Introduction

According to CoinGecko data, the current total market value of stablecoins has surpassed $200 billion. Compared to when we mentioned this track last year, the overall market value has nearly doubled and surpassed historical highs.

I once compared stablecoins to a key component in the crypto world, serving as a stable store of value and acting as a key entry point in various on-chain activities. Now, stablecoins are starting to move into the real world, demonstrating financial efficiency that surpasses traditional banks in retail payments, B2B transactions, and international transfers.

In emerging markets like Africa and Asia, the application value of stablecoins is gradually being realized. Strong financial inclusion allows residents of third-world countries to effectively cope with the high inflation caused by government instability. Through stablecoins, they can also participate in some global financial activities and subscribe to the world's most advanced virtual services (such as online education, entertainment, cloud computing, AI products).

Entering emerging markets and challenging traditional payments is the next step for stablecoins. In the foreseeable future, the compliance and accelerated adoption of stablecoins will become inevitable, and the rapid development of AI will further strengthen the demand for stablecoins (computing power purchases, subscription services).

Compared to the development over the past two years, the only constant is that Tether and Circle still hold a very high dominance in this track, and more startups are starting to shift their focus to the upstream and downstream of stablecoins. But today we still want to talk about the issuers of stablecoins, who else can share the next piece of cake in this extremely competitive hundred billion track?

1. The Evolution of Trends

In the past, when we mentioned the classification of stablecoins, we generally divided them into three categories:

Fiat-collateralized stablecoins:

These stablecoins are supported by fiat currencies (such as USD, EUR) as reserves, typically issued at a 1:1 ratio. For example, each USDT or USDC corresponds to one dollar stored in the issuing bank's account. The characteristics of these stablecoins are relatively simple and direct, and they can theoretically provide high price stability;

Overcollateralized stablecoins:

Such stablecoins are created by over-collateralizing other more volatile and liquid quality crypto assets (such as ETH, BTC). To cope with potential price volatility risks, these stablecoins often require higher collateral ratios, meaning the value of the collateral must significantly exceed the value of the minted stablecoin. Typical representatives include Dai, Frax, etc.;

Algorithmic stablecoins:

By regulating its supply and circulation through algorithms, this algorithm controls the supply and demand relationship of the currency, aiming to peg the price of the stablecoin to a reference currency (usually the U.S. dollar).

Generally speaking, when prices rise, the algorithm will issue more coins, and when prices fall, it will repurchase more coins from the market. Representative examples include UST (the stablecoin of Luna).

In the years following the UST collapse, the development of stablecoins has primarily revolved around micro-innovations in Ethereum LST, creating some quasi-overcollateralized stablecoins through different risk-balancing methods. The term 'stable' has not been mentioned again.

However, with the emergence of Ethena earlier this year, stablecoins have gradually determined a new development direction, which combines quality assets with low-risk wealth management to attract a large number of users through higher yields, creating an opportunity to seize market share in a relatively solidified stablecoin market structure. The three projects I mention below all belong to this direction.

II. Ethena

Ethena is the fastest-growing non-fiat collateralized stablecoin project since the collapse of Terra Luna, with its native stablecoin USDe exceeding Dai at a scale of $5.5 billion, temporarily ranking third.

The overall idea of the project is based on Delta Hedging with Ethereum and Bitcoin collateral. The stability of USDe is achieved by Ethena shorting Ethereum and Bitcoin on Cex to match the value of the collateral. This is a risk-hedging strategy aimed at offsetting the impact of price fluctuations on the value of USDe.

If both prices rise, the short position will incur losses, but the value of the collateral will also rise, offsetting the loss; and vice versa. The entire process relies on off-exchange settlement service providers, meaning that the protocol's assets are held by multiple external entities. The project's sources of income mainly include three points:

1. Ethereum staking rewards:

The LSTs pledged by users will generate Ethereum staking rewards;

2. Hedging Trading Income:

Hedging trades by Ethena Labs may generate funding rates or basis spread income;

3. Fixed rewards for Liquid Stables:

Earn deposit interest by holding in USDC on Coinbase or in other stablecoins on other exchanges.

In other words, the essence of USDe is a packaged low-risk quantitative hedging strategy financial product backed by Cex. Given the aforementioned three points, Ethena can provide floating annualized returns of up to several dozen percentage points during favorable market conditions and high liquidity (currently at 27%), which is higher than the 20% APY of Anchor Protocol (a decentralized bank in Terra) at the time.

Although not a fixed annualized yield, it is still extremely exaggerated for a stablecoin project. So in this situation, does Ethena carry extreme risks like Luna?

Theoretically, the biggest risk of Ethena comes from Cex and custodial collapses, but such black swan events are unpredictable. Another risk to consider is a bank run; a large-scale redemption of USDe requires a sufficient counterparty, and given Ethena's rapid growth, this situation is not impossible.

Users rapidly sold USDe, leading to a decoupling of the secondary market price. To restore the price, the protocol needs to liquidate and sell spot collateral to repurchase USDe, which may turn floating losses into actual losses and ultimately exacerbate the entire vicious cycle. "1" Of course, this probability is much smaller than the likelihood of a single-layer barrier collapse like UST, and the consequences are not that serious; however, the risk still exists.

Ethena also experienced a long period of low during the year. Although yields significantly decreased and its design logic was questioned, there were indeed no systemic risks.

As a key innovation in this round of stablecoins, Ethena offers a design logic that merges on-chain and Cex, introducing a large amount of LST assets from the mainnet into exchanges, becoming scarce short liquidity in a bull market, while also providing exchanges with significant transaction fees and fresh capital.

This project is a compromise but an extremely interesting design idea, achieving high yields while maintaining good security. In the future, as order book Dex rises and matches with more mature chain abstractions, there may be opportunities to realize a fully decentralized stablecoin based on this idea.

III. Usual

Usual is a RWA stablecoin project created by former French parliament member Pierre PERSON, who was also an advisor to French President Macron. The project's popularity has surged recently due to news of its launch on Binance Launchpool, with its TVL rapidly rising from the millions to around $700 million.

The project's native stablecoin USD0 adopts a 1:1 reserve system. Unlike USDT and USDC, users no longer exchange fiat for equivalent virtual currencies, but instead exchange fiat for equivalent U.S. treasury bonds. This is the core selling point of the project, sharing the profits obtained by Tether.

As shown in the figure above, the left side represents the operational logic of traditional fiat-collateralized stablecoins. Taking Tether as an example, users do not earn any interest when minting USDT from fiat currency. To some extent, Tether's fiat currency can also be considered as obtained through 'playing with empty hands'.

The company buys low-risk financial products (mainly U.S. treasury bonds) with a large amount of fiat currency, and last year's profits reached as high as $6.2 billion, which are then reinvested in high-risk areas to achieve passive income.

The right side represents the operational logic of Usual, whose core philosophy is Become An Owner, Not Just A User. (Become an owner, not just a user). The project's design revolves around this philosophy, redistributing ownership of infrastructure to value providers (TVL), meaning that users' fiat will be converted into ultra-short-term U.S. treasury bonds (RWA). The entire realization process is carried out through USYC (USYC is operated by Hashnote, which is currently one of the leading on-chain institutional asset management companies supported by partners from DRW), with the final profits entering the protocol's treasury, owned and governed by the protocol token holders.

The protocol token USUAL will be distributed to holders of locked USD0 (locked USD0 will be converted into USD0++), achieving profit sharing and early alignment. It is worth noting that this lock-up period lasts for four years, consistent with the redemption period of some mid-term U.S. treasury bonds (U.S. mid to long-term treasury bonds generally range from 2 to 10 years).

The advantage of Usual lies in maintaining capital efficiency while breaking the control of centralized entities like Tether and Circle over stablecoins, distributing profits equitably.

However, due to the longer lock-up period and relatively lower yields compared to the crypto space, it may be difficult in the short term to achieve the massive growth of Ethena in such a short time. For retail investors, the attraction may be more concentrated on the token value of Usual.

In the long run, USD0 may have more advantages: first, it facilitates citizens of other countries without U.S. bank accounts to invest more easily in U.S. treasury bond portfolios; second, it has better underlying assets for support, and its overall scale can be much larger than Ethena; third, a decentralized governance model also means that this stablecoin is less likely to be frozen, making it a better option for non-trading users.

IV. f(x)Protocol V2

f(x)Protocol is currently the core product of Aladdindao. We provided a more detailed introduction to this project in last year's article. Compared to the two star projects above, f(x)Protocol is less well-known. Its complex design also brings a number of flaws, such as vulnerability to attacks, low capital efficiency, high trading costs, and complex user access.

However, I still believe this project is the most noteworthy stablecoin project born during the bear market of 2023. Here, I will provide a brief introduction to the project (for details, you can refer to the white paper of f(x)Protocol v1).

In version V1, f(x)Protocol created a concept called 'floating stablecoin', which decomposes the underlying asset stETH into fETH and xETH. fETH is a type of 'floating stablecoin' whose value is not fixed but fluctuates slightly with the price of Ethereum (ETH).

xETH is a leveraged long position in ETH that absorbs most of the price fluctuations of ETH. This means that xETH holders will bear more market risk and return, but it also helps stabilize the value of fETH, making fETH relatively more stable.

At the beginning of this year, following this line of thought, a rebalancing pool was designed. Within this framework, only one stablecoin with strong liquidity and pegged to the dollar exists, namely fxUSD. All other stable leveraged tokens no longer have independent liquidity but can only exist in the rebalancing pool or as collateral for fxUSD.

1. A Basket of LSD: fxUSD is supported by multiple liquidity staking derivatives (LSDs) such as stETH, sfrxETH, etc. Each LSD has its own stable/leverage pair mechanism;
- Minting and Redemption: When users want to mint fxUSD, they can provide LSD or withdraw stable currencies from the corresponding rebalancing pool. In this process, LSD is used to mint the stable derivative of that LSD, and then these stable derivatives are deposited into the fxUSD reserves. Similarly, users can also redeem LSD with fxUSD.

So simply put, this project can also be seen as a super complex version of Ethena and early hedging stablecoins. However, in the on-chain scenario, this balancing and hedging process is very complicated.

First, the volatility was split, and then various balancing mechanisms and leverage margins were introduced, resulting in a negative impact on user access that has surpassed positive attraction.

In version V2, the entire design focus shifted to eliminating the complexity brought by leverage and providing better support for fxUSD. In this version, xPOSITION was introduced, which is essentially a high-leverage trading tool—a non-homogeneous leveraged long position product with a high beta value (meaning it is highly sensitive to market price changes). This functionality allows users to conduct high-leverage trading on-chain without worrying about individual liquidations or paying funding costs, with clear benefits.

  • Fixed leverage ratio: xPOSITION provides a fixed leverage ratio, and users' initial margin will not be subject to additional requirements due to market fluctuations, nor will unexpected liquidations occur due to changes in leverage ratios;

  • No liquidation risk: Traditional leveraged trading platforms may force users' positions to be liquidated due to severe market fluctuations, but the design of f(x) Protocol V2 avoids such situations;
    No funding costs: Typically, using leverage incurs additional capital costs, such as interest generated when borrowing assets. However, xPOSITION does not require users to pay these costs, reducing overall trading costs.

In the new stable pool, users can easily deposit USDC or fxUSD to provide liquidity support for the protocol's stability. Unlike version V1's stable pool, the V2 version stable pool anchors between USDC and fxUSD, allowing participants to engage in price arbitrage in the fxUSD—USDC AMM pool and help stabilize fxUSD. The entire protocol's income sources are based on opening, closing, liquidating, rebalancing positions, capital costs, and collateral earnings.

This project is currently one of the few non-overcollateralized and completely decentralized stablecoin projects. For stablecoins, it still appears somewhat overly complex and does not meet the minimalist design premise of stablecoins. Users must also have a certain level of knowledge to comfortably get started.

In extreme market conditions, the framework design of various barriers may also harm the interests of users when a bank run occurs. However, the goal of this project is indeed aligned with every crypto enthusiast's ultimate vision for stablecoins: a native decentralized stablecoin backed by top crypto assets.

Conclusion

Stablecoins are always a battleground, and they are also a highly challenging track in crypto. In last year's article (in a near-death state, but stable innovation has not stopped), we briefly introduced the past and present of stablecoins and hoped to see some more interesting decentralized non-overcollateralized stablecoins emerge.

Now, a year and a half has passed, and we have not seen any startup projects other than f(x)Protocol taking this direction. However, it is fortunate that Ethena and Usual provide some compromise ideas, at least allowing us to choose some more ideal, more Web3 stablecoins.

Reference Articles

1. Mario Looks at Web3: An In-Depth Analysis of the Reasons for Ethena's Success and the Risk of a Death Spiral
2. fxUSD: The Nuts and the Bolts
3. What is Usual?

This article is collaboratively reprinted from: Deep Tide

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