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Introduction
According to CoinGecko data, the total market value of stablecoins has currently surpassed 200 billion USD. Compared to last year when we mentioned this sector, the overall market value has nearly doubled and surpassed historical highs. I once compared stablecoins to a key element in the crypto world, serving as a stable store of value and playing a crucial entry point in various on-chain activities. Now, stablecoins are beginning to enter the real world, demonstrating financial efficiency that surpasses traditional banks in retail payments, business-to-business transactions (B2B), and international transfers. In emerging markets such as Asia, Africa, and Latin America, the application value of stablecoins is also gradually being realized, with strong financial inclusivity enabling residents of third-world countries to effectively cope with high inflation caused by government instability, participating in global financial activities and subscribing to cutting-edge virtual services (such as online education, entertainment, cloud computing, and AI products) through stablecoins.
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; the rapid development of AI will further strengthen the demand for stablecoins (such as computing power purchases, subscription services). Compared to the developments of the past two years, the only constant is that Tether and Circle still hold a high dominance in this sector, and more new projects are starting to focus on the upstream and downstream of stablecoins. But today, we still want to talk about the issuers of stablecoins—who else can take a piece of the pie in this extremely competitive billion-dollar field?
One, the evolution of trends
In the past, when we discussed the classification of stablecoins, we generally categorized them into three types:
Fiat-collateralized stablecoins: These stablecoins are supported by fiat currency reserves (such as USD, EUR) and are typically issued at a 1:1 ratio. For example, every 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 can theoretically provide high price stability.
Over-collateralized stablecoins: These stablecoins are created by over-collateralizing other more volatile and liquid quality crypto assets (such as Ether, Bitcoin). To address potential price volatility risks, these stablecoins often require higher collateralization rates, meaning the value of collateral must significantly exceed the value of the stablecoins minted. Typical representatives include Dai, Frax, etc.;
Algorithmic stablecoins: These stablecoins completely regulate their supply and circulation through algorithms, which control the relationship between supply and demand to peg the price of the stablecoin to a reference currency (usually the USD). Generally, when the price rises, the algorithm issues more tokens, and when the price falls, it repurchases more tokens from the market. A typical example is UST (the stablecoin of Luna).
In the years following the collapse of UST, the development of stablecoins has mainly revolved around micro-innovations in Ethereum LST, constructing some sort of over-collateralized stablecoins through different risk balances. The term 'stable' was no longer mentioned. However, with the sudden emergence of Ethena earlier this year, stablecoins have gradually defined a new development direction, which is to combine quality assets with low-risk financial management, thereby attracting a large number of users with higher yields, creating an opportunity to seize market share in the relatively solidified stablecoin market structure. The three projects I mention below belong to this direction.
Two, Ethena
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Ethena is the fastest-growing illegal currency-collateralized stablecoin project since the collapse of Terra Luna, with its native stablecoin USDe surpassing Dai with a size of 5.5 billion USD, temporarily sitting in third place. The overall idea of the project is based on Delta Hedging of Ethereum and Bitcoin collateral, with the stability of USDe achieved by shorting Ethereum and Bitcoin on Cex equivalent to the value of the collateralized assets. 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 increase, thus offsetting the losses; and vice versa. The entire operation process relies on over-the-counter settlement service providers, meaning that the project's assets are managed by multiple external entities. The revenue sources of this project mainly include three points:
Ethereum staking rewards: Users' staked LST will generate Ethereum staking rewards;
Hedging trading profits: Hedging trades from Ethena Labs may generate funding rates or basis spread profits;
Fixed rewards for Liquid Stables: Deposited in the form of USDC on Coinbase or in other stablecoin forms on other exchanges to earn deposit interest. In other words, USDe is essentially a packaged low-risk quantitative hedging strategy financial product from Cex. When combining the above three points, Ethena can provide floating annualized yields of up to several tens of points (currently at 27%) during good market conditions and excellent liquidity, which is higher than the 20% APY of Anchor Protocol (the decentralized bank in Terra). Although it is not a fixed annualized yield, it is still extremely exaggerated for a stablecoin project. So, in this case, does Ethena carry extremely high risks like Luna?
Theoretically, the biggest risk of Ethena comes from the explosion of Cex and custody; however, this kind of black swan event is unpredictable. Another risk to consider is bank runs; the large-scale redemption of USDe requires sufficient counterparties to exist. Given the rapid growth of Ethena, such a situation is not impossible. Users quickly sell off USDe, causing the secondary market price to decouple. To restore the price, the protocol needs to liquidate and sell spot collateral to repurchase USDe, and the entire process may turn unrealized losses into actual losses, ultimately exacerbating the vicious cycle. '1' Of course, this probability is much lower than the probability of a single-layer barrier breaking like UST, and the consequences are not as serious; the risk still exists.
Ethena also experienced a long period of low point mid-year; although yields dropped significantly and its design logic was questioned, there was indeed no systemic risk. As a key innovation in this round of stablecoins, Ethena provides a design logic that merges on-chain and Cex, bringing a large amount of LST assets generated from the mainnet into exchanges, becoming scarce short liquidity in a bull market, and providing exchanges with significant trading fees and fresh blood. This project is an interesting design thought that achieves high yields while maintaining good security. In the future, with the rise of order book DEXs matched with more mature chain abstractions, will there be a chance to realize a fully decentralized stablecoin along this line of thought?
Three, Usual
Usual is an RWA stablecoin project created by former French parliament member Pierre PERSON, who was also an advisor to French President Macron. The project has seen a significant increase in popularity recently due to the news of its launch on Binance Launchpool, with its TVL rapidly rising from the tens of millions to around 700 million USD. The project's native stablecoin USD0 adopts a 1:1 reserve system; unlike USDT and USDC, users no longer exchange fiat for equivalent virtual currency but rather exchange fiat for equivalent U.S. Treasury bonds, which is the core selling point of this project, sharing the profits obtained by Tether.
Image source: TechFlow Deep Tide
As shown in the figure above, the left side is the operating logic of traditional fiat-collateralized stablecoins. Taking Tether as an example, users do not earn any interest when converting fiat into USDT; in a way, Tether's fiat can also be considered as obtained through 'making a profit without investing'. The company purchases low-risk financial products (mainly U.S. Treasury bonds) with a large amount of fiat, achieving a staggering profit of 6.2 billion USD in just one year, and then reinvesting these profits into high-risk industries to generate passive income.
The right side shows the operating logic of Usual, whose core philosophy is Become An Owner, Not Just A User. The project's design revolves around this philosophy, redistributing the ownership of infrastructure to total locked value (TVL) providers, meaning that users' fiat will be converted into ultra-short-term U.S. treasury bonds as RWA, with the entire realization process 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), and the final profits entering the protocol's treasury, governed by protocol token holders.
The protocol token USUAL will be distributed to holders of locked USD0 (locked USD0 will be converted to USD0++), achieving profit sharing and early alignment. It is worth noting that this lock-up period lasts four years, which is consistent with the redemption time of certain U.S. mid-term bonds (U.S. mid to long-term bonds usually 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, and sharing profits equally. However, the longer lock-up period and relatively low yield compared to the crypto circle may make it difficult to achieve large-scale growth in a short time like Ethena; the attraction for retail investors may be more concentrated on the token value of Usual. In contrast, in the long term, USD0 has more advantages: first, it facilitates citizens of other countries without U.S. bank accounts to more easily invest in U.S. bond portfolios; second, it has better underlying assets as support, allowing for a much larger overall scale compared to Ethena; third, the decentralized governance method also means that this stablecoin is not easily frozen, making it a better choice for non-trading users.
Four, f(x)Protocol V2
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f(x)Protocol is currently the core product of Aladdindao, and we provided a 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 has also brought a number of flaws, such as vulnerability to attacks, low capital efficiency, high transaction costs, and complex user access. However, I still believe this project is the most noteworthy stablecoin project born during the bear market of 2023, and I will provide a brief introduction to it here.
In the V1 version, f(x) Protocol created a concept known as 'floating stablecoins', which decomposes the underlying asset stETH into fETH and xETH. fETH is a 'floating stablecoin', whose value is not fixed but fluctuates slightly with the price of Ethereum (Ether). xETH is a leveraged Ether long position that absorbs most of the price fluctuations of Ether. This means that xETH holders will bear more market risk and return while also helping stabilize the value of fETH, making fETH relatively more stable. Earlier this year, following this idea, a rebalancing pool was designed, within which there exists only one highly liquid stablecoin pegged to the USD, namely fxUSD. All other stable leveraged derivative tokens no longer have independent liquidity but can only exist within the rebalancing pool or as supporting components of fxUSD.
A basket of LSDs: fxUSD is supported by multiple liquidity staking derivatives (LSDs) such as stETH, sfrxETH, etc. Each LSD has its own stable/leverage pairing mechanism;
Minting and redeeming: When users want to mint fxUSD, they can provide LSD or withdraw stable currency from the corresponding rebalancing pool. In this process, LSD is used to mint the stable derivative of that LSD, which is then deposited into the fxUSD reserves. Similarly, users can also redeem LSD with fxUSD.
Simply put, this project can also be seen as a super-complex version of Ethena and early hedge stablecoins; however, in on-chain scenarios, this balancing and hedging process is very complicated. First, there is volatility separation, followed by various balancing mechanisms and leverage collateral; the negative impact on user access has already surpassed the positive attraction. In the V2 version, the entire design focus shifted to eliminating the complexities 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 product with a high beta value (i.e., highly sensitive to market price changes). This feature allows users to engage in on-chain high-leverage trading without worrying about individual liquidations or paying funding costs, and the benefits are evident.
Fixed leverage ratio: xPOSITION provides a fixed leverage ratio, meaning that the user's initial margin will not be subject to additional requirements due to market fluctuations, nor will it lead to unexpected liquidations due to changes in leverage rate;
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 this situation;
Exemption from funding costs: In general, using leverage involves 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 deposit USDC or fxUSD with one click, providing liquidity support for the protocol's stability. Unlike the stable pool in the V1 version, the V2 version stable pool serves as an anchor 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 revenue sources are based on position opening, closing, liquidation, rebalancing, funding fees, and collateral profits.
This project is currently one of the few non-over-collateralized and fully decentralized stablecoin projects. However, for stablecoins, it still seems somewhat too complex and does not adhere to the minimalist design premise of stablecoins, requiring users to have a certain foundation to feel comfortable getting started. In extreme market conditions, during a bank run, the various barriers designed to resist might also harm users' interests. However, the goal of this project aligns with every crypto enthusiast's ultimate vision for stablecoins: a native decentralized stablecoin backed by top-tier crypto assets.
Conclusion
Stablecoins are always a battleground and a highly competitive track in Crypto. In last year's article (Fallen into a near-death state, but stable has not stopped innovating), we briefly introduced the past and present of stablecoins and hoped to see some more interesting decentralized non-over-collateralized stablecoins emerge. Now, a year and a half has passed, and we have not seen any startup projects other than f(x) Protocol doing this direction. However, it is fortunate that Ethena and Usual provide some compromises, allowing us at least to choose some more ideal and Web3 stablecoins.
Reference article
Mario looks at Web3: An in-depth analysis of the reasons behind Ethena's success and the spiral of death risk
fxUSD: The Nuts and the Bolts
What is Usual?
[Disclaimer] The market has risks, and investment should be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk.
This article is authorized to be reprinted from: (Deep Tide TechFlow)
Original author: YBB Capital Researcher Zeke
The article 'USDT has competitors! Detailed explanation of the features of three stablecoin newcomers, who will win the battle?' was first published in 'Crypto City'
