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Stablecoins are the solution to volatile crypto assets. U can either borrow stablecoins from volatile holdings or pegged to real world asset through centralized off-chain entity. It has been widely used as both a medium of payment and store of value on-chain. Let’s look at a few here.
DAI
A user mint DAI stablecoin by placing volatile collaterals. But when collateral price dropped causing loan-to-value threshold exceeded, external liquidators will come to sell the collateral for DAI and return such DAI to the system. IMO, the liquidation process is very beautiful.
At t3, the DAI holder can walkaway with 1200DAI if he wants, in this case, 1450 DAI is sucked into the vault out of circulation, DAI will be even more overcollateralized, making the system safer. Or , at t3 , the DAI holder can withdraw full 1450 DAI by burning 1200 DAI he holds (so long as the loan to value ratio is not exceeded, he can withdraw as much as he wants). So the whole system either reduces DAI supply by 250, or keep DAI suopply the same as before t0.
One drawback of DAI system is that there is no clear way to efficiently allocate the collateral into other assets to generate yield. It must be done through MKR holders vote. Recent news include reallocating collateral into US treasury bonds to boost yield.
crvUSD
Think about MakerDAO DAI, what crvUSD did differently mainly is one additional step, to put your collateral into a special “AMM with external price oracle”. They both rely on overcollateralization at the beginning.
E.g. When you provide collateral e.g. ETH, crvUSD is minted under overcollateralization method. Then the “Vault” will help you put collateral into a LLAMMA( a special automated market maker), by creating a special “concentrated liqudity LP position”. In this AMM, outside arbitragers will trade with it to maintain the following situation:
When collateral e.g. ETH price goes down, the AMM price will decrease faster than oracle (market) price. By the relationship below:
This will push traders to buy ETH from AMM and sell to market. In this process, ETH is converted into crvUSD.
This goes opposite from normal AMM: In Uniswap, if ETH oracle price is lower, you buy ETH from market, sell to the Uniswap, so uniswap ETH price will decrease to converge. But
Conversely, when collateral ETH prices goes up, the AMM price will increase faster than oracle, pushing arbitragers to buy from market and sell to AMM, thus converting crvUSD into ETH.
Thus, by conduct of arbitragers, the LLAMMA will have more crvUSD when oracle price goes down , and more ETH when price goes up.
An interesting comparison between Uniswap AMM and LLAMMA in picture:
Additional, crvUSD uses PegManager to mint and burn uncollateralized crvUSD (only!) for LLAMMA pool. And monetary policy to set borrowing rate higher when crvUSD is depegged and depreciated too much. So as to incentivize people to quickly liquidate their curvUSD position.
USDT
When users deposit fiat currency into centralized entity of Tether’s reserve, Tether then issues the correspoinding USDT of the same amount. So when USDT value dropped below $1, users can buy such USDT, and burn it in Tether’s reserve for exactly $1, pocket the difference , so as to raise the price. The same if USDT value goes above $1, users can mint 1 USDT from the reserve by depositing $1 and sell USDT in the market to push down the price.
USDC
USDC is also a pegged fiat currency. But there was news that its reserve partially stays in SVB , so it depeged , but soon after that its parent company Circle said $3.3 bn held in SVB would be availble, it regained $1. Where to allocate/take custody of the reserve to balance risk and return is a big question.
BUSD
Issued by Binance and Paxos. Similar mechanism to USDT and USDC. Because Binance has a fundamentally large user base, so easier to reach out to them to issue stable coins as a strategic move.
FRAX
Used to be a partial-collaterallized and algorithmic stablecoin, now has shifted to fully collateralized by USDC. FRAX has sth called AMO, (Algorithmic Market Operations) , as a way to manage the collateral to generate yield.
In my opinion, the central quesiton for stablecoins are all about collaterals:
Can we reduce overcollateralization ratio so as to increase capital efficiency ? (At least crvUSD is trying)
Is there a better (or decentralized) way to manage centralized reserve for 1:1 pegged stablecoins ?
References:
1. https://github.com/curvefi/curve-stablecoin/blob/master/doc/curve-stablecoin.pdf
2. https://www.forbes.com/advisor/in/investing/cryptocurrency/what-is-tether-usdt/
4. https://linen.app/articles/what-is-binance-usd-busd-explained-in-plain-english/
Stablecoins are the solution to volatile crypto assets. U can either borrow stablecoins from volatile holdings or pegged to real world asset through centralized off-chain entity. It has been widely used as both a medium of payment and store of value on-chain. Let’s look at a few here.
DAI
A user mint DAI stablecoin by placing volatile collaterals. But when collateral price dropped causing loan-to-value threshold exceeded, external liquidators will come to sell the collateral for DAI and return such DAI to the system. IMO, the liquidation process is very beautiful.
At t3, the DAI holder can walkaway with 1200DAI if he wants, in this case, 1450 DAI is sucked into the vault out of circulation, DAI will be even more overcollateralized, making the system safer. Or , at t3 , the DAI holder can withdraw full 1450 DAI by burning 1200 DAI he holds (so long as the loan to value ratio is not exceeded, he can withdraw as much as he wants). So the whole system either reduces DAI supply by 250, or keep DAI suopply the same as before t0.
One drawback of DAI system is that there is no clear way to efficiently allocate the collateral into other assets to generate yield. It must be done through MKR holders vote. Recent news include reallocating collateral into US treasury bonds to boost yield.
crvUSD
Think about MakerDAO DAI, what crvUSD did differently mainly is one additional step, to put your collateral into a special “AMM with external price oracle”. They both rely on overcollateralization at the beginning.
E.g. When you provide collateral e.g. ETH, crvUSD is minted under overcollateralization method. Then the “Vault” will help you put collateral into a LLAMMA( a special automated market maker), by creating a special “concentrated liqudity LP position”. In this AMM, outside arbitragers will trade with it to maintain the following situation:
When collateral e.g. ETH price goes down, the AMM price will decrease faster than oracle (market) price. By the relationship below:
This will push traders to buy ETH from AMM and sell to market. In this process, ETH is converted into crvUSD.
This goes opposite from normal AMM: In Uniswap, if ETH oracle price is lower, you buy ETH from market, sell to the Uniswap, so uniswap ETH price will decrease to converge. But
Conversely, when collateral ETH prices goes up, the AMM price will increase faster than oracle, pushing arbitragers to buy from market and sell to AMM, thus converting crvUSD into ETH.
Thus, by conduct of arbitragers, the LLAMMA will have more crvUSD when oracle price goes down , and more ETH when price goes up.
An interesting comparison between Uniswap AMM and LLAMMA in picture:
Additional, crvUSD uses PegManager to mint and burn uncollateralized crvUSD (only!) for LLAMMA pool. And monetary policy to set borrowing rate higher when crvUSD is depegged and depreciated too much. So as to incentivize people to quickly liquidate their curvUSD position.
USDT
When users deposit fiat currency into centralized entity of Tether’s reserve, Tether then issues the correspoinding USDT of the same amount. So when USDT value dropped below $1, users can buy such USDT, and burn it in Tether’s reserve for exactly $1, pocket the difference , so as to raise the price. The same if USDT value goes above $1, users can mint 1 USDT from the reserve by depositing $1 and sell USDT in the market to push down the price.
USDC
USDC is also a pegged fiat currency. But there was news that its reserve partially stays in SVB , so it depeged , but soon after that its parent company Circle said $3.3 bn held in SVB would be availble, it regained $1. Where to allocate/take custody of the reserve to balance risk and return is a big question.
BUSD
Issued by Binance and Paxos. Similar mechanism to USDT and USDC. Because Binance has a fundamentally large user base, so easier to reach out to them to issue stable coins as a strategic move.
FRAX
Used to be a partial-collaterallized and algorithmic stablecoin, now has shifted to fully collateralized by USDC. FRAX has sth called AMO, (Algorithmic Market Operations) , as a way to manage the collateral to generate yield.
In my opinion, the central quesiton for stablecoins are all about collaterals:
Can we reduce overcollateralization ratio so as to increase capital efficiency ? (At least crvUSD is trying)
Is there a better (or decentralized) way to manage centralized reserve for 1:1 pegged stablecoins ?
References:
1. https://github.com/curvefi/curve-stablecoin/blob/master/doc/curve-stablecoin.pdf
2. https://www.forbes.com/advisor/in/investing/cryptocurrency/what-is-tether-usdt/
4. https://linen.app/articles/what-is-binance-usd-busd-explained-in-plain-english/
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