Stablecoin & Synthetic Dollar Landscape: What You Need to Know
Ethena, Liquity, Mountain Protocol, Gyroscope
As markets, specifically $BTC, turn more and more bullish, stablecoin lending rates continue to increase. While some in the markets might not want to be sidelined in stablecoins, there’s a lot more going on in this area than just maintaining value.
Stablecoins can excel in turbelent times, but lending and yield rates, DeFi opportunities, airdrop farming, and more make USD-based assets exciting for the laymen right now. That being said, the underlying security, governance structures, scalability, multichain plans, and more should not be overlooked…
Stay alert in the markets ⬇️
Background on Ethena
Ethena, by Ethena Labs, is a synthetic dollar protocol on Ethereum, aimed at creating a crypto-native dollar alternative in USDe. The protocol creates a delta-neutral position hedging $ETH collateral with perps on both DEX and CEX. The funding fees from shorting $ETH provide the Ethena yield (currently ~33%), since funding currently is swaying much heavier toward the buy side.
The protocol aims to solve scalability and censorship resistance issues within the stablecoin trilemma. The stablecoin trilemma refers to balancing 1. Decentralization 2. Stability and 3. Capital Efficiency. While some may say Ethena falls short of the appropriate decentralization mark because of it’s use of CEXs to hedge against $ETH collateral, a strength still exists in censorship resistance. Ethena’s reliance on a mix of centralized and decentralized liquidity sources allows it to overcome past challenges faced by delta-neutral stablecoins. The avoidance of traditional banking systems to provide an uncorrelated risk profile among stablecoins may be appreciated by DeFi users.
Of course, Ethena is currently drawing attention for its shards program, as well as it’s high stablecoin rate, which is higher than even that of $UST, which stood at around 19%. Shards are Ethena’s take on an airdrops points program, allowing users to earn shards at a rate aligned with their action, which includes buying USDe, staking sUSDe, or locking tokens. The program runs on an epoch basis and has already garnered over 32k users. Shards can even be purchased on Whales Market for a price of around ~$0.0002 per shard, or earned on Pendle at an enhanced rate.
The idea behind Ethena was brought to popularity by Arthur Hayes. With backing from Dragonfly Capital, Binance Labs, OKX Ventures, Bybit Mirana, Deribit, and more, this vision has been able to come to life. Ethena’s roadmap aims to trend towards decentralized governance over collateral-based decisions and risk measures. As it pertains to combatting liquidity fragmentation, Ethena will initially focus on where liquidity is most abundant, particularly on layer-1 networks. Ethena has an interest in decentralized exchanges due to their distributed open interest across chains and exchanges, contrasting with the concentration in centralized exchanges.
The protocol is exploring LayerZero and bridging solutions for cross-chain operations and plans to power layer-2 networks incorporating native yield. There is also the potential of using yield-bearing collateral in decentralized perpetual exchanges, aiming for Ethena to eventually operate across multiple chains and prioritize decentralized exchanges to scale effectively.Ethena’s current focus on staying on Ethereum Layer1 due to concerns about bridge risks, though plans to expand to Layer-2s are in the short term. Recent partnerships were established with Movement Labs and Paralle. It’s important to be transparent and for the team to address risks in their protocol, indicating caution towards introducing additional bridging risks in the near future.
Background on Liquity
Liquity started as an interest free protocol for borrowing LUSD against $ETH. It takes censorship resistance and decentralization seriously as the protocol must be accessed by external frontends made by the community. The protocol has issued over $4.6 billion in loans since its 2021 launch. Liquity is unique due to its immutable nature, reliance solely on $ETH as collateral, and the upcoming V2 that promises significant changes. Liquity V2, featuring user-set interest rates and support for multi-collateral $ETH and LSTs, may slightly reduce decentralization but remain crypto-native and scalable.
Liquity’s strategy for V2 focuses on expanding to every Ethereum-aligned Layer-2 and exploring borrowing integrations on L2 for cheaper gas fees and transaction settlement on Layer-1. There is an existing integration on Starknet as well as plans for similar integrations with other L2s, based on previous success and user preference.
Liquity V2’s innovative user-set interest rate feature, have the potential to set a new standard in DeFi. It includes the ability to borrow against multi-collateral LSTs and access to a stablecoin generating real yield without token inflation. Liquity V1 will continue to exist for users preferring a decentralized approach with Ethereum as collateral.
Background on Mountain Protocol
Mountian Protocol is a digital asset platform offering yield-bearing stablecoins and regulatory-compliant financial services. The protocol has a focus on providing its USDM users with native USD yield.
Mountain Protocol uses a mono-projectable model, which provides simplicity and low risk, akin to the reliability of US government bonds. They aim to democratize access to high-yield checking accounts through Mountain Protocol, offering a 5% reward by tokenizing existing financial products and improving on $USDC and $USDT without increasing risk.
The protocol sees the appeal of decentralization for assets but also acknowledges the current necessity for assets backed by widely accepted real-world currency. The protocol hopes for future resolutions that favor decentralization but prioritizes security to ensure the USDM token’s value remains stable over time.
There is security and inclusivity provided by permissionless stablecoins like USDM, which, unlike bank accounts, do not require user whitelisting and are accessible to anyone not blacklisted. This makes them more inclusive and cost-effective, with $USDM additionally offering a reward.
At its core, USDM is an ERC-20 token format for broad compatibility, regulated by the Bermuda Monetary Authority for added confidence. Bermuda is a monetarily authority in line with international standards. Unlike $USDC and $USDT, USDM rewards its holders with a 5% APY daily rebasing reward, highlighting their commitment to redistributing profits.
Background on Gyroscope
Gyroscope is a decentralized stablecoin (GYD) featuring a novel all-weather stablecoin design combined with more efficient stablecoin liquidity pools. Gyroscope aims to create a common risk control infrastructure to manage asset risks across the crypto space, particularly focusing on stablecoins. This involves diversifying the risk associated with different stablecoins types and implementing automated risk control mechanisms.
Different stablecoins come with their own risk profiles and trade-offs, whether they are centralized or decentralized, creating the stablecoin trilemna mentioned above.
For example, Black Thursday affected MakerDAO‘s $DAI, highlighting the challenges decentralized stablecoins face in maintaining stability. Solutions like using liquidity or negative rates have been explored, but each has its drawbacks. Gyroscope‘s approach to spreading risk, using fallback mechanisms, and automating monetary policy adjustments changes based on flucuations in collateral asset values.
As it pertains to a multichain strategy, Gyroscope focuses on utilizing Layer-2s to enhance usage and experimentation in DeFi, emphasizing the benefits of cheaper gas and the ability to handle smaller transactions. The team acknowledges the severity of bridging risk. It is very important to select secure bridges for L2 strategies, especially for decentralized stablecoins, due to Gyroscope’s emphasis on risk control. There are potential risks associated with non-decentralized bridges or those lacking core security mechanisms, and he talks about considering bridge risks and liquidity fragmentation between L2s in their strategy.
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