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Stablecoin analysis is an in-depth analysis of aspects related to an important component of the crypto market.
The factors analyzed in the article include:
Stablecoin overview: Why the crypto market needs stablecoins, current context and stablecoin evaluation factors.
Classification of stablecoins and case studies: Causes of stablecoin success or failure and potential directions of development.
Stablecoin forecast : Potential development direction for stablecoin segment.
Main content:
Stablecoins are an essential element of the trading of the crypto market.
Fiat-backed stablecoins hold the largest market share. The first-mover advantage affects the stablecoin position a lot.
There are 3 factors that evaluate stablecoins: Liquidity risk, settlement risk, and scalability. In particular, the first two factors are the foundation for a stablecoin to exist, the other factors determine the development of stablecoins.
Stablecoins are essential for trading in the crypto market. Users who take profits, cut losses, or want to avoid price fluctuations if they do not want to leave the market, transferring asset positions to stablecoins is the most optimal solution.
According to data from Coingecko updated on Aug. 22, 22, the stablecoin market cap is currently $153.6 billion, representing more than 14% of the total crypto market cap ($1,068.5 billion), an increase of more than 100 times since 2018.
With its important role, the stablecoin market is a fertile ground for many other parties to develop. Currently, the market is full of stablecoin projects with different approaches (more details below).
However, not all stablecoin projects are successful, in fact only a few are able to attract cash flow. Below is a list of the top 20 stablecoins with the largest market capitalization today.
It can be seen that the top 5 stablecoins are accounting for more than 95% of the stablecoin market capitalization. In which, the top 3 stablecoins with the Fiat-backed model account for more than 90% of the market capitalization – these are “first-movers”. This advantage has a big impact on stablecoins' standing, as the earliest stablecoins often have strong network effects and are consolidated over time.
It is no coincidence that the current stablecoin market is so fragmented. The development of stablecoins depends on their fundamental factors, and meeting these factors will help increase the position of stablecoins in the market.
To judge a well-designed stablecoin, there are 3 factors:
Payment risk (Solvency).
Liquidity risk.
Scalability.
Solvency
Payment risk is the most important factor of a stablecoin, it is related to the ability of the stablecoin to exchange parity with its peg.
For example, 1 USDC is equivalent to 1 USD, in theory, 1 USDC is trading for close to 1 USD in the market. What if USDC trades below the peg?
Because USDC is backed 1:1 by USD and equivalent assets (bonds or government bills). Whenever the price of USDC starts to fall below 1 USD, arbitrageurs buy USDC in bulk and redeem USDC tokens into fiat (USD) through institutions that regulate USDC.
Another aspect of settlement risk is the quality of assets that support that stablecoin. For volatile assets, in the event of a drop in asset value, the stablecoin requires over-collateral positions to provide a buffer for it.
Liquidity
Liquidity risk is the degree to which any asset can be bought or sold in the market without much impact on the market price of that asset.
Besides the liquidity risk of stablecoins, there is also the liquidity risk of collateral assets. If not managed well, it will involve and adversely affect the whole system.
Scalability
Scalability is the level of capital utilization between assets deposited and assets minted. For example, put 1 USD worth of assets into the system and mint 1 USD stablecoin.
Scalability is important to help stablecoins grow, as the ultimate goal of stablecoins is to expand the supply.
Meanwhile, liquidity risk and settlement risk are the two main factors that help preserve and transfer the value of stablecoins. Like the saying “If you want to grow, you must first survive”, the two risks above need to be carefully considered and managed for stablecoins to survive, especially in a volatile market like crypto. .
There have been many case studies of stablecoins with different approaches and different results. Below, we will categorize stablecoins according to the above three factors and analyze examples in each branch: Why one stablecoin is more successful than another, what would the project look like, ignoring the two background factors. solvency and liquidity platform that only focuses on the scalability factor...?
Main content:
The USD has high dominance in the stablecoin market.
For a stablecoin project to develop sustainably, payment risk and liquidity risk must be a top priority. Trade-off of these two fundamental factors to achieve expansion is high risk.
As the crypto market grows, the optimization of capital efficiency will also increase. Stablecoins that accept cryptocurrency as collateral will also grow.
The yield generation is a good factor to attract users. Stablecoins can be kept safe from payment/liquidity risks and yield is also a potential fork.
We divide the current stablecoin market into 4 parts, respectively:
Fully-backed Stablecoin (collateral value equivalent to stablecoin capitalization, collateral ratio approximately 100%).
Over-collateral Stablecoin (collateral value greater than stablecoin capitalization, collateral ratio greater than 100%).
Partial-backed Stablecoin (collateral value less than stablecoin capitalization, collateral ratio less than 100%).
Non-backed Stablecoin (no collateral).
We will learn the overview of the mechanism, analyze typical examples of each branch according to the 3 elements constituting stablecoins, thereby deducing the advantages and disadvantages of each.
Fully-backed stablecoin is a type of stablecoin with collateral value equivalent to stablecoin capitalization, the collateral ratio is approximately 100%.
The most common type of Fully-backed stablecoin is the Fiat-backed stablecoin. Fiat-backed stablecoins are real-life fiat-backed stablecoins, most commonly USDT, USDC, and USD-backed BUSD. That is, for every 1 USDT minted on the blockchain, there will be 1 USD corresponding (fiat or cash equivalent) reserved as collateral.
Fiat-backed stablecoins account for the majority of the stablecoin market share. From 2021 to now, the market share of the top 3 Fiat-backed stablecoins USDT, USDC and BUSD fluctuates on average between 80-90%.
Another less popular fully-backed stablecoin is stablecoins pegged to the price of valuable assets. For example, XAUT is a stablecoin pegged to the price of gold and backed 1:1 in gold.
Coin98 Stablecoin - CUSD is also a fully-backed stablecoin. Users can completely convert/redeem 1:1 with BUSD and USDC at any time. CUSD was developed to be the necessary tool to support Coin98's Multi-chain ecosystem and to help users transfer assets between chains easily.
Learn more about CUSD: What is CUSD?
Case study USDT
USDT (or Tether coin) is a cryptocurrency whose value is guaranteed in USD at a ratio of 1:1. They were issued by Tether Operation Limited in 2014.
The operating model of the project is quite simple:
Users will deposit fiat money (USD) to Tether Limited's bank account. Tether will create and write to the user's account an amount of Tether token (USDT) equal to the amount they deposited. Users can freely make transactions with Tether tokens: directly buy, sell, exchange on exchanges…
When there is no need for use, users can convert Tether tokens into fiat money through the Tether platform, Tether will destroy that Tether token and send the fiat money back to the user.
See also: Analysis of USDT . operating pattern
1. Payment risk
USDT is backed by USD at a 1:1 ratio. The 1:1 ratio means that each USDT will be worth 1 USD.
The Reserve Breakdown shows what factors USDT is currently supported by. We have:
79.62% were cash, cash equivalents, other short-term deposits and commercial paper.
8.36% other investments.
6.77% secured loans.
5.25% corporate bonds, funds and precious metals.
Nearly 80% of USDT's capitalization is backed by cash and equivalent assets.
However the rest (about 20%) is collateralized by higher risk assets. The Tether report did not elaborate on these details. Some of the existing risks include:
Corporate bonds are less safe than government bonds.
Collateral quality of mortgage loans.
Do not disclose the specific status of the investments.
To sum up, there are many unknowns surrounding the topic of USDT's reserve asset.
2. Liquidity risk
A large percentage of assets that are equivalent to cash and can be converted into money in a short time is a guarantee of safety, giving people who deposit money into Tether relatively secure.
Although USDT has lost pegs below 1 USD many times, the main reason comes from temporarily affected supply and demand, affecting the liquidity of the exchange (the impact of FUD, FOMO...). Once those transient factors are over, users realize that Tether's cash-to-asset ratio remains high and the chances of their funds being affected are very low. Demand for USDT increased again and USDT returned to the price of 1 USD.
Scalability
As shown above, the method to deposit money into Tether is quite simple. Because of using 1:1 conversion method, as long as demand increases, USDT can expand quickly with very low risk.
On the Tether side, if you deposit 1 USD and get 1 USDT back, what is the development motivation of the organization?
Tether makes money from a variety of sources, including:
Fees : Tether charges 0.1% deposit and withdraw fees, with deposit users must deposit at least 100,000 USD, with a minimum withdrawal fee of 1,000 USD. Besides, to be able to deposit and withdraw money, customers also have to pay 150 USD/account as a verification fee. Lending : Tether also lends to financial institutions with flexible interest rates. Typically, in 2021 Tether lends Celsius 1 billion USD, Celsius CEO also confirmed that the lending interest rate is 5-6%/year. That means Tether could generate $50-$60 million/year from just that one transaction (if Celsius didn't crash). Investments : A small percentage of Tether is used to carry investments. Market Maker : Tether makes money through order placement and spreads from trading assets on major exchanges and providing OTC liquidity to institutions. Other : Tether also buys bonds, precious metals... As can be seen, Tether makes a profit from the number of assets deposited by multiple sources, the more assets are deposited, the greater the profit the company earns. Therefore, it is understandable that Tether provides customers with the best services to scale.
Case study USDC
Similar to USDT, USDC (or USD Coin) is a cryptocurrency whose value is backed by USD at a ratio of 1:1. They were released by Circle in 2018. The project's operating model is the same as USDT.
Payment risk
USDC is backed by USD at a ratio of 1:1. The 1:1 ratio means that each USDC will be worth 1 USD.
Circle's reserves include cash and short-term government bonds. USDC is even more secure than USDT. Tether has nearly 15% of its reserves used to buy risky bonds or investments, while 100% of Circle's reserves are cash equivalents or can be converted to cash in the short term. Therefore, the quality of assets supporting USDC is very high.
Liquidity risk
Similar to Tether, a large percentage of assets equivalent to cash and can be converted into money in a short time is a guarantee of the safety of Circle, helping depositors to buy USDC with peace of mind.
Scalability
On the user side, the method to deposit money into Circle is quite simple. Because it uses 1:1 conversion, as long as demand increases, USDC can expand quickly with very low risk.
On the Circle side, the organization makes money from:
Market Maker (MM) : Circle also has MM operations similar to Tether. Circle used to be the world's second largest market maker in Crypto Investments : The majority of Circle's assets are used to buy US government bonds. Currently, of the more than 55 billion USDC issued, USDC holds more than 13 billion in cash and more than 42 billion USD in government bonds. These bonds are mostly short-term and divided into many different periods. It can be seen that the approach of the issuers of Fiat-backed stablecoins is quite similar. Attract depositors to profit from the amount of assets deposited, the more assets are put in, the greater the profit the company earns.
However, despite the same development motivation, each company has a different way of allocating assets in the reserve, equivalent to different levels of risk. This explains the recent increase in the number of addresses holding USDC, while USDT has decreased. With the overall market volatile, users will prefer to hold the safest asset class.
Case study XAUT
XAUT is a real gold-backed cryptocurrency issued by Tether Gold Commodities Limited. 1 XAUT is worth vone ounce of actual gold.
The project's operating model is quite simple, users need to register and verify an account with TG Commodities Limited, then buy XAUT in USD. That USD will be used to buy gold and put into the reserve of Tether Gold. Users can use XAUT to trade or store,... If they want to withdraw assets, they just need to return the XAUT number and receive the equivalent amount.
Payment risk
XAUT is backed by real gold at the rate of 1 XAUT equal to 1 ounce of gold. The actual price of gold will show up in the price of XAUT.
Currently, Tether Gold has not released a reserve analysis, so it is not known what the money used to buy XAUT is used for. What guarantees Tether Gold now is the reputation of Tether.
Liquidity risk
As Tether Gold has not published a reserve analysis, it is not possible to analyze the liquidity risk of XAUT at this time.
Scalability
As shown above, the method to deposit money into Tether Gold is quite simple. This model is similar to entrusting a third party to buy assets. The buyer will be responsible for purchasing, storing the assets and issuing the debentures (here, XAUT) to the trustee. The benefit users get with Tether Gold is that there is no need to store assets and can use XAUT as leverage for other transactions.
On the Tether Gold side, they make money from deposit and withdrawal fees. Tether Gold charges 0.25% fee when users deposit and withdraw assets. It is not clear if the deposit amount is loaned or invested.
The current value of XAUT is more than $246 million - a small number compared to Tether's reputation and USDT's market. Besides, the current XAUT trading pairs are mainly with USDT, which proves that there is a need for people to use XAUT to participate in other markets.
To sum up, Fully-backed stablecoin meets the factors of payment risk, liquidity risk because it is directly backed by fiat. Besides, Fully-backed stablecoins are also scalable because they are issued by centralized parties.
However, depending on a centralized party has risks of transparency as well as can negatively affect users if the issuer takes control of user assets.
Over-collateral Stablecoin is the 2nd most popular stablecoin on the market. In Over-collateral Stablecoin systems, in order to generate 1USD, users must collateralize an amount of assets with a value greater than 1USD.
Case study DAI
DAI is a stablecoin issued by MakerDAO. In order to have 1 DAI on the market, users need to collateralize other cryptocurrencies on the market that are worth more than the amount of DAI issued.
1. Payment risk
DAI is secured by the amount of tokens used as collateral. The mortgage rate will be decided based on the riskiness of the property.
Looking at the distribution of DAI, it can be seen that currently more than 80% of the DAI generated comes from Fiat-backed stablecoins (USDC) and LP tokens of stablecoin pools (also tied to USDC). Only a small amount of DAI is generated from volatile assets, and the volatile assets with a large market share are among the top assets in the market like WBTC, ETH.
Liquidity risk
If the asset falls below the required price, the asset will be liquidated to secure the amount of DAI issued. To increase the margin of safety, MakerDAO has a large market share of USDC.
In addition, MakerDAO has Maker Buffer, this product acts as a Financial Fund (Treasury), managing the revenue and expenditure of the project. In the event that the market declines too quickly and the amount of collateral is lower than the amount of DAI issued, Maker Buffer will use the proceeds to repay the protocol debt. If the amount in Maker Buffer is not enough to repay the debt, MKR tokens will be minted and auctioned (Debt Auction) to pay the other two debts.
The role of Maker Buffer and the MKR token has been evident in past Blackswan events. Specifically, on March 13, 2020, the market had a strong crash, although MakerDao conducted a liquidation when the mortgage rate fell below the specified level, but the price fell so quickly that the amount collected was not enough. debt recovery, the deficit amounted to 5.4 million DAI.
At this point, MakerDao has to suspend the protocol operation (Emergency Shutdown) and conduct a debt auction. On March 29, 2020, the debt auction ended, 20,980 MKR was minted to collect 5.3 million DAI.
To better understand MakerDAO's operating model, readers can refer here .
Scalability
The process of borrowing DAI is quite simple, users only need a wallet and tokens accepted by MakerDAO as collateral. Users do not need to reveal themselves and can perform operations anywhere.
Analysis of the supply of DAI shows that the majority of DAI is in lending protocols such as Compound, Aave to create leverage to buy more assets, provide liquidity or bridge to other blockchains to find better yield sources.
It can be seen that DAI is being used more as a financial instrument than as a holding asset to reserve purchasing power.
The adoption of crypto as collateral has met the market's need for efficient capital use. Just as demand increases, the need to use crypto as leverage to increase profits will also grow.
However, DAI itself in particular and other over-collateral stablecoins in general do not have good capital efficiency. To ensure the two fundamental factors, payment risk and liquidity risk, the project must have a safe mortgage rate, thereby failing to make optimal use of the depositor's capital.
Non-backed Stablecoin developed by Terra. In which, the system's stablecoin (UST peg to 1USD) is minted and redeemed by LUNA (2nd token of the system) at Oracle price.
When users mint UST from LUNA, the amount of LUNA is not kept as collateral but burned from the system.
Similarly, when the user redeems UST to LUNA, a corresponding amount of LUNA will be minted by the system to pay the user.
Before Terra (UST), there were a few non-backed stablecoin systems that existed such as the Seignorage & Elastic supply stablecoins .
Case study $UST - Failed
UST is the most popular of the stablecoins issued by Terra, whose value is pegged to USD prices. In order for UST to be stable at the peg price, any price movement will be transferred to the LUNA token.
In order to keep the UST price at ~1 USD, Terra encourages users to mint/redeem LUNA under the arbitrage trading mechanism.
If the UST price is higher than the peg price, users can mint 1 UST from 1 USD worth of LUNA and swap out the Fully-backed stablecoin.
If the UST price is lower than the peg price, the user can reddem 1 UST for 1 USD worth of LUNA.
To understand more about Terra's model and co-UST, readers can refer to: Analysis of Terra's operational model .
1. Payment risk
UST has no backing assets but only depends on the mint & burn LUNA mechanism (LUNA is not in a stockpile but is created from the air). To limit the volatility of LUNA, Terra created a BTC reserve to absorb the UST discharge. Instead of exchanging 1 UST for 1 USD worth of LUNA, users will receive 0.98 USD worth of BTC. However, BTC itself is also a volatile asset and only partially limited volatility before LUNA collapsed.
2. Liquidity risk
Terra's arbitrage incentive mechanism was very successful during the expansion phase, when the demand for UST and LUNA increased sharply. The higher the price of LUNA, the more UST can be converted and the more profit earned. On the contrary, when the market falls, 1 UST will be exchanged for more LUNA and a loop is formed: the more LUNA is withdrawn, the lower the price of LUNA, thereby redeeming more LUNA, making the price drop even more.. .
That is why every time the market fluctuates, the price of LUNA also fluctuates very strongly. Terra's model design amplifies both the rising and falling arcs of LUNA, until the cut-off point is broken and the LUNA coin collapses.
Terra has also recognized this issue and has implemented withdrawal restrictions. Accordingly, an account can only withdraw a fixed amount of LUNA. If the withdrawal limit is exceeded, the slippage will increase significantly. However, this mechanism is only a temporary restriction and users are willing to withdraw money using many different accounts.
3. Scalability
Surely LUNA would not be able to develop like that without Anchor (ANC) , a "bank" of Terra with deposit interest rates up to 18 - 20%. Throughout the development of the Terra system, Anchor on average accounted for more than 80% of the key asset value, at its peak Anchor's key asset value was $17 billion out of the Terra system's $21 billion.
The 3 main drivers that drive people to the crypto market are:
Earn money.
There is joy.
Pursuit of ideals.
In the market, what is more attractive than earning 20% fixed interest - an unbelievable rate of interest from a currency that is "equivalent" to USD. Anchor created a large amount of demand for UST to deposit interest, thereby creating a demand for LUNA. With the above-mentioned bullish supply amplification model, the price of LUNA increased sharply and attracted more new money flow.
However, unlike banks, Anchor's loan revenue is very low. In fact, users only deposit money to receive interest, very few borrowers.
There are 14 billion UST deposited but only 3 billion UST borrowed, showing that the demand for UST is not high. When revenue is lower than spending, Terra eventually has to pay out of pocket or in other words sell LUNA to have UST pay depositors interest. Finally, when the pocket money was empty and “too many mouths” needed to be fed, **the UST lost the peg ** and marked the downfall of the “Ponzi” pattern.
LUNA and UST have grown very quickly with a focus on scalability. Creating money out of thin air at unbelievable interest rates and making users believe in the future of “stable” coins UST has met the needs of users when entering the market.
But focusing on scalability without considering two foundational risks cost Terra dearly when growing too large.
Difference between USDD and USDN
Similar to the model of LUNA/UST, Tron's TRX/USDD and Waves' WAVES/USDN also use the mint & redeem model.
If the USDD/USDN price is higher than the peg price, users can mint 1 USDD/USDN from 1 USD worth of TRX/WAVES and swap out the Fully-backed stablecoin.
If the USDD/USDN price is lower than the peg price, the user can redeem 1 USDD/USDN for 1 USD worth of TRX/ WAVES.
However, when the Terra model collapsed, these two stablecoins survived. So what's the difference?
With USDD/TRX, the project has added a large amount of assets to support the model. Currently, the mortgage rate reaches more than 316%. Before the Terra system collapsed, at one point this number was only 185%. The amount of assets supporting USDD in the reserve reaches more than 70% and 50% of which is Fiat-backed stablecoin.
Besides, TRX - USDD's volatility-absorbing asset is a long-lived token with a strong community, its liquidity is also thicker and more difficult to attack.
With USDN/WAVES, compared to UST/LUNA, the project has the following differences:
LUNA is used to mint UST burned, WAVES is used to mint USDN locked in smart contract
LUNA/UST can be minted endlessly. The amount of USDN minted is limited by the amount of locked WAVES
There is a limit to the amount of WAVES/USDN swapped in 1 day
There are other mechanisms to equalize prices. See more here .
To sum up, after comparing the 3 projects, it can be seen that USDN/WAVES and USDD/TRX have noticed the disadvantages of UST/LUNA and have taken measures to solve the problem.
In essence, both USDD and USDN are over-collateral stablecoins. USDD has a proportion of other assets backed by USDD. or because it creates WAVES out of thin air, USDN reserves WAVES to back its value. The amount of USDN minted is limited by the value of the WAVE - essentially over-collateralized.
The Parital-Reserve stablecoin is a stablecoin that generates profits but still has a degree of security thanks to collateral. Partial-Reserve stablecoin's goal is to create a stablecoin that is stable against payment and liquidity risks but still has good scalability from the incentives they provide.
Case study FRAX
Despite its relatively small market share, partial-reserve stablecoins have the leading growth rate in the stablecoin market. Typical for the development of Partial-reserve stablecoin is FRAX- stablecoin released by Frax Finance in November 2020.
To keep the price of FRAX at ~1 USD, Frax Finance also applies an incentive mechanism for arbitrage:
If the FRAX price is higher than the peg price, the user can mint 1 FRAX from 1 USD worth of FXS + USDC and swap out the Fiat-backed stablecoin
If FRAX price is lower than peg price, user can redeem 1 FRAX for 1 USD worth of FXS + USDC
To understand more about Frax Finance's model, readers can refer to: Analysis of Frax Finance's operating model
It can be seen that this mechanism is quite similar to the operating mechanism of UST/LUNA, but with additional USDC. In fact, the share of USDC accounts for the majority (more than 90% at the moment). Instead of using another project like Anchor to generate yield for users, Frax Finance uses the same USDC to generate yield.
1. Payment risk
Looking at the asset structure of Frax Finance, it can be seen that most of the sender's assets are being used for investment strategies (AMOs), only a small amount of USDC and FRAX are reserved in the protocol.
However, the majority of project assets invested are being used to provide liquidity in Curve to receive yield. Farming in the stablecoin pool helps Frax Finance to adapt well to bad situations related to FRAX losing pegs.
2. Liquidity risk
The stability of FRAX was demonstrated on the day of the UST peg loss incident. The collapse of UST has had a very strong impact on stablecoin projects with similar models in particular and the stablecoin market in general.
During that day, FRAX was heavily redeemed and the token's capitalization dropped by more than 1 billion USD in a short time. However, the price of FRAX fell just over 1% and quickly returned to the peg level.
3. Scalability
During the bull phase, FRAX's market capitalization grew from over $20 million to over $2.9 billion. This proves that FRAX's model has good extensibility. At its peak, Frax Finance's cumulative revenue reached more than 100 million USD - an impressive number after just over 1 year of operation.
Currently, the Partial-reserve stablecoin model shows quite a lot of potential when it comes to relative safety and utilizes the sender's assets to generate more profits. However, the current yield source is too dependent on other parties. In the future, if FRAX as well as other partial-reserve stablecoins can find a more sustainable yield, we can expect the development of this stablecoin.
Main content:
Stablecoins will likely continue to focus on developing their advantages in the near future.
The yield approach factor is the most prominent advantage of stablecoins.
At each stage of development, “elite” stablecoin projects will continue to grow in the future.
Below is the formation time table of the top 20 stablecoins:
The history of stablecoins can be summarized as follows:
Phase 1 (2014-2018): The emergence of stablecoins
The story started when Tether realized the crypto market lacked a stable asset for trading and accounting and issued USDT in 2014.
However, issuing coins too early does not create an advantage for USDT in the early years. The crypto market at that time was too young and the main use of crypto was to use BTC for black market transactions and money laundering. By the end of 2016, the market capitalization of USDT has not exceeded 7 million USD.
However, things changed in 2017, the explosion of BTC and other tokens created huge demand for a stable and safe asset. The value of many tokens x10, x100 or /2, /3 in a short time makes users need a solution to take profit, stop loss. If you do not want to leave the market, holding stablecoins is the simplest solution.
With a hot bull market and a lot of potential, other stablecoin projects such as USDC, TUSD, USDP, GUSD, EURS... are also starting to join the game. Their common feature is that they all use a Fiat-backed mechanism.
By the end of 2018, the capitalization of the stablecoin market reached $2.5 billion. In which, the capitalization of USDT accounts for the majority and reaches more than 2 billion USD. At the peak of 2018, USDT's capitalization reached over $2.7 billion, 385 times higher than at the end of 2016. The strong development of USDT made Tether's reputation soar, creating a token/USDT trading pair became mandatory, Since then, USDT's position has been increasingly strengthened. USDT remains the highest-cap stablecoin to this day.
The piece of cake named stablecoin is too attractive and continues to attract many parties, including two other successful names, USDC and BUSD. USDC was born in the context of USDT dominating the stablecoin market. The project has taken advantage of the high risk factor of USDT to leverage its development. BUSD was launched later, but with the backing of Binance, it has grown rapidly and is now the third highest market capitalization stablecoin after USDT and USDC.
Phase 2 (2019-2022): DeFi and the story of optimizing capital efficiency
Crypto with blockchain technology brings many breakthrough ideas, the most prominent of which is DeFi. The development of DeFi with the idea of bringing finance on-chain has created a strong growth wave for the market.
The emergence of many new asset classes (token) raises the need to optimize capital efficiency. MakerDAO leads this trend with the launch of the DAI token. Accepting collateral is cryptocurrencies that allow users to increase their position without having to sell their tokens.
After DAI, many other stablecoin projects followed. Each project has a different model and approach as described in the above classification, but in general, they are all aimed at optimizing capital efficiency in order to increase profits for users.
To date, DAI is still the most effective stablecoin using the highest capitalization. At its peak, DAI's capitalization reached over $9 billion and is now close to $7 billion. Most other stablecoins have plummeted, only a few coins still have a significant market share such as FRAX, USDD, USDN.
Phase 3 (2023-?): New chapter for the story of optimizing capital efficiency.
The trend of CBDC or central bank-issued electronic money is the inevitable direction of countries to improve the current monetary system. However, the reality proves that CBDC does not generate profits but is essentially just the base money.
Besides, factors such as lower and lower bank interest rates and currency devaluation are creating demand for a stable asset to hold and yield enough to cope with inflation.
Learn more: What is CBDC ?
From the analysis of the model of stablecoin projects, it can be seen that the nature of stablecoins as an upper layer of the system is intended to bring additional benefits to users (adding yield, control, cross-border transactions). gender...). In which the yield factor is the most prominent factor to attract users.
With such an advantage, instead of competing with current currencies that are doing very well such as domestic payments (cash, money in bank cards), or international payments (visa, mastercard), .. It is highly likely that stablecoins will continue to develop their advantages and from there expand to other development directions.
However, because they are the upper layer, their existence depends on the lower layers such as the base currency or the money issued by a commercial bank. Therefore, if you hold stablecoins, you need to be aware of the factors that can affect it in the lower tier. With the current USD-dominated market, the following factors should be kept in mind:
Will the USD continue to hold the position of the world's common currency?
Will the US make any move with the stablecoin market when developing CBDC?
What measures will the crypto market take against the “storms” that may come in the future?
According to the history of the stablecoin market, it can be seen that each stage of development will have a different story and projects will develop around that story. During that period will appear many projects and most of them decline and eventually fail. But when those failed projects are excluded, the market still has stable and developed projects to this day.
Phase 1 saw the birth and decline of fiat-backed stablecoins but so far USDC, USDT and BUSD are still accounting for most of the market share.
Phase 2 saw the birth of many stablecoins to help optimize capital efficiency, but currently only a few projects such as DAI, FRAX, USDN and USDD still hold a significant market share.
In phase 3, it is highly likely that the market will continue to see the development of stablecoins in stages 1 and 2. Many new stablecoins will also appear around the story at this stage.
Stablecoins are essential elements of crypto, their development is a guideline for the development of the market. In the near term, it is highly likely that stablecoins will continue to focus on their advantages instead of expanding in another direction.
Stablecoin analysis is an in-depth analysis of aspects related to an important component of the crypto market.
The factors analyzed in the article include:
Stablecoin overview: Why the crypto market needs stablecoins, current context and stablecoin evaluation factors.
Classification of stablecoins and case studies: Causes of stablecoin success or failure and potential directions of development.
Stablecoin forecast : Potential development direction for stablecoin segment.
Main content:
Stablecoins are an essential element of the trading of the crypto market.
Fiat-backed stablecoins hold the largest market share. The first-mover advantage affects the stablecoin position a lot.
There are 3 factors that evaluate stablecoins: Liquidity risk, settlement risk, and scalability. In particular, the first two factors are the foundation for a stablecoin to exist, the other factors determine the development of stablecoins.
Stablecoins are essential for trading in the crypto market. Users who take profits, cut losses, or want to avoid price fluctuations if they do not want to leave the market, transferring asset positions to stablecoins is the most optimal solution.
According to data from Coingecko updated on Aug. 22, 22, the stablecoin market cap is currently $153.6 billion, representing more than 14% of the total crypto market cap ($1,068.5 billion), an increase of more than 100 times since 2018.
With its important role, the stablecoin market is a fertile ground for many other parties to develop. Currently, the market is full of stablecoin projects with different approaches (more details below).
However, not all stablecoin projects are successful, in fact only a few are able to attract cash flow. Below is a list of the top 20 stablecoins with the largest market capitalization today.
It can be seen that the top 5 stablecoins are accounting for more than 95% of the stablecoin market capitalization. In which, the top 3 stablecoins with the Fiat-backed model account for more than 90% of the market capitalization – these are “first-movers”. This advantage has a big impact on stablecoins' standing, as the earliest stablecoins often have strong network effects and are consolidated over time.
It is no coincidence that the current stablecoin market is so fragmented. The development of stablecoins depends on their fundamental factors, and meeting these factors will help increase the position of stablecoins in the market.
To judge a well-designed stablecoin, there are 3 factors:
Payment risk (Solvency).
Liquidity risk.
Scalability.
Solvency
Payment risk is the most important factor of a stablecoin, it is related to the ability of the stablecoin to exchange parity with its peg.
For example, 1 USDC is equivalent to 1 USD, in theory, 1 USDC is trading for close to 1 USD in the market. What if USDC trades below the peg?
Because USDC is backed 1:1 by USD and equivalent assets (bonds or government bills). Whenever the price of USDC starts to fall below 1 USD, arbitrageurs buy USDC in bulk and redeem USDC tokens into fiat (USD) through institutions that regulate USDC.
Another aspect of settlement risk is the quality of assets that support that stablecoin. For volatile assets, in the event of a drop in asset value, the stablecoin requires over-collateral positions to provide a buffer for it.
Liquidity
Liquidity risk is the degree to which any asset can be bought or sold in the market without much impact on the market price of that asset.
Besides the liquidity risk of stablecoins, there is also the liquidity risk of collateral assets. If not managed well, it will involve and adversely affect the whole system.
Scalability
Scalability is the level of capital utilization between assets deposited and assets minted. For example, put 1 USD worth of assets into the system and mint 1 USD stablecoin.
Scalability is important to help stablecoins grow, as the ultimate goal of stablecoins is to expand the supply.
Meanwhile, liquidity risk and settlement risk are the two main factors that help preserve and transfer the value of stablecoins. Like the saying “If you want to grow, you must first survive”, the two risks above need to be carefully considered and managed for stablecoins to survive, especially in a volatile market like crypto. .
There have been many case studies of stablecoins with different approaches and different results. Below, we will categorize stablecoins according to the above three factors and analyze examples in each branch: Why one stablecoin is more successful than another, what would the project look like, ignoring the two background factors. solvency and liquidity platform that only focuses on the scalability factor...?
Main content:
The USD has high dominance in the stablecoin market.
For a stablecoin project to develop sustainably, payment risk and liquidity risk must be a top priority. Trade-off of these two fundamental factors to achieve expansion is high risk.
As the crypto market grows, the optimization of capital efficiency will also increase. Stablecoins that accept cryptocurrency as collateral will also grow.
The yield generation is a good factor to attract users. Stablecoins can be kept safe from payment/liquidity risks and yield is also a potential fork.
We divide the current stablecoin market into 4 parts, respectively:
Fully-backed Stablecoin (collateral value equivalent to stablecoin capitalization, collateral ratio approximately 100%).
Over-collateral Stablecoin (collateral value greater than stablecoin capitalization, collateral ratio greater than 100%).
Partial-backed Stablecoin (collateral value less than stablecoin capitalization, collateral ratio less than 100%).
Non-backed Stablecoin (no collateral).
We will learn the overview of the mechanism, analyze typical examples of each branch according to the 3 elements constituting stablecoins, thereby deducing the advantages and disadvantages of each.
Fully-backed stablecoin is a type of stablecoin with collateral value equivalent to stablecoin capitalization, the collateral ratio is approximately 100%.
The most common type of Fully-backed stablecoin is the Fiat-backed stablecoin. Fiat-backed stablecoins are real-life fiat-backed stablecoins, most commonly USDT, USDC, and USD-backed BUSD. That is, for every 1 USDT minted on the blockchain, there will be 1 USD corresponding (fiat or cash equivalent) reserved as collateral.
Fiat-backed stablecoins account for the majority of the stablecoin market share. From 2021 to now, the market share of the top 3 Fiat-backed stablecoins USDT, USDC and BUSD fluctuates on average between 80-90%.
Another less popular fully-backed stablecoin is stablecoins pegged to the price of valuable assets. For example, XAUT is a stablecoin pegged to the price of gold and backed 1:1 in gold.
Coin98 Stablecoin - CUSD is also a fully-backed stablecoin. Users can completely convert/redeem 1:1 with BUSD and USDC at any time. CUSD was developed to be the necessary tool to support Coin98's Multi-chain ecosystem and to help users transfer assets between chains easily.
Learn more about CUSD: What is CUSD?
Case study USDT
USDT (or Tether coin) is a cryptocurrency whose value is guaranteed in USD at a ratio of 1:1. They were issued by Tether Operation Limited in 2014.
The operating model of the project is quite simple:
Users will deposit fiat money (USD) to Tether Limited's bank account. Tether will create and write to the user's account an amount of Tether token (USDT) equal to the amount they deposited. Users can freely make transactions with Tether tokens: directly buy, sell, exchange on exchanges…
When there is no need for use, users can convert Tether tokens into fiat money through the Tether platform, Tether will destroy that Tether token and send the fiat money back to the user.
See also: Analysis of USDT . operating pattern
1. Payment risk
USDT is backed by USD at a 1:1 ratio. The 1:1 ratio means that each USDT will be worth 1 USD.
The Reserve Breakdown shows what factors USDT is currently supported by. We have:
79.62% were cash, cash equivalents, other short-term deposits and commercial paper.
8.36% other investments.
6.77% secured loans.
5.25% corporate bonds, funds and precious metals.
Nearly 80% of USDT's capitalization is backed by cash and equivalent assets.
However the rest (about 20%) is collateralized by higher risk assets. The Tether report did not elaborate on these details. Some of the existing risks include:
Corporate bonds are less safe than government bonds.
Collateral quality of mortgage loans.
Do not disclose the specific status of the investments.
To sum up, there are many unknowns surrounding the topic of USDT's reserve asset.
2. Liquidity risk
A large percentage of assets that are equivalent to cash and can be converted into money in a short time is a guarantee of safety, giving people who deposit money into Tether relatively secure.
Although USDT has lost pegs below 1 USD many times, the main reason comes from temporarily affected supply and demand, affecting the liquidity of the exchange (the impact of FUD, FOMO...). Once those transient factors are over, users realize that Tether's cash-to-asset ratio remains high and the chances of their funds being affected are very low. Demand for USDT increased again and USDT returned to the price of 1 USD.
Scalability
As shown above, the method to deposit money into Tether is quite simple. Because of using 1:1 conversion method, as long as demand increases, USDT can expand quickly with very low risk.
On the Tether side, if you deposit 1 USD and get 1 USDT back, what is the development motivation of the organization?
Tether makes money from a variety of sources, including:
Fees : Tether charges 0.1% deposit and withdraw fees, with deposit users must deposit at least 100,000 USD, with a minimum withdrawal fee of 1,000 USD. Besides, to be able to deposit and withdraw money, customers also have to pay 150 USD/account as a verification fee. Lending : Tether also lends to financial institutions with flexible interest rates. Typically, in 2021 Tether lends Celsius 1 billion USD, Celsius CEO also confirmed that the lending interest rate is 5-6%/year. That means Tether could generate $50-$60 million/year from just that one transaction (if Celsius didn't crash). Investments : A small percentage of Tether is used to carry investments. Market Maker : Tether makes money through order placement and spreads from trading assets on major exchanges and providing OTC liquidity to institutions. Other : Tether also buys bonds, precious metals... As can be seen, Tether makes a profit from the number of assets deposited by multiple sources, the more assets are deposited, the greater the profit the company earns. Therefore, it is understandable that Tether provides customers with the best services to scale.
Case study USDC
Similar to USDT, USDC (or USD Coin) is a cryptocurrency whose value is backed by USD at a ratio of 1:1. They were released by Circle in 2018. The project's operating model is the same as USDT.
Payment risk
USDC is backed by USD at a ratio of 1:1. The 1:1 ratio means that each USDC will be worth 1 USD.
Circle's reserves include cash and short-term government bonds. USDC is even more secure than USDT. Tether has nearly 15% of its reserves used to buy risky bonds or investments, while 100% of Circle's reserves are cash equivalents or can be converted to cash in the short term. Therefore, the quality of assets supporting USDC is very high.
Liquidity risk
Similar to Tether, a large percentage of assets equivalent to cash and can be converted into money in a short time is a guarantee of the safety of Circle, helping depositors to buy USDC with peace of mind.
Scalability
On the user side, the method to deposit money into Circle is quite simple. Because it uses 1:1 conversion, as long as demand increases, USDC can expand quickly with very low risk.
On the Circle side, the organization makes money from:
Market Maker (MM) : Circle also has MM operations similar to Tether. Circle used to be the world's second largest market maker in Crypto Investments : The majority of Circle's assets are used to buy US government bonds. Currently, of the more than 55 billion USDC issued, USDC holds more than 13 billion in cash and more than 42 billion USD in government bonds. These bonds are mostly short-term and divided into many different periods. It can be seen that the approach of the issuers of Fiat-backed stablecoins is quite similar. Attract depositors to profit from the amount of assets deposited, the more assets are put in, the greater the profit the company earns.
However, despite the same development motivation, each company has a different way of allocating assets in the reserve, equivalent to different levels of risk. This explains the recent increase in the number of addresses holding USDC, while USDT has decreased. With the overall market volatile, users will prefer to hold the safest asset class.
Case study XAUT
XAUT is a real gold-backed cryptocurrency issued by Tether Gold Commodities Limited. 1 XAUT is worth vone ounce of actual gold.
The project's operating model is quite simple, users need to register and verify an account with TG Commodities Limited, then buy XAUT in USD. That USD will be used to buy gold and put into the reserve of Tether Gold. Users can use XAUT to trade or store,... If they want to withdraw assets, they just need to return the XAUT number and receive the equivalent amount.
Payment risk
XAUT is backed by real gold at the rate of 1 XAUT equal to 1 ounce of gold. The actual price of gold will show up in the price of XAUT.
Currently, Tether Gold has not released a reserve analysis, so it is not known what the money used to buy XAUT is used for. What guarantees Tether Gold now is the reputation of Tether.
Liquidity risk
As Tether Gold has not published a reserve analysis, it is not possible to analyze the liquidity risk of XAUT at this time.
Scalability
As shown above, the method to deposit money into Tether Gold is quite simple. This model is similar to entrusting a third party to buy assets. The buyer will be responsible for purchasing, storing the assets and issuing the debentures (here, XAUT) to the trustee. The benefit users get with Tether Gold is that there is no need to store assets and can use XAUT as leverage for other transactions.
On the Tether Gold side, they make money from deposit and withdrawal fees. Tether Gold charges 0.25% fee when users deposit and withdraw assets. It is not clear if the deposit amount is loaned or invested.
The current value of XAUT is more than $246 million - a small number compared to Tether's reputation and USDT's market. Besides, the current XAUT trading pairs are mainly with USDT, which proves that there is a need for people to use XAUT to participate in other markets.
To sum up, Fully-backed stablecoin meets the factors of payment risk, liquidity risk because it is directly backed by fiat. Besides, Fully-backed stablecoins are also scalable because they are issued by centralized parties.
However, depending on a centralized party has risks of transparency as well as can negatively affect users if the issuer takes control of user assets.
Over-collateral Stablecoin is the 2nd most popular stablecoin on the market. In Over-collateral Stablecoin systems, in order to generate 1USD, users must collateralize an amount of assets with a value greater than 1USD.
Case study DAI
DAI is a stablecoin issued by MakerDAO. In order to have 1 DAI on the market, users need to collateralize other cryptocurrencies on the market that are worth more than the amount of DAI issued.
1. Payment risk
DAI is secured by the amount of tokens used as collateral. The mortgage rate will be decided based on the riskiness of the property.
Looking at the distribution of DAI, it can be seen that currently more than 80% of the DAI generated comes from Fiat-backed stablecoins (USDC) and LP tokens of stablecoin pools (also tied to USDC). Only a small amount of DAI is generated from volatile assets, and the volatile assets with a large market share are among the top assets in the market like WBTC, ETH.
Liquidity risk
If the asset falls below the required price, the asset will be liquidated to secure the amount of DAI issued. To increase the margin of safety, MakerDAO has a large market share of USDC.
In addition, MakerDAO has Maker Buffer, this product acts as a Financial Fund (Treasury), managing the revenue and expenditure of the project. In the event that the market declines too quickly and the amount of collateral is lower than the amount of DAI issued, Maker Buffer will use the proceeds to repay the protocol debt. If the amount in Maker Buffer is not enough to repay the debt, MKR tokens will be minted and auctioned (Debt Auction) to pay the other two debts.
The role of Maker Buffer and the MKR token has been evident in past Blackswan events. Specifically, on March 13, 2020, the market had a strong crash, although MakerDao conducted a liquidation when the mortgage rate fell below the specified level, but the price fell so quickly that the amount collected was not enough. debt recovery, the deficit amounted to 5.4 million DAI.
At this point, MakerDao has to suspend the protocol operation (Emergency Shutdown) and conduct a debt auction. On March 29, 2020, the debt auction ended, 20,980 MKR was minted to collect 5.3 million DAI.
To better understand MakerDAO's operating model, readers can refer here .
Scalability
The process of borrowing DAI is quite simple, users only need a wallet and tokens accepted by MakerDAO as collateral. Users do not need to reveal themselves and can perform operations anywhere.
Analysis of the supply of DAI shows that the majority of DAI is in lending protocols such as Compound, Aave to create leverage to buy more assets, provide liquidity or bridge to other blockchains to find better yield sources.
It can be seen that DAI is being used more as a financial instrument than as a holding asset to reserve purchasing power.
The adoption of crypto as collateral has met the market's need for efficient capital use. Just as demand increases, the need to use crypto as leverage to increase profits will also grow.
However, DAI itself in particular and other over-collateral stablecoins in general do not have good capital efficiency. To ensure the two fundamental factors, payment risk and liquidity risk, the project must have a safe mortgage rate, thereby failing to make optimal use of the depositor's capital.
Non-backed Stablecoin developed by Terra. In which, the system's stablecoin (UST peg to 1USD) is minted and redeemed by LUNA (2nd token of the system) at Oracle price.
When users mint UST from LUNA, the amount of LUNA is not kept as collateral but burned from the system.
Similarly, when the user redeems UST to LUNA, a corresponding amount of LUNA will be minted by the system to pay the user.
Before Terra (UST), there were a few non-backed stablecoin systems that existed such as the Seignorage & Elastic supply stablecoins .
Case study $UST - Failed
UST is the most popular of the stablecoins issued by Terra, whose value is pegged to USD prices. In order for UST to be stable at the peg price, any price movement will be transferred to the LUNA token.
In order to keep the UST price at ~1 USD, Terra encourages users to mint/redeem LUNA under the arbitrage trading mechanism.
If the UST price is higher than the peg price, users can mint 1 UST from 1 USD worth of LUNA and swap out the Fully-backed stablecoin.
If the UST price is lower than the peg price, the user can reddem 1 UST for 1 USD worth of LUNA.
To understand more about Terra's model and co-UST, readers can refer to: Analysis of Terra's operational model .
1. Payment risk
UST has no backing assets but only depends on the mint & burn LUNA mechanism (LUNA is not in a stockpile but is created from the air). To limit the volatility of LUNA, Terra created a BTC reserve to absorb the UST discharge. Instead of exchanging 1 UST for 1 USD worth of LUNA, users will receive 0.98 USD worth of BTC. However, BTC itself is also a volatile asset and only partially limited volatility before LUNA collapsed.
2. Liquidity risk
Terra's arbitrage incentive mechanism was very successful during the expansion phase, when the demand for UST and LUNA increased sharply. The higher the price of LUNA, the more UST can be converted and the more profit earned. On the contrary, when the market falls, 1 UST will be exchanged for more LUNA and a loop is formed: the more LUNA is withdrawn, the lower the price of LUNA, thereby redeeming more LUNA, making the price drop even more.. .
That is why every time the market fluctuates, the price of LUNA also fluctuates very strongly. Terra's model design amplifies both the rising and falling arcs of LUNA, until the cut-off point is broken and the LUNA coin collapses.
Terra has also recognized this issue and has implemented withdrawal restrictions. Accordingly, an account can only withdraw a fixed amount of LUNA. If the withdrawal limit is exceeded, the slippage will increase significantly. However, this mechanism is only a temporary restriction and users are willing to withdraw money using many different accounts.
3. Scalability
Surely LUNA would not be able to develop like that without Anchor (ANC) , a "bank" of Terra with deposit interest rates up to 18 - 20%. Throughout the development of the Terra system, Anchor on average accounted for more than 80% of the key asset value, at its peak Anchor's key asset value was $17 billion out of the Terra system's $21 billion.
The 3 main drivers that drive people to the crypto market are:
Earn money.
There is joy.
Pursuit of ideals.
In the market, what is more attractive than earning 20% fixed interest - an unbelievable rate of interest from a currency that is "equivalent" to USD. Anchor created a large amount of demand for UST to deposit interest, thereby creating a demand for LUNA. With the above-mentioned bullish supply amplification model, the price of LUNA increased sharply and attracted more new money flow.
However, unlike banks, Anchor's loan revenue is very low. In fact, users only deposit money to receive interest, very few borrowers.
There are 14 billion UST deposited but only 3 billion UST borrowed, showing that the demand for UST is not high. When revenue is lower than spending, Terra eventually has to pay out of pocket or in other words sell LUNA to have UST pay depositors interest. Finally, when the pocket money was empty and “too many mouths” needed to be fed, **the UST lost the peg ** and marked the downfall of the “Ponzi” pattern.
LUNA and UST have grown very quickly with a focus on scalability. Creating money out of thin air at unbelievable interest rates and making users believe in the future of “stable” coins UST has met the needs of users when entering the market.
But focusing on scalability without considering two foundational risks cost Terra dearly when growing too large.
Difference between USDD and USDN
Similar to the model of LUNA/UST, Tron's TRX/USDD and Waves' WAVES/USDN also use the mint & redeem model.
If the USDD/USDN price is higher than the peg price, users can mint 1 USDD/USDN from 1 USD worth of TRX/WAVES and swap out the Fully-backed stablecoin.
If the USDD/USDN price is lower than the peg price, the user can redeem 1 USDD/USDN for 1 USD worth of TRX/ WAVES.
However, when the Terra model collapsed, these two stablecoins survived. So what's the difference?
With USDD/TRX, the project has added a large amount of assets to support the model. Currently, the mortgage rate reaches more than 316%. Before the Terra system collapsed, at one point this number was only 185%. The amount of assets supporting USDD in the reserve reaches more than 70% and 50% of which is Fiat-backed stablecoin.
Besides, TRX - USDD's volatility-absorbing asset is a long-lived token with a strong community, its liquidity is also thicker and more difficult to attack.
With USDN/WAVES, compared to UST/LUNA, the project has the following differences:
LUNA is used to mint UST burned, WAVES is used to mint USDN locked in smart contract
LUNA/UST can be minted endlessly. The amount of USDN minted is limited by the amount of locked WAVES
There is a limit to the amount of WAVES/USDN swapped in 1 day
There are other mechanisms to equalize prices. See more here .
To sum up, after comparing the 3 projects, it can be seen that USDN/WAVES and USDD/TRX have noticed the disadvantages of UST/LUNA and have taken measures to solve the problem.
In essence, both USDD and USDN are over-collateral stablecoins. USDD has a proportion of other assets backed by USDD. or because it creates WAVES out of thin air, USDN reserves WAVES to back its value. The amount of USDN minted is limited by the value of the WAVE - essentially over-collateralized.
The Parital-Reserve stablecoin is a stablecoin that generates profits but still has a degree of security thanks to collateral. Partial-Reserve stablecoin's goal is to create a stablecoin that is stable against payment and liquidity risks but still has good scalability from the incentives they provide.
Case study FRAX
Despite its relatively small market share, partial-reserve stablecoins have the leading growth rate in the stablecoin market. Typical for the development of Partial-reserve stablecoin is FRAX- stablecoin released by Frax Finance in November 2020.
To keep the price of FRAX at ~1 USD, Frax Finance also applies an incentive mechanism for arbitrage:
If the FRAX price is higher than the peg price, the user can mint 1 FRAX from 1 USD worth of FXS + USDC and swap out the Fiat-backed stablecoin
If FRAX price is lower than peg price, user can redeem 1 FRAX for 1 USD worth of FXS + USDC
To understand more about Frax Finance's model, readers can refer to: Analysis of Frax Finance's operating model
It can be seen that this mechanism is quite similar to the operating mechanism of UST/LUNA, but with additional USDC. In fact, the share of USDC accounts for the majority (more than 90% at the moment). Instead of using another project like Anchor to generate yield for users, Frax Finance uses the same USDC to generate yield.
1. Payment risk
Looking at the asset structure of Frax Finance, it can be seen that most of the sender's assets are being used for investment strategies (AMOs), only a small amount of USDC and FRAX are reserved in the protocol.
However, the majority of project assets invested are being used to provide liquidity in Curve to receive yield. Farming in the stablecoin pool helps Frax Finance to adapt well to bad situations related to FRAX losing pegs.
2. Liquidity risk
The stability of FRAX was demonstrated on the day of the UST peg loss incident. The collapse of UST has had a very strong impact on stablecoin projects with similar models in particular and the stablecoin market in general.
During that day, FRAX was heavily redeemed and the token's capitalization dropped by more than 1 billion USD in a short time. However, the price of FRAX fell just over 1% and quickly returned to the peg level.
3. Scalability
During the bull phase, FRAX's market capitalization grew from over $20 million to over $2.9 billion. This proves that FRAX's model has good extensibility. At its peak, Frax Finance's cumulative revenue reached more than 100 million USD - an impressive number after just over 1 year of operation.
Currently, the Partial-reserve stablecoin model shows quite a lot of potential when it comes to relative safety and utilizes the sender's assets to generate more profits. However, the current yield source is too dependent on other parties. In the future, if FRAX as well as other partial-reserve stablecoins can find a more sustainable yield, we can expect the development of this stablecoin.
Main content:
Stablecoins will likely continue to focus on developing their advantages in the near future.
The yield approach factor is the most prominent advantage of stablecoins.
At each stage of development, “elite” stablecoin projects will continue to grow in the future.
Below is the formation time table of the top 20 stablecoins:
The history of stablecoins can be summarized as follows:
Phase 1 (2014-2018): The emergence of stablecoins
The story started when Tether realized the crypto market lacked a stable asset for trading and accounting and issued USDT in 2014.
However, issuing coins too early does not create an advantage for USDT in the early years. The crypto market at that time was too young and the main use of crypto was to use BTC for black market transactions and money laundering. By the end of 2016, the market capitalization of USDT has not exceeded 7 million USD.
However, things changed in 2017, the explosion of BTC and other tokens created huge demand for a stable and safe asset. The value of many tokens x10, x100 or /2, /3 in a short time makes users need a solution to take profit, stop loss. If you do not want to leave the market, holding stablecoins is the simplest solution.
With a hot bull market and a lot of potential, other stablecoin projects such as USDC, TUSD, USDP, GUSD, EURS... are also starting to join the game. Their common feature is that they all use a Fiat-backed mechanism.
By the end of 2018, the capitalization of the stablecoin market reached $2.5 billion. In which, the capitalization of USDT accounts for the majority and reaches more than 2 billion USD. At the peak of 2018, USDT's capitalization reached over $2.7 billion, 385 times higher than at the end of 2016. The strong development of USDT made Tether's reputation soar, creating a token/USDT trading pair became mandatory, Since then, USDT's position has been increasingly strengthened. USDT remains the highest-cap stablecoin to this day.
The piece of cake named stablecoin is too attractive and continues to attract many parties, including two other successful names, USDC and BUSD. USDC was born in the context of USDT dominating the stablecoin market. The project has taken advantage of the high risk factor of USDT to leverage its development. BUSD was launched later, but with the backing of Binance, it has grown rapidly and is now the third highest market capitalization stablecoin after USDT and USDC.
Phase 2 (2019-2022): DeFi and the story of optimizing capital efficiency
Crypto with blockchain technology brings many breakthrough ideas, the most prominent of which is DeFi. The development of DeFi with the idea of bringing finance on-chain has created a strong growth wave for the market.
The emergence of many new asset classes (token) raises the need to optimize capital efficiency. MakerDAO leads this trend with the launch of the DAI token. Accepting collateral is cryptocurrencies that allow users to increase their position without having to sell their tokens.
After DAI, many other stablecoin projects followed. Each project has a different model and approach as described in the above classification, but in general, they are all aimed at optimizing capital efficiency in order to increase profits for users.
To date, DAI is still the most effective stablecoin using the highest capitalization. At its peak, DAI's capitalization reached over $9 billion and is now close to $7 billion. Most other stablecoins have plummeted, only a few coins still have a significant market share such as FRAX, USDD, USDN.
Phase 3 (2023-?): New chapter for the story of optimizing capital efficiency.
The trend of CBDC or central bank-issued electronic money is the inevitable direction of countries to improve the current monetary system. However, the reality proves that CBDC does not generate profits but is essentially just the base money.
Besides, factors such as lower and lower bank interest rates and currency devaluation are creating demand for a stable asset to hold and yield enough to cope with inflation.
Learn more: What is CBDC ?
From the analysis of the model of stablecoin projects, it can be seen that the nature of stablecoins as an upper layer of the system is intended to bring additional benefits to users (adding yield, control, cross-border transactions). gender...). In which the yield factor is the most prominent factor to attract users.
With such an advantage, instead of competing with current currencies that are doing very well such as domestic payments (cash, money in bank cards), or international payments (visa, mastercard), .. It is highly likely that stablecoins will continue to develop their advantages and from there expand to other development directions.
However, because they are the upper layer, their existence depends on the lower layers such as the base currency or the money issued by a commercial bank. Therefore, if you hold stablecoins, you need to be aware of the factors that can affect it in the lower tier. With the current USD-dominated market, the following factors should be kept in mind:
Will the USD continue to hold the position of the world's common currency?
Will the US make any move with the stablecoin market when developing CBDC?
What measures will the crypto market take against the “storms” that may come in the future?
According to the history of the stablecoin market, it can be seen that each stage of development will have a different story and projects will develop around that story. During that period will appear many projects and most of them decline and eventually fail. But when those failed projects are excluded, the market still has stable and developed projects to this day.
Phase 1 saw the birth and decline of fiat-backed stablecoins but so far USDC, USDT and BUSD are still accounting for most of the market share.
Phase 2 saw the birth of many stablecoins to help optimize capital efficiency, but currently only a few projects such as DAI, FRAX, USDN and USDD still hold a significant market share.
In phase 3, it is highly likely that the market will continue to see the development of stablecoins in stages 1 and 2. Many new stablecoins will also appear around the story at this stage.
Stablecoins are essential elements of crypto, their development is a guideline for the development of the market. In the near term, it is highly likely that stablecoins will continue to focus on their advantages instead of expanding in another direction.