Overcollateralized stablecoins: These stablecoins are created by overcollateralizing other high-quality crypto assets with high volatility and good liquidity (such as ETH and BTC). In order to cope with potential price volatility risks, these stablecoins often require a higher collateral ratio, that is, the value of the collateral must significantly exceed the value of the minted stablecoins. Typical representatives include Dai, Frax, etc. Algorithmic stablecoins: The supply and circulation of stablecoins are completely regulated by algorithms. This algorithm controls the supply and demand of currencies and aims to peg the price of stablecoins to the reference currency (usually the US dollar). Generally speaking, when prices rise, the algorithm will issue more coins, and when prices fall, it will buy back more coins on the market. Its representative is UST (Luna's stablecoin). In the few years after the collapse of UST, the development of stablecoins has mainly been micro-innovation around Ethereum LST, and some over-collateralized stablecoins have been built through different risk balances. No one mentioned the term "calculated stability" anymore. However, with the emergence of Ethena at the beginning of this year, stablecoins have gradually determined a new development direction, that is, combining high-quality assets with low-risk financial management, thereby attracting a large number of users through higher yields, creating an opportunity to snatch food from the relatively solidified stablecoin market structure. The three projects I mention below all belong to this direction.
2. Ethena
Ethena is the fastest growing non-legal currency collateral stablecoin project since the collapse of Terra Luna. Its native stablecoin USDe is priced at With a volume of 5.5 billion US dollars, it surpasses Dai and ranks third. The overall idea of the project is based on Delta Hedging of Ethereum and Bitcoin collateral. The stability of USDe is achieved by Ethena shorting Ethereum and Bitcoin on Cex at the same value as the collateral. This is a risk hedging strategy designed to offset the impact of price fluctuations on the value of USDe. If the prices of both rise, the short position will lose money, but the value of the collateral will also rise, thus offsetting the loss; and vice versa. The entire operation process relies on over-the-counter settlement service providers to implement, that is, the protocol assets are hosted by multiple external entities. The project's income comes mainly from three sources:
Ethereum staking income: LST pledged by users will generate Ethereum staking rewards;
Hedging transaction income: Ethena Labs' hedging transactions may generate funding rates (Funding Rate) or basis income (Basis Spread);
Liquid Stables' fixed rewards: deposited in the form of USDC in Coinbase or in other stablecoins in other exchanges to obtain deposit interest.
That is to say, the essence of USDe is a packaged Cex low-risk quantitative hedging strategy financial product. Combining the above three points, Ethena can provide a floating annualized rate of return of up to dozens of points (currently 27%) when the market is good and liquidity is excellent, which is higher than the 20% APY of Anchor Protocol (decentralized bank in Terra) in the past. Although it is not a fixed annualized rate of return, it is still extremely exaggerated for a stablecoin project. So in this case, does Ethena have the same high risk as Luna?
In theory, the biggest risk of Ethena comes from the thunder of Cex and custody, but this black swan situation is unpredictable. Another risk needs to be considered. The large-scale redemption of USDe requires a sufficient amount of counterparty. Judging from the rapidly growing volume of Ethena, this situation is not impossible. Users quickly sell USDe, resulting in a decoupling of secondary market prices. In order to restore the price, the protocol needs to close the position and sell the spot collateral to repurchase USDe. The whole process may convert the floating loss into actual loss, and eventually aggravate the whole vicious cycle. "1" Of course, this probability is much smaller than the probability of UST single-layer barrier breaking, and the consequences are not so serious, but the risk still exists. Ethena also experienced a long period of lows in the middle of the year. Although the income dropped sharply and its design logic was questioned, there was indeed no systemic risk. As a key innovation in this round of stablecoins, Ethena provides a design logic that integrates on-chain and Cex, introducing a large number of LST assets brought by the mainnet merger into the exchange, becoming scarce short liquidity in the bull market, and also providing a large amount of handling fees and fresh blood for the exchange. This project is a compromise but extremely interesting design idea, which can achieve high returns while maintaining good security. In the future, with the rise of order book Dex and matching more mature chain abstraction, I wonder if there is a chance to realize a completely decentralized stablecoin according to this idea?
3. Usual
Usual is an RWA stablecoin project created by former French MP Pierre PERSON, who was also an advisor to French President Macron. Influenced by the news of Binance Launchpool's launch, the project's popularity has increased significantly recently, and its TVL has also rapidly jumped from tens of millions to about 700 million US dollars. The project's native stablecoin USD0 adopts a 1:1 reserve system. Unlike USDT and USDC, users no longer exchange fiat currency for equivalent virtual currency, but exchange fiat currency for equivalent US Treasury bonds. This is the core selling point of the project, sharing the profits obtained by Tether. As shown in the figure above, the left side is the operating logic of the traditional fiat currency-collateralized stablecoin. Take Tether as an example. Users will not receive any interest in the process of casting fiat currency into USDT. To some extent, Tether's fiat currency can be regarded as "getting something for nothing". The company used a large amount of fiat currency to purchase low-risk financial products (mainly US Treasury bonds), and its income last year alone was as high as US$6.2 billion. Finally, these incomes were transferred to high-risk areas for investment, making money without doing anything.
On the right is the operating logic of Usual, whose core concept is Become An Owner, Not Just A User. (Become an owner, not just a user.) The design of the project is also based on this concept, redistributing infrastructure ownership to the total locked value (TVL) providers, that is, the user's fiat currency will be converted into RWA of ultra-short-term US Treasury bonds, and the entire implementation process is carried out through USYC (USYC is operated by Hashnote, which is currently a leading on-chain institutional asset management company and is supported by DRW's partners). The final income goes into the protocol's treasury and is owned and governed by the protocol token holders.
Its protocol token USUAL token will be distributed to locked USD0 holders (locked USD0 will be converted to USD0++) to achieve revenue sharing and early alignment. It is worth noting that this lock-up period is as long as four years, which is consistent with the redemption period of some medium-term U.S. Treasury bonds (U.S. medium- and long-term Treasury bonds are generally 2 to 10 years).
Usual's advantage is that it maintains capital efficiency while breaking the control of a number of centralized entities such as Tether and Circle over stablecoins, and dividing the benefits equally. However, the longer lock-up period and the lower yield relative to the currency circle may make it difficult to achieve Ethena's large-scale growth in a short period of time in the short term. For retail investors, the attraction may be more focused on the value of Usual's tokens. In the long run, USD0 has more advantages. First, it enables citizens of other countries who do not have US bank accounts to invest in US Treasury bond portfolios more easily. Second, it has better underlying assets as support, and its overall scale can be much larger than Ethena. Third, the decentralized governance method also means that the stablecoin is no longer so easy to be frozen, which will be more preferred for non-trading users.
4. f(x)Protocol V2
f(x)Protocol is Aladdindao As for the current core product, we have introduced the project in detail in last year's article. Compared with the above two star projects, f(x)Protocol is less famous. The complex design also brings it quite a lot of defects, such as easy to be attacked, low capital efficiency, high transaction costs, complex user access, etc. But I still think that this project is the most noteworthy stablecoin project born in the 23-year bear market. I will give a brief introduction to the project here. (For details, please refer to the white paper of f(x)Protocol v1)
In the V1 version, f(x)Protocol created a concept called "floating stablecoin", which is to split the underlying asset stETH into fETH plus xETH. fETH is a "floating stablecoin" whose value is not fixed, but will follow small changes in the price of Ethereum (ETH). xETH is a leveraged ETH long position that absorbs most of the fluctuations in the price of ETH. This means that xETH holders will bear more market risks and rewards, but it also helps stabilize the value of fETH, making fETH relatively more stable. At the beginning of this year, following this idea, the rebalancing pool was designed, in which there is only one liquid and USD-pegged stablecoin, fxUSD. All other stable derivative tokens in stable leverage pairs no longer have independent liquidity, but can only exist in the rebalancing pool or as a supporting part of fxUSD.
A basket of LSDs: fxUSD is supported by multiple liquid pledge derivatives (LSDs) such as stETH, sfrxETH, etc. Each LSD has its own stable/leverage pair mechanism;
Minting and redemption: When users want to mint fxUSD, they can provide LSD or withdraw stable currency from the corresponding rebalancing pool. In this process, LSD is used to mint stable derivatives of the LSD, which are then deposited into the fxUSD reserve. Similarly, users can also redeem fxUSD back to LSD.
So in simple terms, this project can also be seen as a super-complex version of Ethena and early hedge stablecoins, but in the on-chain scenario, the balancing and hedging process is very complicated. First, the volatility is split, and then the margin of various balancing mechanisms and leverage has a negative impact on user access that has exceeded the positive attraction. In the V2 version, the entire design focus has shifted to eliminating the complexity brought by leverage and better support for fxUSD. In this version, xPOSITION was introduced. This component is essentially a high-leverage trading tool, that is, a non-homogeneous, high-beta (i.e., highly sensitive to market price changes) leveraged long position product. This feature allows users to conduct high-leverage transactions on the chain without worrying about individual liquidations or paying funding fees, and the benefits are obvious.
Fixed leverage ratio: xPOSITION provides a fixed leverage ratio. The user's initial margin will not be required to be increased due to market fluctuations, nor will it cause unexpected liquidation due to changes in leverage ratio;
No liquidation risk: Traditional leverage trading platforms may cause users' positions to be forced to close due to drastic market fluctuations, but the design of f(x) Protocol V2 avoids this situation;
No funding fees: Usually, using leverage involves additional funding costs, such as interest on borrowed assets. However, xPOSITION does not require users to pay these fees, reducing overall transaction costs.
In the new stable pool, users can deposit USDC or fxUSD with one click to provide liquidity support for protocol stability. Unlike the V1 stable pool, the V2 stable pool acts as an anchor between USDC and fxUSD. Participants can conduct price arbitrage in the fxUSD-USDC AMM pool and help fxUSD achieve stability. The source of income for the entire protocol is based on the opening, closing, liquidation, rebalancing, funding fees, and collateral income of positions.
This project is one of the few non-overcollateralized and fully decentralized stablecoin projects. For stablecoins, it still seems a bit too complicated and does not meet the minimalist design premise of stablecoins. Users must also have a certain foundation to get started with peace of mind. In extreme market conditions, the framework design of various barriers to resist bank runs may also in turn harm the interests of users. But the goal of this project does meet the ultimate vision of every crypto person for stablecoins, a native decentralized stablecoin backed by top crypto assets.
Conclusion
Stablecoins are always a battleground, and they are also a track with extremely high barriers to entry in Crypto. In last year's article "Falling on the verge of death, but stable but not stopping innovation", we briefly introduced the past and present of stablecoins, and hoped to see some more interesting decentralized non-overweight stablecoins emerge. Now a year and a half has passed, and we have not seen any startups other than f(x)Protocol working in this direction, but fortunately, Ethena and Usual have provided some compromise ideas, at least we can choose some more ideal, more Web3 stablecoins.