Author: YBB Capital Researcher Zeke
Introduction
According to CoinGecko data, the total market capitalization of stablecoins has surpassed $200 billion. Compared to when we mentioned this sector last year, the overall market capitalization has nearly doubled and surpassed its historical high. I once compared stablecoins to a key component in the crypto world, serving as a stable means of value storage and acting as a critical 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 (B2B) transactions, and international remittances. In emerging markets such as Asia, Africa, and Latin America, the application value of stablecoins is gradually becoming evident, with strong financial inclusion enabling residents of third-world countries to effectively cope with high inflation caused by government instability. Through stablecoins, they can also participate in global financial activities and subscribe to cutting-edge virtual services (such as online education, entertainment, cloud computing, and 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 enhance the demand for stablecoins (computing power purchases, subscription services). Compared to the developments of the past two years, the only constant is that Tether and Circle still hold significant dominance in this sector, with more startup projects beginning to turn their attention to the upstream and downstream of stablecoins. However, today we still want to talk about the issuers of stablecoins. In this highly competitive hundred-billion-dollar sector, who else can share the next piece of the pie?
1. Evolution of Trends
In the past, when we discussed the classification of stablecoins, we generally categorized them into three types:
1. Fiat-Collateralized Stablecoins: These stablecoins are backed by fiat currencies (such as USD, EUR) as reserves and are typically issued at a 1:1 ratio. For example, each USDT or USDC corresponds to one dollar stored in the issuing party's bank account. The characteristics of these stablecoins are relatively simple and direct, and they theoretically provide a high degree of price stability;
2. Over-Collateralized Stablecoins: These stablecoins are created by over-collateralizing other volatile yet liquid high-quality crypto assets (such as ETH, BTC). To address potential price volatility risks, these stablecoins often require a higher collateralization ratio, meaning the value of the collateral must significantly exceed the value of the minted stablecoins. Typical representatives include Dai, Frax, etc.;
3. Algorithmic Stablecoins: These stablecoins adjust their supply and circulation entirely through algorithms that control the relationship between supply and demand, aiming to peg the price of the stablecoin to a reference currency (usually the U.S. dollar). Generally, when prices rise, the algorithm issues more coins, and when prices fall, it buys back more coins from the market. Typical representatives include 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 forms of over-collateralized stablecoins through different risk balances. The term 'stable computing' has not been mentioned since then. However, with the emergence of Ethena earlier this year, stablecoins have gradually defined a new development direction, which combines quality assets with low-risk financial management to attract a large number of users with relatively high yields, creating an opportunity for a breakthrough in the relatively stagnant stablecoin market. The three projects I will mention below all belong to this category.
2. Ethena
Ethena is the fastest-growing non-fiat-collateralized stablecoin project since the collapse of Terra Luna, with its native stablecoin USDe surpassing Dai at a market cap of $5.5 billion, ranking third. The project's overall approach is based on Delta Hedging with Ethereum and Bitcoin collateral, and the stability of USDe is achieved through short-selling Ethereum and Bitcoin on Cex equivalent to 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 incurs losses, but the value of the collateral also increases, offsetting the loss; the opposite is also true. The entire operation relies on over-the-counter settlement service providers, meaning that protocol assets are held by multiple external entities. The project's revenue sources mainly include three points:
1. Ethereum Staking Rewards: The LST pledged by users generates Ethereum staking rewards;
2. Hedging Trading Revenue: Ethena Labs' hedging trades may generate funding rates or basis spread revenue;
3. Fixed Rewards for Liquid Stables: Stored as USDC on Coinbase or in other stablecoins at other exchanges to earn deposit interest.
In other words, the essence of USDe is a packaged Cex low-risk quantitative hedge strategy financial product. Based on the three points mentioned above, Ethena can provide floating annualized returns of up to several tens of points (currently at 27%) when market conditions are good and liquidity is excellent, which is higher than the 20% APY of Anchor Protocol (the decentralized bank in Terra) back in the day. Although it is not a fixed annualized yield, it is still extremely exaggerated for a stablecoin project. So, in this case, does Ethena have extremely high risks like Luna?
Theoretically, the biggest risk of Ethena comes from the disasters of Cex and custody, but such black swan situations are unpredictable. Another risk to consider is redemption; large-scale redemptions of USDe require a sufficient counterparty. Given Ethena's rapid growth, this situation is not impossible. Users quickly sell off USDe, leading to a decoupling of the secondary market price. To restore the price, the protocol needs to close positions and sell off collateral to repurchase USDe, potentially turning unrealized losses into actual losses and ultimately exacerbating the entire vicious cycle. Of course, the probability of this happening is much lower than the probability of a single-layer barrier collapse like UST, and the consequences are not as severe, but the risk still exists.
Ethena also experienced a long period of low in the middle of the year. Although its yields dropped significantly and its design logic was questioned, no systemic risks materialized. As a key innovation in this round of stablecoins, Ethena provides a design logic that integrates on-chain and Cex, bringing a large amount of LST assets generated from the mainnet into exchanges, becoming scarce short-selling liquidity in a bull market and providing exchanges with substantial transaction fees and fresh blood. This project represents a compromise yet extremely interesting design approach, achieving high yields while maintaining reasonable security. In the future, with the rise of order book Dex matching more mature chain abstractions, is there a chance to realize a fully decentralized stablecoin based on this idea?
3. Usual
Usual is an RWA stablecoin project created by former French Congressman Pierre PERSON, who was also an advisor to French President Macron. The project has seen a significant increase in popularity recently, influenced by news of its launch on Binance Launchpool, with its TVL quickly rising from the millions to about $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 currency, but rather exchange fiat for equivalent U.S. Treasury bonds, which 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 operating logic of traditional fiat-collateralized stablecoins. Taking Tether as an example, users do not earn any interest during the process of minting USDT from fiat currency. In some sense, Tether's fiat can be considered as 'getting something for nothing.' The company purchases low-risk financial products (mainly U.S. Treasury bonds) with a large amount of fiat currency, resulting in earnings of up to $6.2 billion in just one year, which are then reinvested in high-risk fields to achieve passive income.
On the right side is the operating logic of Usual, whose core philosophy is Become An Owner, Not Just A User. The project design revolves around this philosophy, redistributing infrastructure ownership to total locked value (TVL) providers, meaning that users' fiat will be converted into ultra-short-term U.S. Treasury bonds as RWA. The entire process is facilitated through USYC (USYC is operated by Hashnote, a leading on-chain asset management company supported by partners from DRW), with the final earnings entering the protocol's treasury and being owned and governed by the protocol token holders.
The protocol token USUAL will be distributed to locked USD0 holders (locked USD0 will be converted into USD0++), achieving profit sharing and early alignment. It is worth noting that this locking period lasts for four years, aligning with the redemption period of some U.S. medium-term Treasury bonds (which typically range from 2 to 10 years).
Usual's advantage lies in maintaining capital efficiency while breaking the control of centralized entities like Tether and Circle over stablecoins and equally distributing the earnings. However, the longer locking period and relatively low yield compared to the crypto space may make it challenging to achieve the rapid growth seen by Ethena in the short term, with retail investors likely being more attracted to the token value of Usual. In contrast, in the long term, USD0 holds more advantages: first, it enables citizens of countries without U.S. bank accounts to invest more easily in U.S. Treasury bond portfolios; second, it has better underlying assets for support, potentially achieving a much larger overall scale than Ethena; third, its decentralized governance mechanism also means that this stablecoin is not easily frozen, making it a better choice for non-trading users.
4. f(x) Protocol V2
f(x) Protocol is currently Aladdindao's core product, 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 somewhat less known. Its complex design also brings many flaws, such as vulnerability to attacks, low capital efficiency, high transaction costs, and complex user access. Nonetheless, I still believe this project is one of the most noteworthy stablecoin projects born during the 2023 bear market, and I will provide a brief introduction to it here (for more details, please refer to the f(x) Protocol v1 white paper).
In the V1 version, f(x) Protocol created a concept known as 'floating stablecoin,' 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 (ETH). xETH, on the other hand, is a leveraged long position in ETH, absorbing most of ETH's price fluctuations. This means that xETH holders will bear more market risk and returns while helping to stabilize the value of fETH, making fETH relatively more stable. At the beginning of this year, following this idea, a rebalancing pool was designed, within which there exists only one highly liquid stablecoin pegged to the dollar, namely fxUSD. All other stable derivative tokens in the leveraged pairs no longer have independent liquidity but can only exist in the rebalancing pool or as supporting portions of fxUSD.
● A Basket of LSD: fxUSD is supported by multiple liquid staking derivatives (LSDs) such as stETH and sfrxETH. Each LSD has its own stability/leverage pair mechanism;
● Minting and Redemption: 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 derivatives of the LSD, which are then stored in the fxUSD reserve. Similarly, users can also redeem fxUSD back for LSD.
So, simply put, the project can also be seen as a super-complex version of Ethena and early hedge stablecoins. However, in the on-chain scenario, this balancing and hedging process is very complicated. First, there is volatility splitting, followed by various balancing mechanisms and margin requirements; 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 about by leverage and better supporting fxUSD. In this version, xPOSITION was introduced, which is essentially a high-leverage trading tool, a non-homogeneous, high-beta leveraged long position product. This functionality allows users to engage in high-leverage on-chain trading without worrying about individual liquidations or paying funding costs, with obvious benefits.
● Fixed Leverage Ratio: xPOSITION offers a fixed leverage ratio, ensuring that users' initial margins will not require additional demands due to market fluctuations, nor will they face unexpected liquidations 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 f(x) Protocol V2's design avoids this situation;
● Waiving 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 expenses.
In the brand-new stable pool, users can deposit USDC or fxUSD with one click to provide liquidity support for the protocol's stability. Unlike the V1 version's stable pool, the V2 version's stable pool acts as an anchor between USDC and fxUSD, allowing participants to conduct price arbitrage in the fxUSD—USDC AMM pool and helping fxUSD achieve stability. The entire protocol's revenue sources are based on opening and closing positions, liquidations, rebalancing, funding fees, and collateral earnings.
This project is one of the few non-over-collateralized and fully decentralized stablecoin projects currently available. It still appears somewhat overly complex for stablecoins and does not align with the minimalist design premise of stablecoins. Users must have a certain level of knowledge to comfortably get started. In extreme market conditions, when a run occurs, the framework design of various protective barriers may also inadvertently harm user interests. However, the project's goal aligns with every crypto enthusiast's ultimate vision of a 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 (On the Brink of Death, But Stable Computing 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. A year and a half later, we have not seen any startup projects in this direction aside from f(x) Protocol. However, it is fortunate that Ethena and Usual have provided some compromise thoughts, allowing us to choose some more ideal and Web3-friendly stablecoins.
Reference Article
1. Mario Looks at Web3: An In-depth Analysis of the Success Factors and Death Spiral Risks of Ethena
2. fxUSD: The Nuts and the Bolts
3. What is Usual?
