Author: seasonw.eth
Source: substack
USDC has almost always been the dominant stablecoin on Ethereum and is the stablecoin of choice for most DeFi protocols. In the past year, the market value of USDC on Ethereum has risen from 22 billion to 36 billion (an increase of 64%). The risks of having a centralized stablecoin as a primary asset in a decentralized ecosystem are largely ignored as its adoption increases. Even DAI, the most popular decentralized stablecoin, has more than a third of its collateral in USDC .
(Source: DefiLlama )
More recently, however, the risks of centralized stablecoins have become more pressing, leading to the rise of protocol-native stablecoins.
While there is no official definition of a "protocol-native stablecoin", I would classify it as a recent trend seen in DeFi protocols creating their own stablecoins, which is not their primary application. Stablecoins issued by other protocols, such as DAI, FRAX, and MIM, will not be considered protocol-native stablecoins because their fast adoption is their stablecoins. Centralized stablecoins such as USDC are not issued by the protocol, so they are not considered native stablecoins of the protocol.
sUSD
sUSD is a protocol-native stablecoin that has been around for a long time. With a supply of 170 million, it is the 15th stablecoin by market capitalization. sUSD is the protocol-native stablecoin ofSynthetix , a synthetic asset derivatives platform, and sUSD is a fully collateralized stablecoin that can be minted on the protocol using SNX. SNX stakers can also earn benefits in the form of sUSD through fees generated by the protocol.
DPXUSD
Another protocol-native stablecoin currently in development, called DPXUSD , is the planned stablecoin for options derivatives platform Dopex. DPXUSD will be fully collateralized by the LP positions of the protocol's native assets DPX and rDPX. The protocol-native stablecoin was first announced in March 2022, and Tetranode recently said on the NIA podcast that its launch is imminent.
Curve, AAVE, and GHO
More recently, two of the largest DeFi protocols, Curve ($5.7 billion TVL) and AAVE ($6.3 billion TVL), also announced their own protocol-native stablecoins in July. Curve’s stablecoin plans to be overcollateralized, but didn’t provide much additional information about it. AAVE’s stablecoin, GHO, has been discussed and voted on with 99.99% approval. The GHO program is staked by several different "facilitators" who are able to mint or burn (redeem collateral) GHO. Some of these facilitators include AAVE, real world assets, and even potential credit scores that allow collateralless minting of GHO.
(Source: AAVE Governance Forum )
The rise of these protocol-native stablecoins can be attributed to both the disadvantages of using a centralized stablecoin and the benefits of owning a native stablecoin, as well as the ability to capture a share of a growing market.
Disadvantages of centralized stablecoins
Reliance on centralized stablecoins (such as USDC) is extremely dangerous for DeFi because of their ability to be frozen and give these centralized parties a lot of power. The reliance on these stablecoins makes DeFi vulnerable to scrutiny. For example, if the USDC collateral of a large protocol is suddenly frozen because it is no longer accepted by the federal government , the entire ecosystem may collapse due to the sudden failure of the collateral. By moving away from centralized stablecoins, protocols can achieve higher levels of security and decentralization.
Benefits of Protocol Native Stablecoins
Protocol-native stablecoins can bring many benefits to protocols, depending on how they are designed. Dopex’s DPXUSD creates stronger liquidity for the protocol as the stablecoin is minted from LP positions. It can also create better token economics for the protocol’s native token by giving it more utility in the ecosystem. Ultimately, protocols can design their own stablecoins based on their needs and utility, while also increasing decentralization.
The Growing Stablecoin Market
Stablecoins currently account for 15% of the total cryptocurrency market capitalization and are likely to continue to grow as the broader industry and DeFi ecosystem develops. This makes having your own stablecoin a lucrative opportunity to grab a share of the growing market.
Let's recap what we've got so far:
Currently, centralized stablecoins have a large share of DeFi stablecoins
Protocol-native stablecoins already exist (e.g. sUSD) and are growing in popularity (e.g. DPXUSD, crvUSD, GHO)
The censorship risk from centralized stablecoins, the benefits of owning a native stablecoin, and the opportunity to capture market share in a growing market are potential reasons for this upward trend
It’s hard to say for sure, but I believe the trend of protocol-native stablecoins will continue and will become more dominant in DeFi protocols in the future. Relying on a single stablecoin for the entire ecosystem carries significant risks, whether it is the risk of censorship or even the risk of collapse (such as the Terra ecosystem after UST decoupling).
However, liquidity fragmentation still poses some problems due to having multiple stablecoins. Reduced liquidity reduces the reliability of stablecoins when large swaps occur and makes them easier to depeg. This will require protocols to invest (either directly or through incentives) to create deep liquidity for their stablecoins. Regardless, the future of stablecoins is sure to be interesting as new models and applications emerge.
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