, it tracks the price of the reserve pool through arbitrage between casting and the market. If HOPE fails to reach the price anchor of $1, users who purchased HOPE in the first stage can exchange HOPE back to BTC and ETH. Once HOPE has fully transitioned to HRP (excess reserve stablecoin), other tokens (such as stablecoins) will be included. Afterwards, the usage scenarios of HOPE stablecoins will gradually expand to lending, derivatives transactions and synthetic assets, etc.
Holders can obtain the governance token LT (Light Token) of the HOPE ecosystem by staking HOPE, and enjoy other benefits in the future HOPE ecosystem, such as the transaction fee discount of HopeSwap, etc.
HOPEs cold start mode provides users with triple value:
HOPE is an asset certificate composed of BTC and ETH, which can be traded and redeemed at any time, and can be used as a high-quality mortgage asset on DeFi, CeFi, and TradFi platforms.
Obtain platform governance token LT incentives.
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03 Flywheel effect between governance tokens and stablecoins
Through mechanism design, governance tokens can stimulate the growth of stablecoins in the early stage, and act as a stabilizer for price anchoring in the later stage. There is usually a mutually reinforcing positive feedback effect between stablecoins and governance tokens, forming a flywheel effect.
UST maintains the price of $1 through the two-way burning casting with LUNA. When there is demand for UST in the market, people will buy and burn LUNA, thereby driving up the price of LUNA. Terra uses the annualized interest rate of up to 20% provided by Anchor to continuously attract external funds into the system, thereby increasing the issuance of UST and pushing up the price of LUNA. Conversely, if the buyers liquidity of LUNA is not enough to support its price anchoring mechanism, it will lead to a spiral decline of UST and LUNA.
Frax is a stablecoin minted with USDC and FXS as collateral. As the demand for Frax increases, the demand for FXS will also increase, which will drive the price of FXS up, thereby bringing income to Frax reserve assets. In the future, Frax will transition to 100% USDC collateral, which will further strengthen the stability and sustainability of Frax.
Flywheel for AAVE-GHO
Holding and staking AAVE tokens can obtain stAAVE, which can reduce the total cost of minting GHO (ie lower interest), which helps to reduce the secondary market sales pressure of AAVE and ensure the security of the AAVE protocol. All the interest expenses incurred by GHO loans will be sent to the DAO treasury. If GHO reaches the market value of DAI, estimated at an average interest rate of 3.5%, AaveDAO can earn nearly 150,000 US dollars per day, which is conducive to the price growth of AAVE, thus It also makes GHO more secure.
Flywheel for rDPX-dpxUSD
rDPX V2 will introduce the ability to mint pegged assets by burning rDPX (making it deflationary). The more demand for dpxUSD, the greater the deflation of rDPX, the easier it is to push up its price, which in turn promotes the demand for dpxUSD.
secondary titleFlywheel for HOPE-LT
The value embodiment of HOPE:HOPE initially started with a reserve price of 50 cents. The agreement is expected to have an anchor price of US$1 and a reserve rate slightly above 100% (eg, 105%-112% in Hong Kong dollars) as the expected endpoint. Until HOPE hits the $1 anchor, holders will be similar to ETFs that hold ETH and BTC, while earning additional LT rewards. When HOPE stabilizes at $1, the excess profits of the protocol will flow into LT tokens.
The value of LT:
LT is the governance token of the protocol, which can be obtained by providing liquidity in the protocol, participating in various protocol services, or staking HOPE. LT can obtain veLT through pledge, which can increase the rate of return of LT. In addition, veLT can also be used to vote to increase the liquidity rewards of holders and obtain additional fee sharing.
This brings the HOPE-LT to the following flywheel:
Users holding HOPE tokens can pledge to obtain LT tokens to increase the holdings of governance and ecological incentive tokens while reducing the circulation of HOPE.
Users who hold LT can use veLT to boost, improve the efficiency of obtaining LT rewards, and vote Gauge to increase liquidity rewards and obtain additional service fee sharing, thereby further increasing the holdings of LT. DeFi projects in the HOPE ecosystem can obtain LT through transaction mining, and the emissions of each agreement are determined by voting, which also gives veLT the value of bribery.
When the reserve price of HOPE reaches $1, its value will be reflected in LT, which will further promote the demand for LT.
In short, the reserve rate and price of HOPE are affected by the market. If the market rises, the reserve price of HOPE will increase, thereby promoting the demand and holdings of LT. Conversely, if the market falls, the reserve price of HOPE will decrease, thereby reducing the cost of LT and reducing the demand and holdings of LT. The HOPE project will go live on April 19th.
epilogue
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Algorithmic stablecoins were once considered a very promising narrative in the stablecoin market. However, with the development of the market and the rapid expansion and collapse of UST, people gradually realized the fragility of this algorithmic stablecoin model without external asset support. This made market participants realize that the over-collateralization model is a more reliable way to keep stablecoin prices stable.
Among the over-collateralized native stablecoin projects, some are based on existing protocols, such as GHO, crvUSD and dpxUSD, which can guarantee the stability of their prices to a greater extent through the over-collateralization model based on existing liquidity . At the same time, some over-collateralized stablecoin projects have achieved a cold start through model innovation, such as HOPE, which uses the method of locking reserve assets and the creation of the DeFi ecosystem to maintain the price stability of stablecoins by establishing reserve pools and usage scenarios.
Today, native stablecoin projects with overcollateralization as the core are still exploring more efficient stabilization mechanisms, liquidation mechanisms, and richer types of mortgage assets. They are committed to improving capital utilization in response to market volatility and risks. The development of these projects not only provides the market with higher capital efficiency and more opportunities for capital arbitrage, but also provides more investment options for more investors, and ultimately promotes the development of the overall DeFi ecosystem.
