Can regulatory crackdowns on BUSD drive a "bull market" for DeFi stablecoins?

Written by: Ignas

Compiled by: Deep Tide TechFlow

When UST collapsed, DeFi stablecoins were hit hard, but DAI, FRAX, and LUSD remained strong. Now, GHO and crvUSD are preparing to enter this space, bringing new innovations. Additionally, with regulators cracking down on BUSD, DeFi stablecoins may be entering a new bull market.

Question: Which DeFi token would you hold to escape the volatility of cryptocurrencies without expecting any interest from it?

In my opinion, it should be DAI.

This is because $DAI has a currency premium—additional value beyond its price, thanks to:

• Spot liquidity
• A proven dollar peg
• Support for many DeFi protocols
• Increasing usage in the real world

The same currency premium applies to centralized stablecoins. The premium depends on its adoption, regulatory compliance, liquidity, and trust.

Currently, the SEC's charges against BUSD are breaking BUSD's currency premium, benefiting USDC and USDT, but primarily targeting DeFi stablecoins.

You can think of this premium as the dollar's premium over other currencies. It comes from reserve currency status, political stability, military and economic strength, and financial markets. It involves various factors and takes time to earn this currency premium.

$UST's currency premium is very low—it is not used as a "pool" to escape cryptocurrency volatility but rather as a risk asset that can earn a 20% APY on Anchor.

That said, DeFi stablecoins like FRAX and LUSD are building their currency premiums and catching up with DAI.

They seem to be interchangeable, but each has its own purpose. With regulatory approval, DAI has shifted its focus to generating income from RWAs.

However, its goal is to be an unbiased world currency supported by decentralized, physically resilient collateral.

Liquity (LUSD) has the same mission: to become "the most decentralized stablecoin capable of resisting various censorship regimes." However, it achieves this with minimal governance, unaffected by RWAs, using only ETH as collateral, and does not abandon the dollar peg (unlike DAI).

Due to its design and immutable smart contracts, LUSD will not (likely) surpass DAI in market cap. However, for those concerned about centralization and censorship risks, it can serve as a niche stablecoin while still maintaining a dollar peg.

Frax's strategy is different.

In an interview with Blockworks, S. Kazemian stated that dollar-pegged stablecoins will not escape regulation through "fake or real decentralization" at scale. They have even applied for a Federal Reserve master account to get as close to the Fed as possible.

A Federal Reserve master account would allow holding dollars and trading directly with the Fed, making FRAX the closest thing to risk-free dollars.

This would enable FRAX to abandon USDC collateral and scale to hundreds of billions in market cap.

But FRAX is not there yet; it does not have DAI's currency premium. Currently, FRAX is used to extract yields in its cleverly designed flywheel ecosystem.

In contrast, most of DAI's supply is held in wallets to avoid market volatility and preserve value.

Frax's yield and efficiency maximization is what sets it apart.

Frax has built an entire "DeFi Trinity" ecosystem centered around FRAX:

• Fraxswap
• Fraxlend
• Fraxferry (bridge)
• frxETH

Each function is designed to enhance the utility of FRAX.

Synthetix's sUSD usage is also pragmatic, linked to its own DeFi ecosystem.

• Kwenta - exchange
• Lyra - options
• Polynomial - structured vaults
• Thales - binary options

The adoption of sUSD depends on the growth of its DeFi products, but its currency premium is low.

Interestingly, Maker aims to build its own DeFi ecosystem like Frax. Maker is constructing a lending protocol and a synthetic LSD—EtherDAI—to create more utility and demand for DAI.

My initial thought was that Spark Protocol is an obvious competitor to Maker and a counter to $GHO. But that does not mean Maker and Aave shouldn't collaborate in the future. In fact, I believe cooperation is the best outcome for both. Let me explain.

Everything Frax builds focuses on enhancing the capabilities of the FRAX stablecoin. Similarly, Maker's new protocol will help increase the utility of DAI. For Maker, DAI as an unbiased world currency is the ultimate drive, and new protocols are being built to achieve this goal.

However, Aave's mission is different: it seeks to become the leading money market protocol, and $GHO is a tool to achieve that goal.

In short: DAI is the mission, and the Spark protocol is the tool. For Aave, the money market is the mission, and $GHO is the tool.

Venus's stablecoin $VAI is a great example. It is a successful lending protocol on the BNB chain with a TVL of $855 million.

At its peak market cap of $250 million, $VAI was larger than FRAX—now it trades below peg (at $0.94), with a 24-hour trading volume of only 60K.

VAI is not a priority for Venus: the lending protocol itself is the mission. However, $VAI has helped Venus reach its current status.

In any case, if the founders truly think this way, then all stablecoins can coexist and even support each other's development. Offering DAI on Aave means the protocol can mint more $GHO, and $GHO can also be supported on the Spark protocol.

The same logic applies to Curve's crvUSD. Curve is a pillar of spot liquidity in DeFi, and crvUSD will help enhance the capital efficiency of the protocol. Therefore, crvUSD is not a threat to FRAX or DAI—it can actually increase the spot liquidity of all DeFi stablecoins.

Thus, I am optimistic about them because they offer unique differentiation. They recognize that regulation is important but have different approaches:

DAI and LUSD seek to make themselves censorship-resistant, while Frax is getting as close to the Federal Reserve as possible.

While GHO and crvUSD may seem to intensify competition, their focus is on improving the underlying protocols. They can all cooperate in their unique ways, strengthening each other.

Moreover, with regulators focusing on us, cooperation is needed now more than ever.