Overview
I will discuss:
How stablecoin maintains the peg
Undercollateralized stablecoin luna/ust, frax, iron
Overcollateralized stablecoin: DAI, Yeti.
Fully Backed coin: UXD, USDT, USDC
How to design a *good* stablecoin
Regulation
Why we need stablecoins:
settle assets more quickly (USDC, USDT, etc.)
decentralization ( MIM, DAI, UXD, Yeti, etc.)
metaverse ???
Utilities are important:
you need *utility* to drive up demand for your stablecoin:
offer rewards for providing stablecoin liquidity (Curve, etc.)
offer rewards on the lending protocol ( Anchor 20% APY, etc.)
*real* world use cases
metaverse ???
There are 3 main types of the stablecoin:
Under Collateralized (Algo Stable)
Over Collateralized / Fully Backed
Fiat Backed
Undercollateralized/ Algo StableCoin :
Backed whole or partially by tokens which have downward pressure to go to 0 as a lot of people redeem
More people redeem -> more tokens minted -> token value depreciate -> panic -> more redeemed -> bank run
i.e., UST and Iron
OverCollateralized/Fully Backed StableCoin:
Two Types:
Fiat Backed (backed by exactly $1): USDC, USDT (probably)
Collateralized Debt Position:
backed by debt: ETH/BTC, Uniswap/AMM LP tokens (MIM, Yeti), Delta Neutral Trade (UXD)
Most StableCoins not backed by Fiat have downward pressure.
people almost always want to sell your stablecoin for leverage -> price down
Simple Example:
Borrow DAI with ETH -> sell DAI for more ETH -> borrow more DAI -> keep looping
Redeemability + Arbitrage is the best way to maintain the peg.
There is no way around it. For a stablecoin to peg to $1, it has to be redeemable for, well, $1
When a stablecoin depeg, anyone can always arbitrage it back to $1 (buy low and redeem for $1)
How did a stablecoin lose its peg?
StableCoin depeg a lot
Because people couldn't timely redeem it for $1, How?:
Protocol ran out of collateral ( Iron, Ust)
not everyone can redeem (MIM, DAI, USDT, etc.)
How does protocol run out of collateral?
In the case of Ust, it was backed by Luna, which as more people redeemed -> more Luna needed to be minted
-> supply increase
-> price fall
-> people sell Luna
-> panic
-> people sell UST
-> bank run
-> 0
Similarly with Iron, Basis Cash ...
Not everyone can redeem stable-coin
USDT: only institutions can redeem
MIM and DAI: only the people who borrowed MIM and DAI can redeem against their debt positions.
Why is this a problem?
Sometimes the originators can't/ don't want to redeem, i.e.
they borrow DAI -> sell it to USDC -> take leverage, and get liquidated
Redemption Fix:
DAI: Peg Stability Module, which allows anyone to Swap DAI for $1 at any time
Yeti: lets anyone redeem the collateral from those with the lowest ratio of collateral to loan.
UXD: when anyone redeems, UXD will close the trade position
Supply Control and Fees:
CDP stablecoins (MIM, Yeti, DAI) usually control supply and demand through fees
to increase supply: reduce minting fees/interest
to reduce supply: increase minting fees /interest or reduce redemption fees
minting fees/interest:
prevent the % of the risky asset as collateral (AMM LP tokens)
prevent infinite selling/leverage ( Borrow DAI -> Sell DAI to ETH -> Loop)
Redemption fees / limit:
control how many coins can be redeemed (i.e. Yeti has a dynamic redemption fee)
How do we design a good stablecoin?
Overcollateralized/Fully Backed or Fiat Backed
Anyone can mint and redeem
Have *real* utilities besides staking somewhere like Anchor 20% APY
Real Utilities are needed:
Without *real* utilities, the protocol will always need to offer an incentive for people to mint.
As we saw in the case of Anchor 20% APY, this doesn't end so well.
Some Cool Utilities I love to see:
be settlement currency on DEX like dydx, etc
be settlement currency in the metaverse, VBUCKS, ROBUX, etc
real-world use cases
What are some good stablecoins currently?
Centralized:
USDC will always be king IMO + have real-world utilities
Decentralized + Algorithmic:
Dai + Yeti + Uxd: Ovecollateralized + anyone can mint and redeem
Yeti and Uxd still need to be more battle-tested though IMO
At a large scale: Centralization is not escapable IMO :
As stablecoin gets too big, people will beg Fed or large Fund for a bailout every time there is a depeg and chance of insolvency.
We already have seen this when USDT depeg to 0.95 and when UST depeg as it tries to raise more funds for peg defense.
Conclusion:
Design purely on-chain stablecoin will always be a hard problem to solve.
IMO the one with the best *real* use cases will be the leading stablecoin in the future.
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