Binance Research Report Emergence of New Types of Stablecoins, Overview of Market Competition Pattern

Binance Research Report New Types of Stablecoins & Market Competition Overview

Source: BinanceResearch

Title: Emerging Stablecoins: Latest Developments

Author: Jie Xuan Chua

Translation: Yvonne, MarsBit

• Review of the Cryptocurrency Market Summer Trends Mixed Bullish and Bearish News, Doubts about the Sustainability of the Rise.
• Bitcoin Spot ETF Application Inventory When will it be approved?
• Interpreting the lending platform Fuji Money unlocking the financial potential of Bitcoin Layer2

1. Key Points

Stablecoins play a crucial role in the crypto ecosystem, widely used in trading, lending, asset management, and many other functions. The market capitalization of stablecoins is $124.4 billion, accounting for 8.5% of the total cryptocurrency market value, demonstrating their importance in the field.

While centralized, fiat-backed stablecoins dominate this field and are likely to continue to do so in the foreseeable future, competition has intensified in recent months with the entry of new players.

The emergence of debt collateral position (CDP) stablecoins, stablecoins supported by liquidity collateral tokens (LST), and other centralized stablecoins reflects the increasing interest in stablecoins, and each project is trying to gain market share.

In this report, we study Aave’s GHO, Curve’s crvUSD, Lybra’s eUSD, Raft’s R, LianGuaiyLianGuail’s PYUSD, and First Digital’s FDUSD to understand the mechanisms and adoption of some recently launched stablecoins.

Considering market liquidity, we also list recent developments and observations, including MakerDAO’s increase in DAI savings rate, integration of real-world assets, and more projects adopting LST.

2. Market Landscape

Stablecoins play a crucial role in the crypto ecosystem, widely used in trading, lending, asset management, and many other functions. By being pegged to external assets (most commonly the US dollar), stablecoins have lower volatility compared to other cryptocurrencies, making them a popular medium of exchange and unit of account.

The importance of stablecoins is undeniable, especially considering that they are the foundation of many decentralized finance (DeFi) protocols, serving as a source of liquidity in trades and enabling stablecoin loans in the lending market.

Although the stablecoin market has significantly contracted compared to its peak before the collapse of TerraUSD in May 2022, stablecoins continue to play a foundational role in the crypto ecosystem. The total market capitalization of stablecoins is currently $124.4 billion, accounting for approximately 8.5% of the total cryptocurrency market value, demonstrating the importance of stablecoins.

Figure 1: The current market capitalization of stablecoins is $124.4 billion

Data Source: DeFi Llama, as of August 22, 2023

2.1 Centralized Stablecoins Lead by a Wide Margin

Top centralized stablecoins such as USDT, USDC, BUSD, and TUSD account for approximately 92% of the total stablecoin market share. It is worth noting that Tether’s USDT has been steadily growing and has become the undisputed market leader with over 66% of the market share. Despite a slight decoupling event in June 2023, where USDT experienced a 0.4% mild decoupling and briefly accounted for over 70% of the Curve 3pool.

The dominant position of USDT comes at the expense of other stablecoins, whose market share has been steadily declining. USDC has failed to regain traction after the decoupling event in March 2023, and BUSD’s market share has steadily declined since its issuance was halted in February.

Figure 2: Centralized stablecoins account for approximately 92% of the market share.

Data source: DeFi Llama, as of August 22, 2023.

3. Emerging Stablecoins

While centralized stablecoins dominate this field and are likely to continue to do so in the foreseeable future, competition has intensified in recent months with the entry of new participants. In particular, we have seen the emergence of new collateralized debt position (CDP) stablecoins, stablecoins backed by liquidity collateral tokens (LST), and centralized stablecoins launched by a well-known Web2 company. These launches coincide with increasing interest in stablecoins and projects vying to establish a foothold in this field.

Figure 3: Summary of stablecoins launched in recent months.

Data source: Binance Research, Coinmarketcap, DeFi Llama, as of August 23, 2023.

3.1 CDP Stablecoins

CDP stablecoins refer to loan protocols based on smart contracts, where users collateralize assets (e.g., ETH) and receive loans denominated in stablecoins as a reward. This mechanism was first introduced by the MakerDAO team and is the working principle of DAI stablecoin. Such a mechanism allows users to unlock their liquidity without selling their crypto assets. Once the stablecoin loan is repaid, the collateral is released back to the user.

crvUSD launched by Curve

A few months ago, in May of this year, Curve Finance introduced the stablecoin crvUSD. As one of the leading decentralized exchanges and the seventh-largest DeFi protocol, Curve’s entry into the stablecoin market added another heavyweight to the competition landscape.

crvUSD is pegged to the US dollar and is minted by depositing collateral and opening loans on Curve.

The simplified process of obtaining and repaying crvUSD loans includes the following steps:

1. Provide collateral;

2. Borrow crvUSD;

3. Repay crvUSD and accrued interest.

One unique feature of crvUSD is its liquidation mechanism called the Loan Liquidation Automated Market Maker algorithm (LLAMMA). In a typical liquidation process, a borrower’s collateral is immediately liquidated when it breaches a threshold, while LLAMMA employs a “soft liquidation.” In this process, a borrower’s collateral is dispersed across a range of liquidation prices, allowing liquidation to occur continuously as the collateral value decreases rather than instantaneously.

In addition, crvUSD uses a smart contract called “Peg Keepers” to create and absorb debt, with the aim of enabling stablecoins to trade near their peg. When crvUSD trades above $1, peg holders can mint crvUSD and deposit it into the stablecoin swap pool. If crvUSD trades below $1, it will be withdrawn from the stablecoin swap pool and burned.

Adoption and Activity

With the support of new collateral types, the adoption rate of crvUSD has grown exponentially in June. wstETH was added as collateral on June 8th, WBTC was added on June 18th, and WETH was added on June 20th. Currently, wstETH and WBTC have the largest share in collateral, accounting for 44% and 32% respectively.

By the end of July, the activity decreased possibly due to the re-emergence of vulnerabilities. After that, metrics such as crvUSD debt and TVL have resumed their upward trend, reaching new highs of $1.048 billion and $1.624 billion respectively.

Figure 4: Continuous increase in crvUSD debt

Source: Dune Analytics (@Marcov), as of August 23, 2023

Figure 5: TVL of crvUSD collateral also reaches a new high

Source: Dune Analytics (@Marcov), as of August 23, 2023

As debt and TVL grow, the number of crvUSD holders has also increased over time, currently totaling 560. This means that the average crvUSD debt per holder is approximately $187,000. Considering the relatively small holder base compared to the overall debt, it indicates that crvUSD is mainly used by larger participants or advanced DeFi players.

Figure 6: Currently, there are 560 crvUSD holders

Source: Dune Analytics (@Marcov), as of August 23, 2023

Outlook and Risks

crvUSD stands out from other stablecoins in the market with its unique LLAMMA model, which can attract users seeking a smoother liquidation process. From a protocol perspective, crvUSD adds to Curve’s product suite and may have a positive flywheel effect on protocol activity. Specifically, the mechanism of LLAMMA requires constant rebalancing of collateral, which can attract more liquidity providers, increase trading volume in the Curve pool, and generate fees for protocol and vote-locking CRV (“veCRV”) holders.

On the other hand, holders of crvUSD debt should be aware that once their positions enter soft-liquidation mode, they cannot withdraw or increase collateral. Holders can only repay the loan with crvUSD or liquidate it themselves. Additionally, there is still a risk of significant losses in the LLAMMA model if the price of collateral sharply declines in a short period of time, although it has decreased substantially.

GHO launched by Aave

As the largest lending protocol with a total locked value of $4.5 billion (“TVL”), Aave’s entry into the stablecoin field is noteworthy. GHO is a decentralized stablecoin with overcollateralization. Borrowers and suppliers can use the assets they provide to Aave V3 as collateral to mint GHO.

The simplified process of borrowing and repaying GHO loans includes the following steps:

1. Provide collateral;

2. Borrow GHO;

3. Repay GHO and accumulated interest;

4. The repaid interest will be redirected to the DAO, contributing to the DAO’s funds.

Aave DAO will manage GHO by setting the allowed GHO supply, determining interest rates, setting mining limits, and approving “facilitators”. “Facilitators” are entities that can burn or mint GHO under the predetermined conditions set by the DAO.

One unique feature of GHO is that the collateral deposited in the Aave V3 protocol remains productive and continues to generate yield. This helps to reduce borrowing costs for GHO loan users.

Adoption and Activities

GHO’s adoption has been steadily growing. After launching for over a month, the circulating supply of GHO has exceeded 23.4 million, making it the 34th largest stablecoin based on circulating supply.

Figure 7: GHO total supply of 23.4 million

Data source: Dune Analytics (@aave_comLianGuainies), as of August 23, 2023

Currently, there are 501 GHO holders. Considering that there are over 86,000 unique users on Aave V3, this implies a user penetration rate slightly below 6%. This indicates significant growth potential even within the existing user base.

Figure 8: 501 GHO holders

Data source: Dune Analytics (@aave_comLianGuainies), as of August 23, 2023

Prospects and Risks

Overall, GHO’s launch has received widespread support from the community and is the next strategic step for a top-tier lending protocol. Aave DAO benefits from the additional revenue stream created by GHO; stkAAVE holders can enjoy a discount on GHO borrowing rates; Aave can further expand its influence by expanding its ecosystem.

However, considering the competitive pressure in the stablecoin field, scaling up and disrupting the existing market landscape undoubtedly pose challenges. What could work in favor of GHO is its existing network effects, user base, and brand value. In particular, the market cap of GHO is only a small fraction of Aave’s TVL ($23 million vs. $4.5 billion), representing growth potential considering the untapped user base.

It is worth noting that the current GHO interest rate is determined by governance rather than market-driven, the latter being a more neutral mechanism that considers organic demand and supply. The borrowing cost is currently fixed at 1.51%, lower than other stablecoins on Aave, with borrowing costs as high as 3.50%. According to Stani Kulechov, CEO of Aave, the reason for the low interest rate is to encourage “borrowers to convert to Aave native assets at a lower cost and encourage liquidity.”

Since its launch a month ago, GHO has mostly traded below the pegged exchange rate. It has proposed a “GHO Stability Module” that allows users to convert between GHO and stablecoins accepted by governance at a predetermined ratio. If implemented, this would provide some assurance for GHO holders and allow market forces to intervene in cases of significant deviations from the peg mechanism.

3.2 Stablecoins Based on LST

The successful transition of Ethereum to Proof of Stake (PoS) and the introduction of ETH collateralized withdrawals have facilitated the rapid growth of liquidity staking tokens (LSTs) such as stETH, rETH, WBETH, etc. In addition to the growing interest in LST and LSTfi, we have also witnessed the emergence of stablecoins supported by LST.

LST-backed stablecoins allow holders to earn intrinsic returns while preserving the key properties of stablecoins through overcollateralization with liquid staking tokens.

Please note that the following LST-backed stablecoins also adopt the CDP model, but we choose to highlight their emergence in a dedicated section of this report.

eUSD Introduced by Lybra

Lybra is a DeFi protocol that facilitates the mining of its interest-bearing stablecoin, eUSD. Users can mint eUSD by depositing ETH or stETH as collateral. The protocol plans to support more LST in the future.

eUSD is pegged to the US dollar and stands out for its interest-bearing nature. eUSD holders are expected to earn approximately 7-8% APY. This provides an opportunity for investors seeking stable income streams while maintaining exposure to potential crypto collateral.

The simplified process for obtaining and repaying eUSD loans includes the following steps:

1. Deposit ETH or stETH as collateral;

2. Mint or borrow eUSD against the collateral;

3. Hold eUSD to earn interest or use it in other DeFi protocols;

4. Repay the eUSD debt anytime as long as the collateralization ratio is above 150%.

So how does eUSD enable holders to earn returns by holding it? This is made possible by the collateralization of LST. When users mint eUSD, Lybra converts the underlying LST staking rewards back into eUSD and distributes them proportionally to eUSD holders. Specifically, 98.5% of the staking rewards generated by LST collateral are converted to eUSD and distributed proportionally to eUSD holders. The remaining 1.5% flows to holders of custody LBR (esLBR).

The stability of eUSD is supported by the following factors:

Overcollateralization: Each eUSD is backed by at least $1.5 worth of stETH collateral.

Liquidation mechanism: If a user’s collateralization ratio falls below the safe collateralization ratio, any user can voluntarily become a liquidator and purchase the liquidated portion of the staked stETH.

Arbitrage Opportunity: Users can profit from the deviation of eUSD price from its peg and help restore eUSD price to its expected value.

Adoption and Activity

In the initial stages of the launch, especially in May and June, the circulating supply of eUSD grew significantly. This may be attributed to early adopters and the increased interest in LSTfi during that period. Since early July, the current circulating supply has been fluctuating within a range, with 170 million eUSD currently in circulation.

The collateral ratio represented by the stETH to eUSD ratio also remains at a relatively healthy level of around 190%. In other words, every eUSD is overcollateralized and backed by approximately $1.9 worth of stETH.

Figure 9: 170 million eUSD in circulation

Data source: Dune Analytics (@defmochi), as of August 23, 2023

The protocol deposited $140.1 million worth of stETH as eUSD collateral in May 2023, setting a monthly record high. Since then, net deposits have slowed down, averaging over $70 million in June and July.

Figure 10: Net deposits peaked in May 2023

Data source: Dune Analytics (@defmochi), as of August 23, 2023. *Note: August data is not for the full month

The holdings metric paints a positive picture. Since its launch, the number of eUSD holders has steadily increased, currently reaching 827. On average, each eUSD holder owns over $206,000 worth of eUSD, indicating wider adoption among DeFi advanced players.

Figure 11: 827 eUSD holders

Data source: Dune Analytics (@lybra-finance), as of August 23, 2023

Outlook and Risks

As an interest-bearing stablecoin, eUSD may attract investors seeking income as they can earn a baseline level of returns by holding the stablecoin. Unlike other non-LST-backed stablecoins, holders need to take additional measures to participate in the DeFi market (e.g., staking or lending) to earn returns.

The growth in ETH collateral provides momentum for the sector and Lybra’s development. As the amount of ETH held increases, the addressable market also grows accordingly. That is to say, it is crucial to better integrate eUSD into the DeFi ecosystem and accept more forms of LST collateral beyond stETH to further drive the adoption of eUSD.

Holders should note that eUSD yield depends on the investment returns obtained from the underlying LST collateral. Therefore, the yield will fluctuate with the volatility of ETH investment returns and may directly impact the attractiveness of holding eUSD.

Raft’s R

Raft allows users to generate their stablecoin R by depositing LST as collateral. R is an overcollateralized stablecoin supported by LST, designed to be pegged to the US dollar. Currently, stETH and rETH are supported as collateral for LST to mint R. R holders are able to use R in the crypto ecosystem while earning staking rewards.

The simplified process for obtaining and repaying R loans includes the following steps:

1. Deposit stETH or rETH;

2. Mint R with a collateral ratio of at least 120%;

3. Repay R debt to receive underlying LST.

To maintain the peg, R adopts a combination of “hard peg” and “soft peg” mechanisms.

Hard peg: Arbitrage opportunities play a role in maintaining the anchor exchange rate. When R exceeds $1.2, users can deposit LST worth $1.2, mint 1 R, and sell it on the market for profit. Redemption helps stabilize the peg when R falls below $1. This feature has been disabled, and the details of the anchoring mechanism module will be announced soon. (4)

Soft peg: This refers to the design of stablecoins that incentivizes users to take action based on the expectation of maintaining the peg. For example, when R is below $1, borrowers are incentivized to repay their positions, reducing the supply of R in the market and pushing the price back to the peg.

Adoption and Activity

R’s circulating supply grew rapidly during its initial release, surpassing 20 million in less than a week after its official mainnet launch on June 5, 2023. This was contributed by a small group of less than 100 holders, with an average of over 200,000 R per wallet. Since then, R’s circulating supply has stabilized and slightly decreased, hovering around 24 million as the average holding per wallet decreases.

Figure 12: 24.5 million R in circulation

Source: Dune Analytics (@dcfLianGuaiscal), as of August 23, 2023

However, the growing user base indicates expanding demand among a wider user group, which is a positive signal. The increasing number of holders is crucial for supporting the circulation supply of R and maintaining it at a higher level, even if large whales reduce their average R holdings.

Figure 13: The number of R holders continues to increase, reaching 661 people

Data source: Dune Analytics (@dcfLianGuaiscal), as of August 23, 2023

Prospects and Risks

Similar to other LSTfi projects, R benefits from the growth of liquidity provided by staked tokens. By allowing LST holders to use their LST as collateral to mint R, holders can continue to earn investment returns while freely using R in other protocols within the DeFi ecosystem.

One key point to note is that R is in the middle of a transition; the exchange feature has been disabled and it is seeking to launch an anchoring module. Meanwhile, users should be aware that the stability of R’s anchoring relies on other mechanisms, such as soft anchoring. Due to R’s current trading price being slightly lower than the peg, several proposals have recently been put forward to address this issue. Specifically, a one-way DAI liquidity incentive program and an R savings module have been proposed.

3.3 Centralized Stablecoins

As the name suggests, centralized stablecoins are stablecoins issued by centralized entities. These stablecoins are typically backed by fiat currencies held in offline bank accounts. Leading examples of centralized stablecoins in the market, such as USDT and USDC, serve as prime examples.

PYUSD Introduced by LianGuaiyLianGuail

As one of the most well-known companies in the Web2 domain, LianGuaiyLianGuail’s introduction of its native stablecoin is particularly noteworthy. In addition to providing credibility to the crypto ecosystem, LianGuaiyLianGuail’s entry into the stablecoin market may bring new users considering the wide consumer base of stablecoins.

PYUSD is a stablecoin fully backed by deposits in US dollars, US Treasury bonds, and similar cash equivalents. It is issued by LianGuaixos Trust Company and is an ERC-20 token. Eligible US LianGuaiyLianGuail account balances can utilize PYUSD.

Use cases for PYUSD:

Transfer of LianGuaiyLianGuail USD between LianGuaiyLianGuail and compatible external wallets;

Person-to-person payments using PYUSD;

Selection of LianGuaiyLianGuail USD during checkout and payment of shopping expenses using LianGuaiyLianGuail USD;

Conversion of any cryptocurrency supported by LianGuaiyLianGuail into LianGuaiyLianGuail USD.

Outlook and Risks

PayPal’s extensive coverage is a competitive advantage for stablecoins. As of the end of Q2 2023(6), PayPal has over 431 million active accounts worldwide. In contrast, PYUSD is currently only available to eligible US accounts, and the corresponding number of active accounts is relatively small. LianGuaiyLianGuail’s foothold in the payment field contributes to the distribution and adoption of PYUSD. Additionally, by making the process of using stablecoins more seamless for users, LianGuaiyLianGuail can benefit non-crypto users, ultimately benefiting the entire crypto ecosystem.

Concerns related to centralized risks have persisted due to the emphasis of the crypto community on LianGuaixos’ ability to suspend PYUSD authorization and transfer functions in any potentially necessary situation. This means that LianGuaixos will have the ability to freeze or seize assets in individual wallets. Please note that these risks generally apply to any centralized stablecoin (such as USDT, USDC, etc.) as centralized entities may need to invoke certain functions in certain situations to comply with regulatory requirements, although the frequency of such occurrences should be relatively low.

Overall, concerns about centralization, combined with a lack of differentiation compared to other centralized stablecoins, make it difficult for PYUSD to gain adoption from native cryptocurrency users, who have no real incentive to switch to PYUSD. However, the wide coverage of LianGuaiyLianGuail can help attract non-native crypto users and allow PYUSD to carve out a niche market in this field.

FDUSD launched by First Digital

FDUSD, the First Digital Dollar, is issued by FD121 Limited, a subsidiary of First Digital Limited, a custody company based in Hong Kong, and operates under the brand name First Digital Labs. This stablecoin was first launched in June 2023 and is intended to be fully backed by cash and cash equivalents.

FDUSD can be used on the Ethereum and BNB chains, and plans to support more and more blockchains.

Recent Developments

In early August, Binance announced that users would enjoy zero maker and taker fees for the BTC/FDUSD spot and margin trading pairs for a limited time, resulting in a surge in the market value of FDUSD.

Specifically, the market value of FDUSD has grown more than tenfold, from about $20 million in early August to over $312 million currently. The daily trading volume has also soared from an average of a few hundred thousand dollars before the announcement to over $15 million today.

Figure 14: Market value of FDUSD increased more than tenfold in August

Data source: Coinmarketcap, Binance Research, as of August 23, 2023

Outlook and Risks

The listing of FDUSD on Binance, coupled with zero fees for certain FDUSD trading pairs, has helped drive the growth of FDUSD. However, it remains to be seen whether FDUSD can continue to maintain this growth trajectory as the zero fee incentive measures are gradually phased out. It is important to observe broader market adoption, such as integration with other centralized exchanges or increased usage in DeFi.

Like any new stablecoin, the stability of FDUSD pegged to the US dollar will be tested over time to understand its volatility. As a collateralized stablecoin, the security and liquidity of its reserves are key to the stability of FDUSD. Users may find it helpful to refer to FDUSD’s attestation report for indications of the composition and health of the collateral reserves. Other risks include operational risks, regulatory risks, and counterparty risks, which are detailed in the FDUSD whitepaper.

4. Market Development

4.1 Incentivizing DAI Adoption

On August 7, 2023, MakerDAO launched the Enhanced DAI Savings Rate (“EDSR”).

This mechanism temporarily increases the DAI savings rate (“DSR”) available to users by a multiplier. The multiplier is determined by the utilization rate of the DAI savings rate contract, which is the amount of DAI relative to the total supply of DAI in the DAI savings contract.

DSR initially increased from 3.19% to 8% to stimulate the growth of DAI by increasing demand. This helps incentivize holders to deposit DAI into the DSR contract, reducing circulating supply. DAI effectively becomes the highest-yielding stablecoin, enhancing its competitiveness.

Recently, a new proposal was passed to reduce DSR from 8% to 5% to “ensure that regular DAI holders benefit from EDSR, rather than disproportionately benefiting ETH whales.” Specifically, many large participants have benefited from “borrowing arbitrage” by borrowing DAI at a 3.19% interest rate and earning an 8% EDSR yield.

Just before the launch of EDSR, DAI’s supply in August dropped below 4.5 billion for the first time since May 2021. This is a significant decrease compared to the peak of 10.3 billion in February 2022. However, with the increasing demand for DAI, the launch of EDSR has played an important role in reversing the situation. Although still far from the peak of the bull market, DAI’s supply has increased by about 16% from the bottom, currently at around 5.2 million DAI.

Figure 15: DAI supply has declined over the past year but has slightly rebounded recently

Data source: Makerburn, as of August 20, 2023

The most significant impact is the growth of DAI in DSR, which has increased from less than 400 million to approximately 1.2 million, nearly tripling in size. The recent decline is due to users withdrawing from the DSR contract after the DSR was reduced from 8% to 5%.

Figure 16: Surge in DAI in DSR after the launch of EDSR

Data source: Makerburn, as of August 20, 2023

Compared to US Treasury bonds, increasing DSR provides an attractive on-chain alternative, helping boost demand for DAI and increasing adoption of Maker’s lending protocol. On the other hand, it is worth noting that the increase in DSR has a direct financial impact on MakerDAO. This can be seen as the customer acquisition cost of the protocol. Based on current estimates and parameters, DSR is expected to cost MakerDAO $56.3 million per year.

Considering that DSR will be adjusted based on utilization, it will be interesting to see how the utilization changes when interest rates normalize. Our speculation is that DSR may maintain a rate at least comparable to other stablecoins to remain competitive.

4.2 Integration of Real-World Assets

In the context of rising interest rates, US Treasury bond yields have steadily increased and have already surpassed DeFi yields. In order to remain competitive and take advantage of the returns in the traditional financial (“TradFi”) market, stablecoin issuers have allocated some reserves for investing in TradFi instruments. This can be observed from the audit reports of centralized issuers like Tether and Circle, as well as the balance sheet of MakerDAO.

It is worth noting that MakerDAO has always been at the forefront of tokenizing real-world assets (RWAs), and its funds benefit from the rising yields of asset categories. Currently, MakerDAO’s RWA exposure exceeds $2.4 billion, accounting for 58% of its income. (9) Considering that the yields of DeFi are far lower than those of TradFi, it is not surprising to see more stablecoin protocols exploring the integration of RWAs to increase their financial income and possibly pass it on to stablecoin holders to increase the attractiveness of their stablecoins.

Figure 17: TradFi yields surpass DeFi stablecoin yields

Data source: Federal Reserve Bank of New York, rwa.xyz, SLianGuairk, Compound, Aave, Curve, Binance Research, as of August 22, 2023

4.3 Adoption of LST

With the growth of the LST market, we have witnessed the diversity and scale of the LSTfi ecosystem increase. More projects have already entered or are about to enter the market to take advantage of the industry’s growth. In this regard, in addition to those mentioned in the previous section, we have seen an increase in the number of LST-backed stablecoins that have been launched or are about to enter the market.

Examples include:

GRAI by Gravita: The Gravita protocol is a lending protocol that allows users to mint GRAI, which is an over-collateralized debt token backed by LST and its stable pool. (10)

mkUSD by Prisma: Prisma enables users to mint a stablecoin called mkUSD, which is fully collateralized by liquid staked tokens. (11)

USDe by Ethereum: Ethereum allows users to deposit dollars, ETH, or LST as collateral to create USDe. (12)

It is worth noting that we have also witnessed mature DeFi projects related to stablecoins diversifying their collateral risk exposure and leveraging the growth of LST. Specifically, several projects have diversified their collateral risk exposure, including LST.

These include:

Curve: The crvUSD stablecoin by Curve can be minted by using Frax’s strxeth or Lido’s wstETH as collateral. Currently, wstETH has the largest share in the collateral for crvUSD, accounting for 44%.

MakerDAO: LST collateral in the form of wstETH (wrapped staked ETH by Lido) has significantly increased in MakerDAO’s treasury, from less than 12% of MakerDAO collateral to over 40% currently. (13)

Frax Finance: Frax Finance, the issuer behind the Frax stablecoin, directly interacts with LST through its liquidity collateral solution. Frax (frxETH) is a stablecoin loosely pegged to ETH. (14)

Frax Finance is the issuer behind the Frax stablecoin, and it directly touches LST through its liquidity collateral solution. LST is directly involved. Frax Ether (frxETH) is a stablecoin loosely pegged to ETH.

5. Conclusion

Stablecoins play a crucial role in the cryptocurrency ecosystem by providing price stability, enabling seamless transactions, and bridging the gap between TradFi and the crypto world by offering users familiar stable value. As the cryptocurrency ecosystem matures, the importance and relevance of stablecoins may continue to grow.

Although the current competitive landscape is dominated by centralized, fiat-backed stablecoins such as USDT and USDC, the demand for decentralized alternatives suggests that the competition is far from over. In recent months, new stablecoins have emerged, each with its own unique features, indicating that project teams are still interested in building in this space and challenging the existing market.

Given the scale, resources, and liquidity that the leading stablecoins currently possess, achieving market leadership is not an easy task. However, we expect the competitive landscape to become more diverse, allowing newcomers to also have a share of the pie.

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