MakerDAO EDSR: Stablecoin Landscape after: Transformation, Response, and Opportunity

Original author: Jiang Haibo, PANews

With the emergence of disruptors like Liquidity and Security-Boosted Derivative Financial Products (LSDFi) and MakerDAO's Enhanced DAI Savings Rate (ESDR), stablecoin holders have an increased demand for returns. Due to MakerDAO's EDSR allocating a 5% annualized return to DAI holders, other stablecoins may be exchanged for DAI to earn returns, resulting in them being "drained" and leading to a decrease in circulation or a transition from a premium to a discount. In order to address this situation, some stablecoin issuers are actively updating their strategies.

USDC: Hold in Coinbase to earn a 5% annualized return

Maker's Peg Stabilization Module (PSM) allows for the minting of DAI using centralized stablecoins like USDC at a 1:1 ratio or the redemption of DAI for centralized stablecoins. Since the introduction of this feature, the proportion of USDC in DAI collateral has gradually increased to over 50%. This has led to criticism of DAI, claiming that it has lost its decentralized nature. Although the circulation of DAI has increased, this portion of DAI does not earn a stability fee and does not generate value for Maker. Instead, it assumes counterparty risk with USDC, as demonstrated during this year's USDC anchoring event.

The situation has gradually changed as Maker has started to allocate funds from the PSM to Real World Assets (RWA). In this process, the USDC in the PSM will be redeemed for dollars and used to purchase US bond ETFs. At this point, the pressure shifts to USDC's issuer, Circle. Since there are no fees for minting or redeeming USDC, Circle transitions from benefiting from DAI to becoming a compliant channel that helps Maker attract funds for purchasing US bonds.

According to glassnode data, the circulation of USDC has decreased from 55.9 billion in June 2022 to the current level of 26.08 billion (as of September 12, 2023). Maker's redemption of USDC to purchase US bonds has played a significant role in this decrease.

In September 2022, Coinbase launched a proposal on the Maker forum, hoping to deposit some USDC in Coinbase Prime as part of the PSM to participate in Coinbase's institutional rewards program. These funds can earn an annualized yield of 1.5%.

However, Maker did not stop redeeming USDC to purchase government bonds. In July of this year, when there was only over 300 million USDC left in the PSM as the required liquidity, Maker co-founder Rune proposed to implement EDSR and increase DSR to 8% to attract incremental funds. Later, EDSR was lowered to 5%.

In this situation, Coinbase continues to follow suit, and users only need to hold USDC in the Coinbase exchange to earn a 5% annualized yield.

Recently, it seems that the issuance of USDC has escaped the downward trend, but the income obtained by USDC issuers will decrease due to Coinbase's concession. In the same centralized stablecoin race, competing products such as PYUSD and FDUSD have also emerged.

Frax: Significant decrease in issuance

From the beginning, the majority of reserves in the stablecoin issued by Frax Finance were USDC. As shown in the figure below, most of the reserves in Frax Finance are held in the protocol's FRAX-USD on Curve, which provides liquidity for FRAX, USDC, and USDP. This means that a portion of the circulating Frax is held by the protocol, while a significant proportion of the remaining reserves consists of USDC. The issuance of FRAX stablecoin is easily affected when the yield on DAI is higher and relatively safer.

According to data from glassnode, the supply of Frax has decreased from 2.9 billion in March 2022 to the current 670 million, a decrease of 17.3% compared to 810 million when Maker's EDSR took effect.

At the time when Maker's EDSR took effect, Frax founder Sam Kazemian proposed a collaboration with the US company FinresPBC to redeem USDC and USDP for USD through the FRAX v3 RWA asset strategy to earn interest. After deducting costs, the remaining income generated by Frax will be directly returned to the protocol by FinresPBC.

Liquity: LUSD premium turns negative

With Maker gradually shifting towards RWA, Liquity's LUSD has become the representative project of fully decentralized stablecoins, supporting only ETH as collateral to mint LUSD.

And precisely because the current Liquity only supports ETH as collateral, in the face of competition from forked product versions Gravita and Lybra, it also has to consider adding new features.

During the Stable Summit held in July, Liquity founder Robert Lauko announced plans for Liquidity V2, which will balance decentralization, stability, and scalability. Liquidity V2 is expected to be publicly released in 2024, and will add leverage and lending products, and support ETH as collateral for staking.

According to official data, the circulation of LUSD has decreased from 1.56 billion in May 2021 to the current 287 million. This is a smaller decrease compared to the 297 million when Maker EDSR was in effect.

But the impact on LUSD price seems to be larger. According to CoinMarketCap data, for the past month, LUSD has consistently been at a discount, which is the first time this has happened in the past year.

Lybra Finance: After the Lybra V2 upgrade, most of the funds were withdrawn

So who is the better solution in the area of interest-bearing stablecoins, U.S. bonds or LSDFi? Currently, U.S. bond projects are temporarily winning.

Lybra is the LSDFi flagship project, supporting the minting of eUSD by collateralizing ETH staked derivatives. eUSD holders can earn higher returns than Maker EDSR, but recent data has shown a significant decline. According to DeFiLlama data, the combined TVL of Lybra V1 and V2 has dropped from $343 million on September 5th to the current $129 million. Lybra V2, the full-chain version, was recently launched, supporting more collaterals and extending stablecoin to other chains without sacrificing interest.

Similarly, according to CoinGecko data, the price of eUSD (OLD) was $1.04 with a market cap of $184 million on September 5th. However, according to Etherscan data as of September 13th, the circulation supply of eUSD (OLD) and eUSD was only 29.3 million and 36.02 million respectively, a decrease of over 50% compared to before.

This indicates that in the migration from Lybra V1 to V2, the majority of the previous funds chose to leave directly. Although it cannot be determined whether it is due to Maker EDSR, the main income for users in Lybra still comes from the project's liquidity mining incentives, which may decrease in attractiveness as the governance token price falls.

Summary

With the development of LSDFi and the launch of Maker EDSR, stablecoin holders may expect to share profits from their holdings, which may lead to a decrease in circulation supply or a negative premium for stablecoins that cannot generate returns.

Among several stablecoins observed by PANews, FRAX has experienced a significant decrease in circulation, LUSD has shifted from a premium to a discount, USDC has followed suit by allocating 5% annualized yield to Coinbase holders, and the eUSD of Lybra has decreased by over half during the migration process from V1 to V2.