Over the last few months, there have been new stablecoin concepts that have been introduced into crypto. Previously, we have seen a few variations of stablecoins. Some examples are:

• DAI

• FRAX

• USDC

• USDt

• LUSD

• BUSD

Not listed are many of the tokens that arose during the DeFi summer that were primarily “algorithmic stablecoins”; many of which were variations of Terra’s infamous UST (99%+ of which, ultimately failed). 

An algorithmic stablecoin is one that uses, to no surprise, an algorithm to attempt to keep its’ peg at $1, regardless of whether it has collateral or not. The stablecoins listed above are some of the most popular currently, ranging from over-collateralized (DAI & LUSD), collateralized (USDC, USDt, & BUSD), and undercollateralized algorithmic stablecoins (FRAX- one of the lone survivors from DeFi summer). 

During DeFi summer, this thought process led many to thinking about the meme below since many were literally built as ponzi’s. Thankfully, those experiments are behind us, allowing us to build significantly more robust systems.

Since then, we are now seeing innovative concepts on how stablecoins can be introduced using lending protocols- that are significantly safer, and easily understood. Most of these have evolved from the original stablecoin concept that Compound brought up a couple of years ago when they introduced Compound Cash, and the CASH token. 

Earlier this year, a couple of projects announced their thoughts on how a stablecoin could be introduced within DeFi, most notably Nostra & Aave. Nostra is a DeFi project on StarkNet, built by Tempus, who have also built a fixed income protocol on Ethereum. 

Nostra is the Liquidity Layer on StarkNet which will be launching a permissionless crypto lending market where users are able to borrow and lend crypto, along with an overcollateralized stablecoin coin called UNO, and a decentralized stablecoin exchange. 

Aave, on the other hand, is one of the most prolific DeFi protocols in existence to-date. At the time of writing, they have roughly $4B locked up in their protocol, according to DeFi Pulse. Both of these teams have planned to introduce new stablecoins, which are able to leverage their underlying money markets, creating a new form of money legos.

Aave announced a new stablecoin, with the ticker GHO (likely short for ghost, the company’s symbol 👻). Nostra also announced the first StarkNet native stablecoin, which they are calling UNO. These two stablecoins are quite innovative as they are built directly on top of DeFi lending markets, using collateral on the lending market to mint a stablecoin. So, let’s dive into both of these solutions, and how they work 😎👨🏻‍💻!

This stablecoin was introduced to the Aave community earlier this summer, and would allow for users to mint a stablecoin, called GHO, by using supported collateral types on the Aave protocol. There are a variety of assets supported on Aave, like:

• AAVE

• ETH

• BAT

• wBTC

• YFI

• UNI

• REN

• DAI

• …among others!

By depositing these assets into the Aave protocol, you will be able to mint GHO! Anytime you repay the GHO to retrieve your underlying collateral, or if you get liquidated (plz don’t get us rekt SBF), then the GHO is burned, and the interest is paid directly to the Aave treasury, managed by the DAO. The best part, is since you are depositing your assets into Aave to mint GHO, your collateral is constantly generating yield, and will passively be improving your debt ratio.

In the above image, there are also facilitators. These entities are able to mint GHO (or burn it), and will initially start with the Aave Protocol as the first. Other facilitators will be able to get introduced through governance. One of the interesting aspects that the Aave team never really dove into that I would be curious to learn more about is their thought process with how GHO will be able to get minted in an undercollateralized manner through your credit score. My assumption is that this will be through Aave’s Credit Delegation, though this hasn’t been adopted very widely.

One of the interesting factors around minting GHO will be with Aave v3. This will enable for near 1:1 ratios for some of the stablecoins on the protocol, which will help to keep the peg if the token goes above or below peg- making these actions profitable for arbitragers, & leading to more volume and liquidity for partners in the ecosystem like Curve, Balancer, MakerDAO, Frax, Uniswap, etc. More importantly, since Aave has built itself as a “multi-chain” protocol, it will enable for GHO to seamlessly be passed between various L1 blockchains and L2s through Portal.

Over the last year or so, we have seen a Cambrian explosion around the zkRollup ecosystem, especially around StarkNet, which launched the first production zkRollup supporting permissionless smart contracts. Teams like Nostra are able to leverage this underlying technology to build/deploy products on top of it with the increasing adoption of DeFi. The team has already launched Tempus Fixed Income, a fixed yield protocol, and more recently are focused on Nostra, which includes their Nostra Money Market, Nostra Swap, and most importantly UNO, their StarkNet native stablecoin.

The goal for Nostra’s UNO is to have it be used across various ecosystems, including DeFi, Payments, and Gaming.

But the question is: why do people want to mint UNO, let alone use UNO? Let’s dig into how it works!

The Nostra team is building UNO to optimize the user experience by leveraging the underlying DeFi protocol. 

How does it work? Users that want to mint UNO, need to deposit ETH. The minter is then given tokenized ETH that represents the exact amount of ETH which is deposited into the Nostra money market. This means, after depositing your ETH, you begin to immediately earn interest on every block through Nostra iETH. The cool benefit here is that there is virtually no fee for you to mint UNO. In order to keep costs as low as possible for the end user, the fees for the protocol are paid out from the yield you generate off of the underlying money market (the additional iETH-c you generate)!

Right now in order to mint UNO, the only collateral type you are allowed to use is ETH, but I’m curious to see if other collateral types (or lack thereof) will be introduced through governance.

As UNO is a decentralized stablecoin, its goal is to be pegged to $1 USD. This is how external parties are able to be introduced to help maintain this peg and even be able to monetize the arbitrage process.

If UNO is above $1 on the open market, you can mint UNO with ETH as your collateral at a rate of $1 and then sell the UNO for ETH. In this scenario, you are doing an arbitrage trade, and profiting for more ETH.

If UNO is trading below $1 on the open market, you can just purchase UNO, repay the UNO debt, redeem ETH (the collateral for UNO), and then sell the ETH for USD.

The interesting aspect of UNO, when compared to MakerDAO’s DAI or Liquity’s LUSD, is that there are no fees for minting UNO, and there are also no fees to repay your debt. 

DAI is one of the first stablecoins and has a functionality known as the DAI Savings Rate (or DSR for short), which ranges from 0-8.75%, depending on market conditions. This is the interest you pay for minting DAI. In contrast, LUSD has no fee to repay (similar to UNO), but you pay a small fee when LUSD is minted. In order to mint LUSD, you have to pay a 0.5% fee, and then you can use the LUSD as you wish. You don’t have to worry about either of these for Nostra's UNO! You have no fee to mint, and even better, no interest rate for outstanding loans 😎.

As I have mentioned plenty of times, I love seeing new innovations and experiments in crypto. I think we are going to start seeing other new stablecoins, similar to GHO and UNO, underlying DeFi protocols, which will unlock new paradigms in how money legos operate. These types of solutions have different ways in which they generate revenue and how people interact with them.

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