HOPE, Emerging from the CeFi Crisis: The Vision of "Distributed Stablecoins" from DeFi to CeFi and TradFi

Written by: Frank, Foresight News

Stablecoins, as one of the "Holy Grails" sought after in the crypto world, have always been a highly imaginative track in the industry. However, since 2022, various stablecoin solutions have faced continuous setbacks, whether it was the collapse of UST or the reserve turmoil of USDC. In contrast, the often-criticized USDT has continued to expand while maintaining its value stability.

"All that is past is prologue." On April 19, the new challenger HOPE officially launched on the Ethereum mainnet. As a distributed stablecoin project launched by former PayPal Financial founder Flex Yang, what innovative mechanisms does it offer compared to others, and what answers does it plan to provide in the competition for the stablecoin Holy Grail?

The "Change and Constancy" of the Stablecoin Market

As is well known, stablecoin solutions can be roughly divided into three categories:

• Fiat-backed stablecoins represented by USDT emerged first and currently hold the largest market share, but they sacrifice decentralization in issuance and have always faced skepticism regarding 100% asset reserve support;

• Asset-collateralized stablecoins represented by DAI have achieved a degree of decentralization but cannot avoid issues of over-collateralization and low capital utilization;

• Algorithmic stablecoins represented by UST establish a monetary system through market supply and demand, maximizing "decentralization" and liberating the upper limit of capital utilization. However, their inherent volatility of "spiral deflation and inflation" makes them difficult to escape a Ponzi fate;

Since 2022, the stablecoin market has undergone tremendous changes, but the development pattern can be described as an intertwining of "change and constancy."

First, UST rapidly rose, bringing the possibility of algorithmic stablecoins into the spotlight of the crypto stage. However, the seemingly too-big-to-fail Terra blockchain ecosystem and UST's algorithmic empire collapsed within a week, leaving algorithmic stability in disarray.

The centralized stablecoin representative USDC, known for its "compliance," was also deeply entangled in the series of CeFi institution collapses last year. The severe blow from the Silicon Valley Bank crisis at the beginning of this year further interrupted its efforts to catch up with USDT.

According to CoinGecko data, since U.S. regulators shut down Silicon Valley Bank on March 10, the net outflow of USDC tokens has exceeded $12 billion, with total circulation dropping to around $32 billion, a decrease of about 30%. BUSD has also been continuously destroyed under regulatory pressure, with circulation declining by nearly $2 billion in the past 30 days.

The "decentralized stablecoins" DAI and FRAX, which primarily use USDC as their reserves, have also seen a significant decline in market share due to these events.

Meanwhile, USDT's market capitalization has increased by about $11 billion, surpassing $81 billion, with its market share re-exceeding half, reaching 61% of the total market capitalization of stablecoins. It can be said that USDT's market share advantage has continued to expand after the market turmoil in the first quarter of this year, solidifying its position as the leading stablecoin.

Amidst this backdrop, after the tumultuous years of 2022 and 2023, stablecoins have undoubtedly entered a new stage of development.

HOPE: From DeFi to CeFi and TradFi

Just as the global credit tsunami triggered by the 2008 financial crisis gave birth to Bitcoin, sudden changes often give rise to seeds that may have far-reaching impacts. The birth of the distributed stablecoin HOPE stems from the changes in the CeFi landscape of the crypto industry since 2022.

Most crypto users and Web3 practitioners are likely familiar with "Babel Finance," a leading crypto financial institution. In 2022, Babel Finance, along with other top CeFi institutions like Three Arrows Capital, found itself deeply mired in turmoil.

It was precisely because of this that Flex Yang, a founding member who had already left the company, realized the importance of DeFi for the next generation of financial infrastructure and services amid the collapse of the CeFi ecosystem, leading to the launch of the crypto-native distributed stablecoin HOPE.

Born from the CeFi crisis, HOPE's vision is to start from DeFi—becoming an important collateral in the DeFi world, while further expanding in the future to become a significant collateral in CeFi and TradFi, ultimately transforming into a globally accepted decentralized cryptocurrency for payments.

HOPE: A Dynamic Stablecoin Anchored to Mainstream Crypto Assets

HOPE's economic model determines that it is not a conventional "fixed-value stablecoin," but a stablecoin that dynamically changes between "under-collateralized" and "fully collateralized."

Its design is based on the judgment that "in the long run, core mainstream crypto assets will definitely trend upwards," thus incorporating the future growth of mainstream crypto assets into HOPE's future value changes:

HOPE's initial price is set at $0.5, backed by Bitcoin and Ethereum as reserves, with subsequent real-time prices synchronized with the value changes of the reserves.

What does this mean? It means that when HOPE first launched at a price of $0.5, if 1 billion tokens were issued, that would amount to $500 million, meaning the reserves backing HOPE would be Bitcoin and Ethereum worth $500 million.

Subsequently, HOPE's price will dynamically change with the actual value fluctuations of the reserves (Bitcoin and Ethereum):

• If the value of the reserves rises to $600 million, HOPE's price will change to $0.6 in real-time;

• If the value of the reserves rises to $1 billion, HOPE's price will be $1;

• If the value of the reserves exceeds $1 billion, HOPE will always be anchored at $1;

In the third scenario, as the value of HOPE's reserves increases, HOPE will transition from an under-collateralized stablecoin to an over-collateralized stablecoin, and the excess reserves can also be proposed for further issuance of HOPE.

According to the rules, the HOPE issued from this excess reserve will return to the community, and the official expects the final HOPE collateralization ratio to be maintained at around 110%.

Fully "Distributed" HOPE

Additionally, as a stablecoin, especially one intended for large-scale application as a reserve asset in TradFi, CeFi, and DeFi, how to ensure value stability, particularly during extreme market conditions, is the most critical issue.

It is important to note that USDC's experience during the Silicon Valley Bank crisis sounded another alarm for the stablecoin market: even centralized stablecoins backed by full reserves could face reserve redemption crises due to single-point risks in traditional financial custody.

HOPE's official answer is "distributed," primarily reflected in three aspects:

• Distributed reserves. The assets related to HOPE will be entrusted to globally trusted institutions, including Coinbase, for custody, collaborating with local custodians in major regions worldwide. This approach can meet local regulatory requirements while avoiding the risks of centralization due to overly concentrated assets;

• Distributed distribution system. HOPE has many distributors, similar to how Bank of China, HSBC, and Standard Chartered can issue Hong Kong dollars. In the future, any qualified institution can open a whitelist in the HOPE system for minting;

• Distributed system (multi-chain system). HOPE will initially operate on Ethereum but plans to expand to other blockchains in the future to avoid single points of failure;

Recently, HOPE announced that it has chosen Coinbase Custody as the first custodian for its distributed reserve network, ensuring that the custody accounts are independent and not mixed. More similar custodial service providers may collaborate in the future to achieve distributed custody.

Building On-Chain Native "Scenarios"

"One gives birth to two, two gives birth to three, and three gives birth to all things." Alongside the launch on the Ethereum mainnet, HOPE has introduced protocols and functions such as HopeSwap, HOPE staking, and DAO governance. In the future, it will also launch supporting products like the lending protocol HopeLend and on-chain custody and settlement protocol HopeConnect, which are core to building on-chain native HOPE usage scenarios.

In fact, in the blockchain world, leading players often serve as the best benchmarks. Even though UST is a "failed" example, its rapid growth from zero to over $10 billion before its collapse remains quite instructive.

The key lies in the series of scenario constructions built around UST's usage needs from the very beginning, especially the closed-loop designs of on-chain Mirror, Anchor, and subsequent ecological projects, which created a breakthrough path for the entire Terra ecosystem of "stablecoin + scenarios."

HOPE is actually following a similar path to the Terra ecosystem, gradually creating a series of on-chain application scenarios to establish a robust liquidity market and interest rate market for HOPE. It aims to build its composable ecosystem across various tracks such as trading, staking, and custody, ultimately funneling the core scenarios of the ecosystem back to the demand for HOPE.

If this self-built on-chain ecosystem can be steadily promoted, it can deepen the robustness of the HOPE ecosystem, avoiding the risks that centralized stablecoins like USDC may easily face due to traditional financial issues—indeed, even the "decentralized stablecoins" DAI and FRAX could follow suit due to their extreme reliance on USDC for reserves.

On the other hand, if it can ultimately move towards a relatively healthy positive cycle, the excess reserves generated from this part of HOPE can continue to flow into various DeFi protocols internally, continuously deepening the on-chain scenario demand for HOPE, becoming a means of market promotion, thus helping HOPE to influence and move towards a positive cycle.

Attribute Dividends Under Dual Token Design

HOPE "Dynamic Stability" + LT "Governance Responsibility"

HOPE adopts a dual-token model design. In addition to the stablecoin HOPE, there is also a governance token LT (Light Token), with 60% allocated to the community, 30% to the team, and 10% released to the treasury and foundation.

The HOPE ecosystem provides a complete and rich set of application scenarios around HOPE, including trading, lending, custody, and settlement, and incentivizes users to participate in the ecosystem and governance through LT.

As mentioned earlier, if 1 billion HOPE is initially issued, with a total reserve value of $500 million, and the value of reserves like Bitcoin increases to $1.5 billion, there will be $500 million in excess reserves.

At this point, users holding LT can decide how to manage the excess reserve portion and can also participate in governance mechanisms related to HOPE's monetary policy and maintaining its peg.

Possible Yield Options for HOPE

Through the analysis of HOPE's specific dynamic stability mechanism, we find that users face two different pathways when participating in the HOPE protocol, although the specific yields differ:

1. HOPE: Limited Yield "Stablecoin Option"

HOPE essentially resembles an under-collateralized stablecoin option with a strike price of $1, offering limited returns.

For example, when HOPE is below $1, buying HOPE directly is akin to holding a "security" certificate mapped to the reserves, indirectly anchoring the future value fluctuations of mainstream crypto assets like Bitcoin and Ethereum.

However, since HOPE can only rise to $1 at most, even if the reserves soar, the excess returns cannot be directly reflected in HOPE's value.

Thus, HOPE can be understood as a "stablecoin option" purchased by users at the current price, with the maximum potential return capped at: strike price ($1) - premium.

2. LT: Governance Token Linked to Reserve Overflow Value

LT essentially functions as a governance token that locks in future excess reserve profits, benefiting from the value linked to reserve overflow.

Especially during bear markets, when the value of reserves is low, holding LT effectively locks in the overflow value brought by the continuous rise of reserves:

As the value of Bitcoin and Ethereum rises, HOPE's price will achieve a 1:1 peg to the dollar, while the overflow value from the rising reserves will be reflected in the value of LT—LT will grow alongside the scale of HOPE's reserves, issuance, and ecosystem. As long as HOPE's stablecoin ecosystem is established, the growth dividends will directly benefit LT holders.

Overall, under such a mechanism:

1. Users holding HOPE can obtain returns from the judgment of bond sales proceeds through the option mechanism;

2. Users holding LT can benefit from the overflow value of reserves and the collective dividends from the growth of the entire ecosystem;

In short, this means that users have the potential for returns in both scenarios—either from option exercise profits or from overflow value + rights to ecosystem income distribution (50% of the transaction fee income generated by various protocols within the HOPE ecosystem will be distributed to liquidity providers, while the other 50% will be distributed to community members holding LT).