Bankless: One Year Anniversary of Terra's Collapse and Innovations in Stablecoins
It's hard to believe that a year has passed since Terra's death spiral. The impact of UST is still significant, having evaporated hundreds of billions of dollars in wealth. Today, let's take a look at the state of stablecoins one year after the UST collapse.Original Title: 《Stablecoins: 1 Year After Terra》
Author: 563, Bankless
Compiled by: Kate, Marsbit
What has the market learned one year after the collapse of UST?
The death spiral of Terra USD (UST) and the corresponding collapse of LUNA shattered hopes for the cryptocurrency market, which had reached historic highs in 2022, toppling the first (of many) leveraged dominoes supported by cheap capital, hype, and outright fraud. Users who pinned their hopes on the idealistic algorithmic design of UST saw billions of dollars and countless fortunes evaporate in just a few days.
Many early supporters of the Terra ecosystem were fascinated by the concept of a fully decentralized stablecoin. While the architecture of UST ultimately proved unsustainable, some might argue that the idea of completely isolating DeFi users from traditional systems is a very valuable goal.
A year later, as we reflect, we ask ourselves: "What have we learned?" and "Where are we now?"
While algorithmic ("algo") stablecoins have fallen out of favor (despite USTC's market cap being only 1.5 cents, it still stands at $150 million), the broader stablecoin industry has continued to solidify its product-market fit. Whether as a medium of exchange or a store of value during a bear market, today's DeFi market is filled with stable assets.
What is the only problem? We went in the wrong direction.
Despite many people boasting about their USDC and mocking those holding Terra, all DeFi's USDC fell below 90 cents in March after discovering that Circle's funds were tied to the now-defunct Silicon Valley Bank, putting DeFi to the test of reality. Users flocked to the relatively "safe" USDT (just saying it feels wrong).
In contrast, in April 2022, the market cap of stablecoins was about 82% centralized stablecoins (mainly USDT, USDC, BUSD, and TUSD). Today, our centralization level is 95%. After the USDC depegging, Tether (USDT) alone surged from 44% of the total stablecoin market to over 63% today. Not a pretty picture.
Thus, on one hand, we have algorithmic stablecoins, which, while decentralized, are easily susceptible to death spirals. On the other hand, we have centralized fiat-backed stablecoins, which are open to bank failures and censorship. How do we reconcile this?
Fortunately for us, bear markets have always been an ideal environment for practitioners to stop and do what they do best—innovate.
In today's article, we will introduce some new decentralized stablecoin projects that excite us. These new projects not only enhance the antifragility of token design—new mechanisms for stablecoins and truly innovative use cases are on the horizon, potentially undermining Tether's dominance and providing much-needed decentralization to the market.
1. Curve's crvUSD
Curve Finance is the preferred platform for stablecoin trading in DeFi.
Since entering the space, Curve has had a significant impact on the market. Whether innovating stable pools on the AMM model or reinventing tokenomics design with their voting escrow structure and subsequent metric mechanisms, the entire ecosystem is built on this pillar.
Just as users can mint DAI with their ETH using Maker, Curve users will soon be able to mint crvUSD with assets on Curve (such as ETH and its derivatives). Through their new loan liquidation AMM algorithm (LLAMMA), Curve intends to improve the time-tested debt collateral position (CDP = "loan") stablecoin design of DAI.
Here’s the ELI5 version of why crvUSD liquidation can significantly improve upon traditional designs:
• Collateral is gradually liquidated within a certain price range rather than being immediately liquidated upon reaching the liquidation price. This reduces the likelihood of market volatility caused by large-scale liquidations.
• The design of crvUSD aims to provide lower prices for Curve's AMM, incentivizing liquidators to arbitrage on external DEXs. Additionally, the gradual liquidation strategy reduces the demand for external DEX liquidity, thereby decreasing the likelihood of bad debt accumulation.
• If the price rebounds above the liquidation price, the liquidation can be reversed. This means that "liquidation" won't be the primary concern for borrowers.
2. TapiocaDAO's USDO
Liquidity is the lifeblood of financial markets—without it, incentive mechanisms dry up, and economic activity stagnates.
Today, the liquidity of stablecoins exists in small bubbles around decentralized DeFi. While we can say there are stablecoins worth $130 billion, not all ecosystems are equal. If your protocol exists in a market with low capital allocation, you are fighting against gravity.
TapiocaDAO is building a fully decentralized bank across chains—users can seamlessly borrow and mint their stablecoin (USDO) on about 17 EVM and non-EVM chains (and growing)—all without the need for bridging. Tapioca achieves this by leveraging LayerZero's universal messaging network as its cross-chain infrastructure, aiming to establish a robust stablecoin for our multi-chain future.
USDO is another CDP design that uses network gas tokens (like ETH, MATIC, etc.) and their LSD as collateral. In addition to simple fund transfers, cross-chain lending and leveraging are also possible. For example, you can:
• Mint USDO on Berachain by opening a collateral debt position (CDP = "loan") against your stMATIC on Polygon, using up to 5x leverage with just a click.
• Borrow USDO on Starknet using your yield-bearing jGLP on Arbitrum as collateral, with your yield helping to pay off your loan.
• Lend your USDO to users on any of the approximately 17 LayerZero-supported chains from zkSync—capital efficiency has significantly improved compared to traditional lending platforms.
The issue of liquidity fragmentation in DeFi has been a problem for both existing and emerging protocols. With Tapioca using LayerZero, we may soon see the day when new projects are no longer forced to default to liquidity market leaders.
3. Redacted Cartel's DINERO
Known for establishing meta-governance and an unparalleled bribery market with the "invisible hand," Redacted Cartel has released the highly anticipated announcement of the Dinero project, marking its entry into the world of stablecoins and LSD.
The initial paper released in April revealed the fundamental design and motivations behind Dinero. Essentially, Dinero aims to provide users with premium Ethereum block space through private RPC (Remote Procedure Call), called Redacted Relayer. The RPC sends transaction data from dApp/wallets to the blockchain.
Using Redacted Relayer for transactions offers several advantages over using the default RPC:
• Prevents malicious actors from exploiting MEV opportunities (Hi, Jared!)
• Meta-transactions—the ability to pay gas fees using the DINERO stablecoin instead of ETH.
• Once a certain scale is reached, additional use cases such as privacy transactions and order flow payments become possible.
The DINERO stablecoin itself is a CDP, over-collateralized by a combination of USDC and Redacted's own LSD pxETH, where the ETH used to mint pxETH runs Redacted's validators. This closed-loop system allows Redacted to create a comfortable block space ecosystem. By marketing DINERO as a medium of exchange and gas token on their block space island, Redacted is turning the tide—providing a unique new use case for stablecoins.
The future trend is on-chain and over-collateralized
For those of us who are decentralists (myself included), 2023 will be an exciting year for stablecoin innovation.
As most projects avoid algorithmic designs and turn to over-collateralization, the likelihood of a UST-style death spiral decreases with subsequent code submissions.
Even Frax—its name itself referring to its decentralized architecture—has decided to go fully collateralized—indicating that the market's appetite for "unstable stability" is at a historic low. We have also observed experiments with non-pegged DeFi native assets, such as Reflexer’s RAI, pushing the boundaries of the centralized/decentralized dichotomy.
Overall, we see DeFi users excited about owning fully on-chain asset-backed decentralized stablecoins. Whether the future is dominated by crvUSD, USDO, DINERO, FRAX, RAI, or something else, at least we can agree that it is better than Tether's dominance.
Special thanks to Albert Lin, twMatt, and Figgy for their fact-checking assistance.
