Author: Zeke, YBB Capital Researcher

According to CoinGecko data, currently, the total market value of stablecoins has exceeded $200 billion mark. Compared with when we mentioned this track last year, the overall market value has nearly doubled and exceeded all-time highs. I once compared stablecoins to a key link in the encryption world. As a stable value storage method, they serve as a key entry point in various on-chain activities. Now stablecoins are beginning to enter the real world, demonstrating financial efficiency beyond traditional banks in retail payments, business-to-business transactions (B2B), and international transfers. In emerging markets such as Asia, Africa and Latin America, the application value of stablecoins has gradually been reflected. Strong financial inclusion allows residents in the third world to effectively cope with the high currency inflation caused by instability. Stablecoins can also participate in some Global financial activities and subscriptions to use the world's most cutting-edge virtual services (such as online education, entertainment, cloud computing, AI products).

Entering emerging markets and challenging traditional payments is the next step for stablecoins. In the foreseeable future, the compliance and accelerated adoption of stablecoins will become inevitable, and the rapid development of AI will also further strengthen the demand for stablecoins (computing power purchase, subscription services). Compared with the development in the past two years, the only thing that remains unchanged is that Tether and Circle still have a high degree of dominance on this track, and more start-up projects are beginning to turn their attention to the upstream and downstream of stablecoins. But what we are going to talk about today is still the issuer of stablecoins. Who else can take the next piece of cake in this extremely involved 100 billion track?

When we mentioned the classification of stablecoins in the past, we generally divided them into three categories:

Fiat-collateralized stablecoins: This type of stablecoin is backed by fiat currencies (such as US dollars and euros) as reserves and is usually issued at a 1:1 ratio. For example, each USDT or USDC corresponds to one dollar stored in the issuer’s bank account. The characteristics of this type of stablecoin are that it is relatively simple and straightforward, and in theory can provide a high degree of price stability;

Over-collateralized stablecoin: This type of stablecoin passes It is created by over-collateralizing other high-quality crypto assets with high volatility and good liquidity (such as ETH and BTC). In order to cope with the risk of potential price fluctuations, these stablecoins often require higher collateralization ratios, that is, the value of the collateral must significantly exceed the value of the stablecoins minted. Typical representatives include Dai, Frax, etc.;

Algorithmic Stablecoin: Its supply and circulation are fully regulated by an algorithm. This algorithm controls the supply and demand of the currency and aims to make the price of the stablecoin consistent with the reference currency (usually the US dollar). )hook up. Generally speaking, when the price rises, the algorithm issues more coins, and when the price falls, it buys back more coins on the market. Its representative is UST (Luna’s stablecoin).

In the years after the collapse of UST, the development of stablecoins mainly focused on micro-innovation around Ethereum LST, and built some types of cryptocurrencies through different risk balances. Overcollateralized stablecoin. As for the word "stable", no one mentioned it again. However, with the emergence of Ethena at the beginning of this year, stablecoins have gradually determined a new development direction, that is, high-quality assets combined with low-risk financial management, thus attracting a large number of users through higher yields and creating new opportunities in the relatively solid stablecoin market structure. There is an opportunity to seize food from the tiger's mouth, and the three projects I mentioned below all fall into this direction.

Ethena is the fastest-growing illegal currency since the collapse of Terra Luna As for the collateralized stablecoin project, its native stablecoin USDe surpassed Dai and temporarily ranked third with a volume of US$5.5 billion. The overall idea of ​​the project is based on the delta hedging of Ethereum and Bitcoin collateral. The stability of USDe is achieved by Ethena shorting Ethereum and Bitcoin on Cex with the same value as the collateral value. This is a risk hedging strategy designed to offset the impact of price fluctuations on the value of USDe. If the prices of both increase, the short position will lose money, but the value of the collateral will also increase, offsetting the loss; and vice versa. The entire operation process relies on over-the-counter settlement service providers, that is, the protocol assets are hosted on multiple external entities. There are three main sources of income for this project:

Ethereum pledge income: The user's mortgaged LST will generate Ethereum pledge rewards;

Hedging transaction income: Ethena Labs' hedging transactions may generate funding rates (Funding Rate) or basis spread income (Basis Spread);

Liquid Fixed rewards for Stables: placed on Coinbase in the form of USDC or placed on other exchanges in the form of other stablecoinsEarn interest on your deposits.

In other words, the essence of USDe is a packaged Cex low-risk quantitative hedging strategy financial product. Based on the three points of appeal, Ethena has good market conditions and excellent liquidity. It can provide a floating annualized rate of return of up to dozens of points (currently 27%), which is higher than the 20% APY of Anchor Protocol (the decentralized bank in Terra) back then. Although it is not a fixed annualized rate of return, it is still extremely exaggerated for a stable currency project. So in this case, is Ethena as extremely risky as Luna?

Theoretically speaking, Ethena's biggest risk comes from the thunderstorms between Cex and custody, but this black swan situation is unpredictable. Another risk needs to be considered: a run. A large-scale redemption of USDe requires the existence of a sufficient number of counterparties. Judging from the rapid growth of Ethena, this situation is not impossible. Users quickly dumped USDe, causing secondary market prices to decouple. To restore the price, the protocol needs to close positions and sell spot collateral to buy back USDe, a process that could turn floating losses into actual losses and ultimately exacerbate the entire vicious cycle. "1" Of course, this probability is much smaller than the probability of UST single-layer barrier rupture, and the consequences are not that serious, but the risk still exists.

Ethena also experienced a long trough in the middle of the year. Although its income dropped significantly and its design logic was questioned, there was indeed no systemic problem. risk. As the key innovation of 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 main network merger into exchanges, becoming scarce short liquidity in the bull market, and also providing exchanges with Provided a lot of fees and new blood. This project is an eclectic but extremely interesting design idea that achieves high returns while maintaining good safety. In the future, with the rise of order book Dex and more mature chain abstraction, I wonder if there is an opportunity to implement a fully decentralized stablecoin based on this idea?

Usual is a RWA stablecoin project created by former French Congressman Pierre PERSON, who was also an advisor to French President Macron. Affected by the news of the launch of Binance Launchpool, the popularity of this project 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 uses 1:1The reserve system is different from USDT and USDC in that users no longer exchange legal currency for equivalent virtual currency, but exchange legal currency for equivalent U.S. Treasury bonds. This is the core selling point of the project. Tether obtains Revenues are shared.

As shown in the figure above, the left side is the operating logic of traditional legal currency-collateralized stablecoins. Taking Tether as an example, users will not receive any interest in the process of casting legal currency into USDT. To a certain extent, Tether's legal currency can also be regarded as a "white wolf". The company purchases low-risk financial products (mainly U.S. Treasury bonds) with a large amount of legal currency, and its income last year alone was as high as 6.2 billion US dollars. Finally, it transferred these profits to high-risk areas for investment, making money while lying down.

The right side is the operating logic of Usual. Its core concept is Become An Owner, Not Just A User. .) The design of the project is also based on this concept, redistributing the infrastructure ownership to the total locked value (TVL) provider, that is, the user's legal currency will be converted into RWA of ultra-short-term US Treasury bonds, and the entire implementation process is through USYC conducted by Hashnote Operations, the company is currently one of the leading on-chain institutional asset management companies, supported by DRW's partners), and the final proceeds go into the protocol's treasury and are owned and governed by protocol token holders.

Its protocol token USUAL tokens will be distributed to locked USD0 holders (locked USD0 will be converted to USD0++), enabling revenue sharing and early alignment. It is worth noting that this lock-in period is as long as four years, which is consistent with the redemption time of some medium-term Treasury bonds in the United States (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 centralized entities such as Tether and Circle on stablecoins, and equally distributes the proceeds. divide. However, due to the long lock-up period and the low yield compared to the currency circle, in the short term, it may be difficult to achieve the large-scale growth of Ethena in a short period of time. For retail investors, the attraction may be more concentrated on Usual. Token value. In the long run, USD0 has more advantages. First, it makes it easier for citizens of other countries without U.S. bank accounts to invest in U.S. Treasury bond portfolios; second, it has betterWith the support of underlying assets, the 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.

f(x)Protocol is Aladdindao’s current As for the core product, we had a more detailed introduction to this project in last year’s article. Compared to the above two star projects, f(x)Protocol is less famous. The complex design also brings it many flaws, such as easy attack, low capital efficiency, high transaction costs, complicated user access, etc. But I still think 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 system called "floating stable The concept of "coin" is to dismantle 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 ETH price fluctuations. 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, a rebalancing pool was designed. Within this framework, there is only one highly liquid stablecoin pegged to the US dollar, namely fxUSD. Stable derivative tokens in all other stable leverage pairs no longer have independent liquidity and can instead only exist in rebalancing pools or as part of the backing of fxUSD.

A basket of LSD: fxUSD is supported by multiple liquid collateral derivatives (LSDs) such as stETH, sfrxETH, etc. Each LSD has its own stabilization/leverage pair mechanism;

Minting and redemption: When users want to mint fxUSD, they can provide LSD or buy from the corresponding Stable currency is withdrawn from the rebalancing pool. In this process, LSD is used to mint stable derivatives of that LSD, which are then deposited into the fxUSD reserve. Likewise, users can also usefxUSD exchanged back to LSD.

So in simple terms, this project can also be regarded as a super complex version of Ethena and early hedging stablecoins, but in the on-chain scenario, this balance and hedging The process is very complicated. First, the splitting of fluctuations, and then the margins of various balancing mechanisms and leverage, have had a negative impact on user access that has exceeded the positive attraction. In the V2 version, the entire design focus turned to eliminating the complexity caused 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-fungible It is a leveraged long position product with high beta value (that is, high sensitivity to market price changes). This feature allows users to conduct high-leverage transactions on-chain without having to worry 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 increase due to market fluctuations, nor will it be required due to changes in the leverage ratio. Unexpected liquidation due to changes;

No liquidation risk: Traditional leverage trading platforms may cause user positions to be forcibly liquidated due to violent market fluctuations. But f(x) Protocol V2 The design avoids this situation;

Exemption from capital fees: Normally, using leverage will involve additional capital costs, such as those incurred when borrowing assets interest. 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 the stability of the protocol. Different from the V1 version of the stable pool, the V2 version of the 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 income source of the entire protocol is based on position opening, closing, liquidation, rebalancing, funding fees and collateral income.

This project is currently one of the few non-overcollateralized and fully decentralized stablecoin projects. For stablecoins, it still seems a bit too complicated. It does not meet the minimalist design premise of stablecoins, and users must have a certain foundation to get started with peace of mind. In extreme market conditions, the framework design of various resistance barriers may also in turn lead to losses when a run occurs.Harm the interests of users. But the goal of this project is indeed in line with every cryptographer’s ultimate vision for a stablecoin, a native decentralized stablecoin backed by top crypto assets.

Stablecoin will always be a battleground for military strategists, and it is also a track with extremely high barriers to entry in Crypto. In last year's article "Trapped in a near-death situation, but still In "Stability Has Not Stopped Innovation" we briefly introduced the past and present of stablecoins, and hope to see the emergence of some more interesting decentralized non-super stablecoins. Now a year and a half later, we have not seen any start-up projects other than f(x)Protocol working in this direction. Fortunately, Ethena and Usual have provided some compromise ideas. At least we can choose some more ideal ones. More stablecoins for Web3.