The next market narrative? Why are protocols like Aave and Curve creating their own stablecoins?
Compilation of the original text: Deep Tide TechFlow
Compilation of the original text: Deep Tide TechFlow
The launch of $GHO and $crvUSD is just around the corner, so are protocol-specific stablecoins the next big story?
Of all the cryptocurrency types, stablecoins still have the greatest product-market fit.
This is because they allow investors to use USD exposure in DeFi to trade, make payments, store value, or earn yield.
Today, the market capitalization of all stablecoins has grown to over $150 billion.
Why would a protocol seek to create its own stablecoin?
The first main reason is to increase income.In the overcollateralized model, the protocol calculates revenue based on the dollar amount of outstanding loans.
To give an idea of how stablecoins can help protocols gain revenue growth, we can predict Aave's growth as a result of the launch of GHO.
Assume that the reserve factor of the stablecoin is 10%, the optimal lending rate is 4%, and the rate of GHO is 3%.
This income is fully escrowed by the agreement. As of now, of Aave's total interest of approximately $150 million, approximately $18 million has been retained by the protocol and allocated to the DAO. Therefore, if the supply of GHO grows to ~$700 million, it will double the revenue of the protocol.
In addition to revenue, protocols can use stablecoins as a way to increase the value accumulation and utility of governance tokens.For example, holders of stkAAVE will be able to mint GHO at interest rates favorable to ordinary borrowers, giving users an incentive to purchase and stake AAVE.
These protocols also have the ability to expand and contract the supply or use collateral for certain strategies.For example, stablecoin issuers could establish direct deposit modules with other lending marketplaces, or deposit collateral with AMM LPs (e.g., Maker's D3M and FRAX AMO).
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This all sounds great, but where are the risks?
The main risk is the increased complexity of the protocol and therefore a vector for attacks.There have been many bugs in stablecoins (Cashio, Acala, Bean, etc.) in recent years, leading to complete bankruptcy of the protocol.
The competition in the stablecoin space is also fierce, and some decentralized stablecoins have built huge moats in terms of on-chain liquidity and cooperation with other protocols (such as Frax and Curve).
It may be difficult or very expensive for protocol stablecoins to obtain deep liquidity.
In addition, as seen through Maker's PSM, it is very difficult to maintain a strong peg while maintaining decentralization, and regulatory or OFAC sanctions may make the creation and maintenance of protocol stablecoins very difficult.
at last,A very important consideration is the liquidation process.first level title
So, in a future where multiple protocol stablecoins exist, who will be the final winner?
Besides those who successfully create their own stablecoins, other beneficiaries are those projects that directly benefit from the increase of stablecoins and providing liquidity needs: Curve and Frax.
Any stablecoin issuer needs to use Curve to ensure sufficient liquidity on-chain-- This will generate more revenue and TVL for Curve.
Frax is also integrated into Curve's flywheel through CVX accumulation, and its FraxBP pool will become the main pair of liquidity.
Besides Aave and Curve, which projects will follow to build their own stablecoins?
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