On May 9, the Terra USD (UST) stablecoin in the Terra ecosystem showed the first signs of “depegging”. The value of UST is algorithmically secured to the price of the US Dollar — that is, 1 UST should always be equal to 1 USD. That started changing, fast. In around 12 hours, the value of UST plunged from 0.99 USD to 0.76 USD. On the back of assurances from Terra founder Do Kwon, the price rose to 0.93 USD before precipitously plunging to 0.30 on May 11. Complete mayhem ensued. $40 billion dollars were wiped out in one swoop, and the third-largest stablecoin by marketcap crashed and burned. Several thousand retail investors lost their life savings. The wider crypto market crashed into the deep red. US Treasury Secretary Janet Yellen issued a full-throated condemnation, stating that the incident highlighted the dangers posed by crypto stablecoins. The signs were not good. The threat of draconian regulations loomed larger than ever before.

Before going into the heart of the UST collapse, and understanding where Fluidity comes into the equation, let us cover the basics. What are stablecoins? Why do they exist?

In simple terms, stablecoins are tokens pegged to the value of fiat money (overwhelmingly the US Dollar), and reinforced by various designs (which we will explore in a bit) to ensure minimum deviation in value.

Why do we need stablecoins? Cryptocurrencies like Bitcoin are notoriously volatile, with hair-trigger responses that invoke price fluctuations in the range of 2–10 per cent in a day. That is where stablecoins come in, ensuring base layer stability for transactional purposes as a medium of exchange. In countries reeling under hyperinflation and acute economic distress, stablecoins became an easily and openly accessible alternate payment rail and store of value.

What are the different types of stablecoins available on the market? Different stablecoins utilize different mechanisms to ensure stability in prices. Here is the lowdown in transfer volumes per coin over the last 30 days (courtesy: Dune)

• Fiat-backed/centralized stablecoins: Here, every unit of stablecoin issued is (ostensibly) backed up by a corresponding unit of fiat currency in the reserve. Some popular examples are Tether’s USDT, Circle’s USDC and Binance’s BUSD. You deposit one USD, you mint one USDT; this would mean, ideally, you can redeem the deposited fiat at any point of time. One big problem is that fiat-backed stablecoins are highly centralized, with all funds in the custody, and at the complete discretion of the issuer.

• Crypto-backed/over-collateralized stablecoins: These are largely decentralized designs, where the stablecoins are over-collateralized by other crypto assets. For example, you can deposit $1.7 worth of SOL and redeem $1 worth of a crypto-backed stablecoin. The extra collateral serves as a hedge against possible asset volatility and subsequent under-collateralisation. Maker DAO’s stablecoin DAI is one popular example.

• Algorithmic stablecoins: Here, in lieu of collateralized backing, stablecoin prices are stabilized by complex algorithms. With the support of arbitrage incentives, the cryptocurrency supply is adjusted in accordance with the price directionality. For example, if the price falls below $1, the supply will be reduced; vice versa if the price rises above $1. There is also the ‘mint and burn’ mechanism, where a crypto pair works in tandem to ensure the peg is adhered to. UST is one example of an algorithmic stablecoin, and we will explore it more later in the piece. Ideally, an algorithmic stablecoin is capital efficient (that is, there is no need to over-collateralise) unlike crypto-backed stables, and fully decentralized unlike USDC or USDT.

Next, let us explore some popular examples:

• Pax USD: Fiat-backed stablecoin offered by Paxos, where each new USDP minted is backed by USD (or rather Treasury Bills). The project is audited by the New York State Department of Financial Services.

• StraitsX: A fiat-backed stable that is pegged to the Singapore dollar, and compatible with Zilliqa and Ethereum blockchains. The founders of the coin assured in this interview that the system was fully collateralized by cash, unlike most other centralized stablecoins.

• Neutrino: USDN is an algorithmic stablecoin backed by WAVES as collateral.

• FRAX: The novel ‘fractional-algorithmic’ protocol uses two assets: FRAX stablecoin and FXS governance token. To mint FRAX, users have to deposit collateral both in the form of USDC and the FXS token, in a pre-defined ratio.

• FEI: The stablecoin is both undercollateralized and decentralized, and uses ‘direct incentives’ — like dynamic mint rewards and burn penalties — as stability mechanism. Designed to scale.

At the time of writing, USDT leads in marketcap, followed by USDC, Binance USD and DAI (courtesy: Coinmarketcap).

How did UST crash? Was it a deliberate attack by malicious actors that toppled a flawed system? Or, were there deeper factors in play?

Let us start with how UST works. Terraform Labs is the core team behind the Terra blockchain, with two native tokens UST and LUNA; the latter is crucial to UST maintaining its peg. This was the clinching point — 1 UST could always be exchanged for $1 worth of LUNA, and vice versa. This would open up arbitrage incentives in the open market. Let us explore a couple of scenarios:

• If UST went below $1, let us say $0.9, the user could always redeem 1 UST for $1 worth of LUNA (an easy 10 per cent profit). As more UST was burnt for LUNA, supply would reduce, and that would place an upward pressure on the price of UST.

• If UST rose above $1, let us say $1.1, the user could mint 1 UST with $1 worth of LUNA. That UST (purchased for $1) can be sold on profit.

• LUNA is pivotal to the whole operation, its price and liquidity laying the foundation and collateralising the entire system.

And what would be the immediate utility for UST? That came in the form of Terra’s Anchor Protocol, which provided a fixed yield for UST deposits at a very attractive 20 percent APY. The perennially high yields were backed by the reserves of non-profit Luna Foundation Guard (LFG), with backing from market makers like Jump Crypto.

The initial success of the chain was mind boggling. Where many had tried and failed, Terra and Do Kwon managed to build up what seemed to be a fully decentralized, algorithmic stablecoin that looked destined for big things. Over the year 2021, the value of Luna surged 150x. It became a top 10 cryptocurrency (by marketcap), and the second most valuable Layer 1 after Ethereum.

But, still, questions piled on about the Terra ecosystem mechanics — in particular, a circularity in design that has raised critics’ eyebrows ever since the inception of the chain.

Consider this. For the ecosystem to work, LUNA (the collateral backing UST) has to have some kind of value. The value of LUNA came from the demand for UST — as more LUNA is burnt to mint UST tokens, the price of LUNA would moon. Meanwhile, the demand for UST was sparked almost exclusively by the Anchor Protocol and its 20 percent APY that was backed by the LFG. Get it? As succinctly summarized here, UST was essentially backed by nothing but leveraged positions on itself.

It was all well and good during the bull market uptrend. More and more LUNA would be burnt to create USTs, creating a supply shock and boosting the value of LUNA (and pumping up the LFG reserves). The price of LUNA surged from $4 in May 2021 to ATHs of $116 by February 2022. LFG had even started accumulating sizable amounts of Bitcoin in its reserve to diversify the collateral and, as they stated, “further [the] layer of support for the UST peg using assets that are considered less correlated to the Terra ecosystem”.

But, as time proved, only a mere couple of days were needed for everything to unravel.

There is a deep irony in the timing of the UST collapse. For a long time, there was negligible UST demand outside of Terra. At one point in time, more than 50 per cent of circulating UST was deposited in Anchor, making the protocol the biggest UST sink. Just before the depegging, Terraform Labs was working to extend UST utility outside the blockchain. For that purpose, they had announced the creation of a Curve 4Pool, with UST, USDT, FRAX and USDC, with a publicly stated aim to dethrone the prepotent 3Pool (with DAI, USDT and USDC).

You can think of Curve as the premier decentralized exchange that facilitates trades with liquidity pools of homogenous assets like stablecoins. The balance in the pools is an efficient bellwether of general confidence in the stablecoin pegs.

Then, a couple of incidents happened in tandem. Terraform Labs swept up $150 million liquidity from the biggest UST pool on Curve (UST+3Pool) to deploy into 4Pool. The liquidity transfer was to happen a week later. However, at this vulnerable moment, UST sell orders to the tune of $300 million came pouring in (the timing led to speculations that this was a coordinated attack). The UST+3Pool quickly became unbalanced, with over 90 per cent UST and with the rest DAI, USDC and USDT — the implication being that spooked UST holders were flocking to perceived safer options. UST was starting to get depegged.

Sell orders to the tune of $600 million started appearing on exchanges like Binance, and this created a massive furore in the market. Anchor faced an exodus of capital. More and more UST was redeemed for LUNA, and a full-on bank run ensued. By May 12, LUNA supply surged from 300 million to over 6 trillion and its value had fallen more than 99.9 per cent. This was hyperinflation unfolding in front of our eyes, at warp speed. This was the ‘death spiral’ — spawned by a confluence of unstable UST, and LUNA that was rapidly losing confidence — that Terra critics had long warned about.

The shockwaves of the UST crash resonated throughout the stablecoin ecosystem. Fears of depegging grew on algorithmic stablecoins like FEI, USDN and FRAX. USDN dropped precipitously to 0.88 before rebounding to 0.97. FRAX and FEI briefly dropped to 0.96.

The market panic spread to USDT, which dipped to low 0.95 for a brief period. On May 23, the DAI-USDC-USDT 3Pool had 74 per cent USDT liquidity, which means concerns of stability are far from abated. Courtesy: Dune

At the end of the day, it was Anchor that turned out to be the fulcrum of Terra’s undoing. The artificially propped up 20 per cent APY was not sustainable by any stretch of imagination, and the chain collapsed before it could organically develop an alternate source of demand.

As Eric Tung wrote:

Pull quote: If Terra had succeeded as a strong general-purpose blockchain, this would give LUNA a strong and diversified demand beyond factors correlated to UST. Couple this with avoiding destructive mechanisms like Anchor that subsidise UST demand without increasing collateral, and the system would probably have been solvent and the whole collapse averted.

That brings us to the larger question of the utility problem faced by stablecoins. A coordinated attack could have been the reason behind the UST crash. However, it is also very plausible that a couple of whales withdrew UST from Anchor to move to other protocols which offered higher yields — Tron ecosystem’s stablecoin USDD, which runs on similar mechanics as UST, promises 30–40 per cent APY.

This raises the all-important question. Beyond its predominant use-case as mere speculative instruments in DeFi, how can stablecoins breach the next frontier of organic utility? In an APY-hungry market like crypto, can we have a sustainable yield model that does not depend on short-term inflationary token emissions?

That is where Fluidity comes into play.

Suppose you have 1 USDC in hand. Head over to Fluidity Money (currently on Solana dev net), where you can exchange the USDC for fUSDC. Fluid assets are one-to-one mapped, wrapped versions of tokens that can be redeemed for the base asset at any point of time. Now, unlike most DeFi use-cases, where you have to lend, stake, or lock up your assets in one way or another to earn yields, Fluidity pays you rewards for utilising your crypto assets. You get randomly paid rewards (large dividends ranging from cents to the millions) by sending, receiving or swapping your fluid assets.

An example: If User A transfers fUSDC to User B, both User A and User B stand a chance to win a random reward (the yield split 80:20 between sender and receiver); roughly 70–80 per cent of transactions using fluid assets will be yield-bearing.

How does this work? The collateral you deposit to receive fluid assets will earn yield, and a novel algorithm — the Transfer Reward Function (TRF) — will allow Fluidity to distribute that yield whenever the fluid-wrapped assets are used.

For stablecoins, this creates an additional incentive for its utilisation. Moving the assets around also helps hedge against speculation to a large extent — along with incentives for money to be used the way it is designed to be used.

Apart from this, stablecoin protocols like Hubble can use Fluidity’s novel Utility Mining process to bootstrap liquidity in a sustainable manner, and ensure a fairer distribution of its governance tokens. Hubble is a DeFi protocol on Solana, where users can deposit assets like BTC, ETH or SOL and mint stablecoin USDH (up to 75 per cent LTV currently). While the collateral earns yields, users can deposit their USDH in the USDH Vault — which acts as a guarantor for the borrowings — and earn, among other rewards, the protocol’s governance token HBB.

How does Utility Mining work, and how can Hubble make use of it?

It problem-solves on two fronts:

• Fairness in native token distribution.

• Ensuring a long-term sustainable liquidity strategy.

Earlier, we mentioned TRF, which is used by Fluidity to distribute rewards every time a user transacts with a fluid asset. With Utility Mining, we can distribute tokens on top of the rewards, maintaining the same level of even-handedness — the magnitude of your transactions with fluid assets don’t matter; the probability of reward (and receiving tokens) remains the same. With Fluidity’s Utility Mining, Hubble can ensure a much more equitable way of token distribution, where the whales don’t get to gobble up the lion’s share of token emissions, and intended outcomes are rewarded.

In addition, this can also help the protocol move away from passive yield farmers, whose long-term impact can be detrimental to the protocol, and build up an active and engaged user base whose main incentives will be to trade, transact and swap. Traditional liquidity mining is a very ephemeral phenomenon, and the numbers back this assertion. According to a report by nansen.ai, 42 per cent of yield farmers that enter a protocol on the day it launches exit within 24 hours, and 70 per cent of these users leave within three days.

Utility Mining provides a much more sustainable alternative.

Stablecoins are currently at a stage of inflection. Its importance in the world of crypto can hardly be understated, both in terms of liquidity and value transfer. But, as the Terra incident showed, there are still a lot of pain points and fatal flaws to be resolved in the system. Utility will be one of the biggest issues to be resolved. And therein lies the value proposition of protocols like Fluidity. In the upcoming cycles of DeFi, lacunae will have to be plugged, and fast. It is just a question of how, and how quickly. And, who capitalises on it. Only time will tell. Until then, see you on the other side.

Learn more about Fluidity here.

Learn more about Utility Mining here.

Learn more about Transfer Reward Function here.

*To learn more about the future of stablecoins, and where Fluidity comes in, check out CEO Shahmeer Chaudhry in conversation with Kento Inami, founder of UXD stablecoin, here.*

On May 9, the Terra USD (UST) stablecoin in the Terra ecosystem showed the first signs of “depegging”. The value of UST is algorithmically secured to the price of the US Dollar — that is, 1 UST should always be equal to 1 USD. That started changing, fast. In around 12 hours, the value of UST plunged from 0.99 USD to 0.76 USD. On the back of assurances from Terra founder Do Kwon, the price rose to 0.93 USD before precipitously plunging to 0.30 on May 11. Complete mayhem ensued. $40 billion dollars were wiped out in one swoop, and the third-largest stablecoin by marketcap crashed and burned. Several thousand retail investors lost their life savings. The wider crypto market crashed into the deep red. US Treasury Secretary Janet Yellen issued a full-throated condemnation, stating that the incident highlighted the dangers posed by crypto stablecoins. The signs were not good. The threat of draconian regulations loomed larger than ever before.

Before going into the heart of the UST collapse, and understanding where Fluidity comes into the equation, let us cover the basics. What are stablecoins? Why do they exist?

In simple terms, stablecoins are tokens pegged to the value of fiat money (overwhelmingly the US Dollar), and reinforced by various designs (which we will explore in a bit) to ensure minimum deviation in value.

Why do we need stablecoins? Cryptocurrencies like Bitcoin are notoriously volatile, with hair-trigger responses that invoke price fluctuations in the range of 2–10 per cent in a day. That is where stablecoins come in, ensuring base layer stability for transactional purposes as a medium of exchange. In countries reeling under hyperinflation and acute economic distress, stablecoins became an easily and openly accessible alternate payment rail and store of value.

What are the different types of stablecoins available on the market? Different stablecoins utilize different mechanisms to ensure stability in prices. Here is the lowdown in transfer volumes per coin over the last 30 days (courtesy: Dune)

• Fiat-backed/centralized stablecoins: Here, every unit of stablecoin issued is (ostensibly) backed up by a corresponding unit of fiat currency in the reserve. Some popular examples are Tether’s USDT, Circle’s USDC and Binance’s BUSD. You deposit one USD, you mint one USDT; this would mean, ideally, you can redeem the deposited fiat at any point of time. One big problem is that fiat-backed stablecoins are highly centralized, with all funds in the custody, and at the complete discretion of the issuer.

• Crypto-backed/over-collateralized stablecoins: These are largely decentralized designs, where the stablecoins are over-collateralized by other crypto assets. For example, you can deposit $1.7 worth of SOL and redeem $1 worth of a crypto-backed stablecoin. The extra collateral serves as a hedge against possible asset volatility and subsequent under-collateralisation. Maker DAO’s stablecoin DAI is one popular example.

• Algorithmic stablecoins: Here, in lieu of collateralized backing, stablecoin prices are stabilized by complex algorithms. With the support of arbitrage incentives, the cryptocurrency supply is adjusted in accordance with the price directionality. For example, if the price falls below $1, the supply will be reduced; vice versa if the price rises above $1. There is also the ‘mint and burn’ mechanism, where a crypto pair works in tandem to ensure the peg is adhered to. UST is one example of an algorithmic stablecoin, and we will explore it more later in the piece. Ideally, an algorithmic stablecoin is capital efficient (that is, there is no need to over-collateralise) unlike crypto-backed stables, and fully decentralized unlike USDC or USDT.

Next, let us explore some popular examples:

• Pax USD: Fiat-backed stablecoin offered by Paxos, where each new USDP minted is backed by USD (or rather Treasury Bills). The project is audited by the New York State Department of Financial Services.

• StraitsX: A fiat-backed stable that is pegged to the Singapore dollar, and compatible with Zilliqa and Ethereum blockchains. The founders of the coin assured in this interview that the system was fully collateralized by cash, unlike most other centralized stablecoins.

• Neutrino: USDN is an algorithmic stablecoin backed by WAVES as collateral.

• FRAX: The novel ‘fractional-algorithmic’ protocol uses two assets: FRAX stablecoin and FXS governance token. To mint FRAX, users have to deposit collateral both in the form of USDC and the FXS token, in a pre-defined ratio.

• FEI: The stablecoin is both undercollateralized and decentralized, and uses ‘direct incentives’ — like dynamic mint rewards and burn penalties — as stability mechanism. Designed to scale.

At the time of writing, USDT leads in marketcap, followed by USDC, Binance USD and DAI (courtesy: Coinmarketcap).

How did UST crash? Was it a deliberate attack by malicious actors that toppled a flawed system? Or, were there deeper factors in play?

Let us start with how UST works. Terraform Labs is the core team behind the Terra blockchain, with two native tokens UST and LUNA; the latter is crucial to UST maintaining its peg. This was the clinching point — 1 UST could always be exchanged for $1 worth of LUNA, and vice versa. This would open up arbitrage incentives in the open market. Let us explore a couple of scenarios:

• If UST went below $1, let us say $0.9, the user could always redeem 1 UST for $1 worth of LUNA (an easy 10 per cent profit). As more UST was burnt for LUNA, supply would reduce, and that would place an upward pressure on the price of UST.

• If UST rose above $1, let us say $1.1, the user could mint 1 UST with $1 worth of LUNA. That UST (purchased for $1) can be sold on profit.

• LUNA is pivotal to the whole operation, its price and liquidity laying the foundation and collateralising the entire system.

And what would be the immediate utility for UST? That came in the form of Terra’s Anchor Protocol, which provided a fixed yield for UST deposits at a very attractive 20 percent APY. The perennially high yields were backed by the reserves of non-profit Luna Foundation Guard (LFG), with backing from market makers like Jump Crypto.

The initial success of the chain was mind boggling. Where many had tried and failed, Terra and Do Kwon managed to build up what seemed to be a fully decentralized, algorithmic stablecoin that looked destined for big things. Over the year 2021, the value of Luna surged 150x. It became a top 10 cryptocurrency (by marketcap), and the second most valuable Layer 1 after Ethereum.

But, still, questions piled on about the Terra ecosystem mechanics — in particular, a circularity in design that has raised critics’ eyebrows ever since the inception of the chain.

Consider this. For the ecosystem to work, LUNA (the collateral backing UST) has to have some kind of value. The value of LUNA came from the demand for UST — as more LUNA is burnt to mint UST tokens, the price of LUNA would moon. Meanwhile, the demand for UST was sparked almost exclusively by the Anchor Protocol and its 20 percent APY that was backed by the LFG. Get it? As succinctly summarized here, UST was essentially backed by nothing but leveraged positions on itself.

It was all well and good during the bull market uptrend. More and more LUNA would be burnt to create USTs, creating a supply shock and boosting the value of LUNA (and pumping up the LFG reserves). The price of LUNA surged from $4 in May 2021 to ATHs of $116 by February 2022. LFG had even started accumulating sizable amounts of Bitcoin in its reserve to diversify the collateral and, as they stated, “further [the] layer of support for the UST peg using assets that are considered less correlated to the Terra ecosystem”.

But, as time proved, only a mere couple of days were needed for everything to unravel.

There is a deep irony in the timing of the UST collapse. For a long time, there was negligible UST demand outside of Terra. At one point in time, more than 50 per cent of circulating UST was deposited in Anchor, making the protocol the biggest UST sink. Just before the depegging, Terraform Labs was working to extend UST utility outside the blockchain. For that purpose, they had announced the creation of a Curve 4Pool, with UST, USDT, FRAX and USDC, with a publicly stated aim to dethrone the prepotent 3Pool (with DAI, USDT and USDC).

You can think of Curve as the premier decentralized exchange that facilitates trades with liquidity pools of homogenous assets like stablecoins. The balance in the pools is an efficient bellwether of general confidence in the stablecoin pegs.

Then, a couple of incidents happened in tandem. Terraform Labs swept up $150 million liquidity from the biggest UST pool on Curve (UST+3Pool) to deploy into 4Pool. The liquidity transfer was to happen a week later. However, at this vulnerable moment, UST sell orders to the tune of $300 million came pouring in (the timing led to speculations that this was a coordinated attack). The UST+3Pool quickly became unbalanced, with over 90 per cent UST and with the rest DAI, USDC and USDT — the implication being that spooked UST holders were flocking to perceived safer options. UST was starting to get depegged.

Sell orders to the tune of $600 million started appearing on exchanges like Binance, and this created a massive furore in the market. Anchor faced an exodus of capital. More and more UST was redeemed for LUNA, and a full-on bank run ensued. By May 12, LUNA supply surged from 300 million to over 6 trillion and its value had fallen more than 99.9 per cent. This was hyperinflation unfolding in front of our eyes, at warp speed. This was the ‘death spiral’ — spawned by a confluence of unstable UST, and LUNA that was rapidly losing confidence — that Terra critics had long warned about.

The shockwaves of the UST crash resonated throughout the stablecoin ecosystem. Fears of depegging grew on algorithmic stablecoins like FEI, USDN and FRAX. USDN dropped precipitously to 0.88 before rebounding to 0.97. FRAX and FEI briefly dropped to 0.96.

The market panic spread to USDT, which dipped to low 0.95 for a brief period. On May 23, the DAI-USDC-USDT 3Pool had 74 per cent USDT liquidity, which means concerns of stability are far from abated. Courtesy: Dune

At the end of the day, it was Anchor that turned out to be the fulcrum of Terra’s undoing. The artificially propped up 20 per cent APY was not sustainable by any stretch of imagination, and the chain collapsed before it could organically develop an alternate source of demand.

As Eric Tung wrote:

Pull quote: If Terra had succeeded as a strong general-purpose blockchain, this would give LUNA a strong and diversified demand beyond factors correlated to UST. Couple this with avoiding destructive mechanisms like Anchor that subsidise UST demand without increasing collateral, and the system would probably have been solvent and the whole collapse averted.

That brings us to the larger question of the utility problem faced by stablecoins. A coordinated attack could have been the reason behind the UST crash. However, it is also very plausible that a couple of whales withdrew UST from Anchor to move to other protocols which offered higher yields — Tron ecosystem’s stablecoin USDD, which runs on similar mechanics as UST, promises 30–40 per cent APY.

This raises the all-important question. Beyond its predominant use-case as mere speculative instruments in DeFi, how can stablecoins breach the next frontier of organic utility? In an APY-hungry market like crypto, can we have a sustainable yield model that does not depend on short-term inflationary token emissions?

That is where Fluidity comes into play.

Suppose you have 1 USDC in hand. Head over to Fluidity Money (currently on Solana dev net), where you can exchange the USDC for fUSDC. Fluid assets are one-to-one mapped, wrapped versions of tokens that can be redeemed for the base asset at any point of time. Now, unlike most DeFi use-cases, where you have to lend, stake, or lock up your assets in one way or another to earn yields, Fluidity pays you rewards for utilising your crypto assets. You get randomly paid rewards (large dividends ranging from cents to the millions) by sending, receiving or swapping your fluid assets.

An example: If User A transfers fUSDC to User B, both User A and User B stand a chance to win a random reward (the yield split 80:20 between sender and receiver); roughly 70–80 per cent of transactions using fluid assets will be yield-bearing.

How does this work? The collateral you deposit to receive fluid assets will earn yield, and a novel algorithm — the Transfer Reward Function (TRF) — will allow Fluidity to distribute that yield whenever the fluid-wrapped assets are used.

For stablecoins, this creates an additional incentive for its utilisation. Moving the assets around also helps hedge against speculation to a large extent — along with incentives for money to be used the way it is designed to be used.

Apart from this, stablecoin protocols like Hubble can use Fluidity’s novel Utility Mining process to bootstrap liquidity in a sustainable manner, and ensure a fairer distribution of its governance tokens. Hubble is a DeFi protocol on Solana, where users can deposit assets like BTC, ETH or SOL and mint stablecoin USDH (up to 75 per cent LTV currently). While the collateral earns yields, users can deposit their USDH in the USDH Vault — which acts as a guarantor for the borrowings — and earn, among other rewards, the protocol’s governance token HBB.

How does Utility Mining work, and how can Hubble make use of it?

It problem-solves on two fronts:

• Fairness in native token distribution.

• Ensuring a long-term sustainable liquidity strategy.

Earlier, we mentioned TRF, which is used by Fluidity to distribute rewards every time a user transacts with a fluid asset. With Utility Mining, we can distribute tokens on top of the rewards, maintaining the same level of even-handedness — the magnitude of your transactions with fluid assets don’t matter; the probability of reward (and receiving tokens) remains the same. With Fluidity’s Utility Mining, Hubble can ensure a much more equitable way of token distribution, where the whales don’t get to gobble up the lion’s share of token emissions, and intended outcomes are rewarded.

In addition, this can also help the protocol move away from passive yield farmers, whose long-term impact can be detrimental to the protocol, and build up an active and engaged user base whose main incentives will be to trade, transact and swap. Traditional liquidity mining is a very ephemeral phenomenon, and the numbers back this assertion. According to a report by nansen.ai, 42 per cent of yield farmers that enter a protocol on the day it launches exit within 24 hours, and 70 per cent of these users leave within three days.

Utility Mining provides a much more sustainable alternative.

Stablecoins are currently at a stage of inflection. Its importance in the world of crypto can hardly be understated, both in terms of liquidity and value transfer. But, as the Terra incident showed, there are still a lot of pain points and fatal flaws to be resolved in the system. Utility will be one of the biggest issues to be resolved. And therein lies the value proposition of protocols like Fluidity. In the upcoming cycles of DeFi, lacunae will have to be plugged, and fast. It is just a question of how, and how quickly. And, who capitalises on it. Only time will tell. Until then, see you on the other side.

Learn more about Fluidity here.

Learn more about Utility Mining here.

Learn more about Transfer Reward Function here.

*To learn more about the future of stablecoins, and where Fluidity comes in, check out CEO Shahmeer Chaudhry in conversation with Kento Inami, founder of UXD stablecoin, here.*