Foresight Ventures: The Holy Grail of Stablecoins, Ponzi, Leverage, and Liquidity

2 months ago
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Utopian ideals aside, here’s what stablecoins actually mean to us.

Original author: Kylo@Foresight Ventures


  • Heterogeneous chains combined with stablecoin protocols can easily produce Ponzi magic

  • MakerDAO’s bull-bear strategy switching is achieved by switching the source of income from on-chain to off-chain.

  • AAVE’s next strategy is to increase GHO yield through Aura

  • In the future, the ecology based on curve and convex will continue to produce a large number of crvUSD cannon fodder.

  • Abracadabra points a firm direction for the development of stablecoin protocols during bull cycles

Web 3 Stablecoins

There is always the ideal of a decentralized central bank in Web3. This central bank can be independent of all legal currency systems and realize a complete set of central bank currency issuance logic based entirely on various assets on the chain. This utopian ideal has inspired countless developers who have designed a series of stablecoin systems. But regardless of whether its starting point is noble or whether the stablecoin system is mathematically sound, in the end most stablecoin protocols will inevitably be labeled as Ponzi or over-leveraged. When the tide recedes, all the magic of stablecoins will be torn off the shameful fig leaf, and assets and liquidity will recede like water, leaving only the bare skeleton of the mechanism. In the end, it was found that only fully-collateralized stablecoins that were robust enough could survive.

Perhaps we can think about what stablecoins mean to the Web3 industry? Putting aside utopian ideals and thinking about the specific meaning of stablecoins, it can construct a sufficiently beautiful Ponzi system; it can also be used as a new asset issuance method to bring sufficient liquidity to the chain; it can also be used as leverage to provide benefits to the chain. Users increase the amount of available liquidity.

To sum up, the charm of stablecoins for the Web3 industry comes from Ponzi, leverage and liquidity. The main purpose of this article is to explain the tricks of some stablecoin protocols, mainly including some Ponzi designs and the stablecoin operating modes of MakerDAO, AAVE, Curve Finance, and Abracadabra. In fact, there are some stablecoin designs based on the arbitrage principle, such as Luna-UST, Ethena Labs, etc. We will elaborate on them in the next article.

Reasonable construction of Ponzi using collateralized stablecoins

When we create a brand new asset and give it value using other real assets, in a sense this new asset also has value. This means that whether the created assets have value needs to be confirmed through a value anchor. Taking stablecoins as an example, the value anchoring of various junk stablecoins is achieved through stablecoin trading pairs. The role of this stablecoin trading pair is not to really give various values ​​to junk stablecoins, but only to give them their current face value. value. The real value refers to the value of steel, while the face value is only the paper value, which can be directly affected by the oracle or marginal value.

In order to better understand the meaning of new asset pricing, value anchor, and the true value and par value of stablecoins, we can understand it through heterogeneous chain stablecoins. Any heterogeneous chain is essentially similar to a legal currency system, and stablecoins within the ecosystem can be minted through the native tokens of the heterogeneous chain. Theoretically, the native token of the heterogeneous chain has a price in the over-the-counter CEX. Therefore, within the ecosystem, the token can be used as collateral to mint a large number of native stable coins, and then part of the USDC can be transferred through the heterogeneous chain cross-chain bridge. When the stable currency is transferred into the ecosystem and paired with the native stable currency, the native stable currency is given a face value, and USDC becomes the value anchor of the native stable currency, with an anchor value of 1. However, the anchor value is essentially the face value, not the true value of the stablecoin. Since the amount of real assets that USDC cross-chain is far smaller than the amount of native stablecoins minted, the native stablecoin cannot achieve total exchange with USDC.

But the ponzi thing about the financial system is that it often confuses real value with face value. The valuation of the total assets in the financial market is determined by the par value, which determines the marginal price of transactions. This means that in the transmission of the financial system, new assets can be maintained by using a small number of assets with real value as value anchors. The par value in turn affects the marginal price of transactions, expanding the total nominal assets in the financial market.

In the heterogeneous chain ecosystem, what usually happens is that a large number of native tokens are mortgaged to mint a large number of mortgaged stablecoins. The only use of the mortgaged stablecoins within the ecosystem is to be combined with native tokens to form LP trading pairs; a small amount of USDC is used cross-chain The bridge spans to this heterogeneous chain ecosystem, which serves as an anchor of value and gives the native mortgage stablecoin a par value of 1. Since the only use of a large number of native mortgage stablecoins in the ecosystem is to form LP, this has resulted in a large number of purchases of native tokens, pushing up the price of the native token. It is worth noting that the price of the native token at this time is actually determined by the par value of the native mortgage stablecoin, which is 1. The essence of CEXs capture of on-chain prices is to capture its par value through an oracle. The result is that there is a nominal price difference between CEX and the chain. Arbitrage often purchases native tokens through real money (USDC) on CEX. , and sold on the chain to complete arbitrage. As everyone knows, when arbitrageurs purchase native tokens on CEX, they passively become a part of the Ponzi structure: as a liquidity provider, they expand the exit liquidity of the native token...

The above-mentioned gameplay of heterogeneous chain stablecoins is just one of the basic gameplays of a large number of Ponzi structures in TradFi or DeFi. The Luna-UST architecture that we are familiar with is essentially the same set of logic. The par value of UST is anchored by the market value of Curve 4 pool and Luna, while $ANC and $LUNA within the ecosystem are supported by the par value of UST; in addition, this logic can also explain the exchange rate issue between the US dollar and the RMB and upbit transactions. Regarding the trading issues of the BTC trading pairs, we can expand on the specific details later.


When MakerDAO was first established, it did not follow up with complex designs such as PSM, D3M, etc., but started with a simple CDP mortgage model. Users use ETH as collateral and generate DAI according to a certain mortgage rate. At this time, the user can choose to exchange DAI for ETH and then repeat the above operation for revolving loans. A large number of users are performing revolving loan operations, which means they are selling DAI, so DAI was often in a slightly unanchored state before the emergence of DeFi summer. Regarding the issue of DAI de-anchoring, MakerDAO realizes it through transfer payment, that is, DSR. When users mint DAI, they need to pay a certain interest rate, which will be paid to DSR depositors in the form of transfer payments. Therefore, MakerDAO can adjust the supply of DAi in the entire market by adjusting the deposit interest rate of DSR, thereby maintaining the anchoring of DAI.

MakerDAOs introduction of PSM occurred after DeFi summer. Due to the inflow of large amounts of capital, the returns from DeFi farming have become extremely exaggerated, and commonly used assets for DeFi farming include DAI. Therefore, the demand for DeFi farming has given rise to the demand for DAI, and DAI has also experienced a premium. In order to solve the premium problem of DAI while maintaining the stability of DAI price, MakerDAO also introduced PSM. Users can use the assets accepted by PSM, such as USDC, USDP and other stable coins, to exchange DAI at an exchange rate of 1:1. The introduction of this mechanism greatly enhanced the stability of DAI prices, but later because PSMs USDC composition accounted for the majority of DAIs collateral, this also laid the foundation for the ripple effect of USDCs subsequent de-anchoring.

D3M (Direct DAI Deposit Module) is a cooperation between MakerDAO, AAVE and Compound regarding DAI deposit interest rates. Since the interest rate determination curves of AAVE and Compound are directly related to the fund utilization rate of the deposit pool, this means that asset lending rates may surge at some point. In order to maintain the stability of the DAI borrowing rate, MakerDAI introduced D3M, which limited the DAI borrowing rate to a certain interest rate range by giving some emergency casting quotas to AAVE and Compound. The introduction of this model has affected the market competitiveness of fixed-rate lending products on the chain to a certain extent. In addition, the introduction of morpho labs also seizes the fixed-rate lending market from another angle. At present, only long-tail asset lending still has room in this track. MakerDAOs cooperation with AAVE and Compound on D 3 M may be canceled in the future as Spark Protocol matures.

MakerDAO made a number of adjustments to the product direction of DAI during the transition from bull to bear cycles, including:

  • Further reduce the types of DAI collateral, retaining only core currencies such as ETH, wBTC, and stETH.

  • Set the mortgageable share of GUNI to 0

  • When U.S. bond interest rates rise, the stablecoin assets in PSM will be promptly used for RWA business through coinbase and specific trust companies.

MakerDAO’s last two adjustments actually reflect their bull-bear strategy: bull markets obtain profits from the chain, and bear markets obtain profits from off-chain. GUNI is the DAI-USDC automatic income strategy LP launched by gelato during the last bull market cycle. MakerDAO once supported the minting of DAI using the LP as collateral. The proposal to use GUNI as collateral to mint DAI faced widespread discussion in the community as soon as it was launched. The opposition mainly lies in the fact that using DAI derivatives as collateral to mint DAI will pose a risk to the stability of DAI in the future; while the support lies in this part. The minted DAI will form an LP trading pair together with USDC and be locked in Uniswap, and will not have any impact on the price of DAI from the circulation disk. After GUNI was integrated into MakerDAO, its asset management scale reached billions of dollars. In addition to MakerDAO, the direct beneficiary was Arrakis Finance. Its Uni V3 LP automatic income strategy protocol, which was a fork of the gelato team, obtained a large amount of TVL through GUNI, but it also subsequently As MakerDAO removed GUNI as collateral, Arrakia Finance faced a massive drain on TVL. The decline of Arrakis Finance also reflects the final fate of most DeFi protocols that rely on others...

On-chain transactions are extremely frequent during the bull market cycle, and GUNI can capture a large amount of DAI-USDC transaction fees. But when U.S. bond yields slowly rise and on-chain activities calm down, GUNI will no longer be able to generate a large amount of fee income. At this time, in order to obtain more income, MakerDAO began to transform into RWA business, replacing a large number of stable coins in PSM memory with assets related to U.S. debt. And this operation will continue to ferment in Q2 of 2023, creating the RWA track.


AAVE is currently developing in the direction of Super Dapp. The social protocol Lens Protocol and lending business have matured. The stable currency protocol GHO is the next subdivision direction of AAVE. GHOs mortgage minting is currently embedded in AAVEs lending business. The unused collateral deposited by users in AAVE can become GHOs minting collateral, and its minting interest rate will decrease as the amount of personal AAVE pledged increases. The current The fluctuation range is 3.38-4.83%. Since the previous minting interest rate of GHO and the income scenarios of GHO on the market are far lower than DAI or crvUSD, GHO is currently in a state of significant de-anchoring. Therefore, restoring the anchoring of GHO price is an important next step for AAVE. The specific methods include the following two:

  • Increase the minting interest rate of GHO to basically close to the interest rates of DAI and crvUSD

  • Expand the use scenarios of GHO yield farming as much as possible

These two methods are complementary to each other. A lower minting rate coupled with a higher Yield faming rate of return can expand the minting amount of stablecoins while maintaining the anchor. Therefore, under the premise that AAVE can currently achieve a lower than market minting interest rate, increasing GHO yield farming income is the most beneficial strategy for GHO.

For the income enhancement of GHO, AAVE is implemented through Balancer and Aura Finance. AAVE and Balancer have always cooperated extremely closely, and the introduction of Boosted Pool is a milestone in their cooperation. From now on, the stable coins deposited into the Balancer boosted pool can not only obtain swap fees, but also obtain AAVE deposit interest. This method greatly improves the capital interest rate efficiency of stablecoins. The next step of cooperation between Balancer and AAVE is around GHO. Balancer will serve as GHOs liquidity hub, and Aura Finance will serve as GHOs yield booster. To achieve this purpose, AAVE purchased approximately $800k worth of Aura and deposited a large amount of veBAL in the treasure into Aura Finance to obtain more governance rights on the balancer. The current minting number of GHO is 35 million. When the flywheel of GHO yield boosting is running, the expected result is that the upper limit of GHO minting will be significantly increased. At the same time, in order to reduce the minting interest rate, the pledge amount of AAVE will gradually increase. This is a great benefit for AAVE, balancer and Aura Finance, but it may still take some time for the magic to start.


Although crvUSD is also an over-collateralized stablecoin, its model different from CDP has also created a new design idea for a large number of other DeFi protocols. The design of crvUSD is inspired by AMM. In AMM, token swap is achieved by depositing one type of token and withdrawing another type of token according to a certain algorithm. If we deduce through the equivalence principle, the lending process is essentially similar to AMM. Users need to deposit part of the collateral and then lend out another part of the assets based on a certain mortgage rate. This method of borrowing and lending through the AMM model has been adopted by some protocols, such as timeswap and instadapp’s sub-product 0x fluid.

In the crvUSD model, it adopts a gradual liquidation model similar to AMM. The characteristic of the traditional CDP model is that as long as the mortgage rate reaches a certain threshold, all collateral will be liquidated at once. The pattern of crvUSD is that as long as the price of the collateral changes downward, the price of the collateral determined by the LLAMA algorithm of crvUSD will be slightly smaller than the price of the collateral in Uni V3. In this case, arbitrageurs will use crvUSD to purchase collateral from LLAMA at a lower price and sell it to Uni V3 to achieve arbitrage; conversely, when the price of collateral moves upward, the price of collateral in LLAMA will higher than uni V3, at this time the arbitrageur will sell the collateral to LLAMA, obtain crvUSD, and use the crvUSD to buy back the assets in Uni V3 to achieve arbitrage.

The advantage of the above-mentioned AMM gradual liquidation is that the asset mortgage rate can be set low enough. Since the liquidation process proceeds gradually as collateral prices fall, this means that the price elasticity of liquidation is large enough. In other words, gradual liquidation is the sale of collateral bit by bit. Compared with selling all the collateral at the lowest price at once, the more assets are obtained, the lower the mortgage rate that can be set. If higher capital utilization is the advantage of crvUSD, then the price is more impermanent losses. If the price of collateral drops sharply and then rises sharply back to the original price, due to the existence of the arbitrage mechanism within the LLAMA algorithm, the value of the users collateral will be reduced, and the reduced part will be the part arbitraged by the outside world.

crvUSD has several tools that can maintain the crvUSD price anchor:

  • higher minting rate

  • Rich crvUSD income scenarios

  • pegkeeper’s automatic coin minting function

According to the theory of AAVE GHO described above, minting interest rate and yield farming income are the two major factors that determine the scale of the stablecoin. From these two perspectives, due to the existence of various cannon fodder, even though the current minting interest rate of crvUSD is basically at the highest level in the industry, there are still a large number of users minting crvUSD. If it wants to further expand the minting scale of crvUSD in the future, it only needs to lower the minting interest rate to the industry average level.

Judging from the current situation, crvUSD has a tendency to unanchor upward. Since the yield farming income is too high and the minting interest rate of crvUSD is also high, a common practice among DeFi farming users is to mint other stablecoins at low interest rates and exchange them for crvUSD through stablecoin swaps to conduct DeFi farming. This arbitrage behavior based on interest rate differences creates demand for crvUSD in the secondary market, which may lead to upward unanchoring. CrvUSDs solution to this upward de-anchoring is also very simple and crude: directly mint unsecured coins through pegkeeper and sell them in the relevant liquidity pool of Curve V1. The difference between this approach and the MakerDAO PSM mechanism is that pegkeeper has almost no capital cost, and the model inherits the high capital efficiency characteristics of crvUSD.

crvUSD has gradually built a cannon fodder ecosystem. Before Conic Finance was stolen, crvUSD built a three-layer ponzi structure of Curve, Convex, and Conic. After crvUSD forms 3 pools or 4 pools with various stablecoins, the income can be transferred in one step Through to Conic Finance. In the early days, crvUSD accumulated approximately 150 million crvUSD mints through this method. Prisma Finance was originally the fourth layer of income after conic finance. However, due to the theft of Conic Finance, its credibility as a link in income was damaged, and Conic also withdrew from the crvUSD cannon fodder ecosystem. Therefore, Prisma Finance essentially inherits the function of Conic Finance for crvUSD, and its valuation logic is essentially similar to Conic Finance.

Theoretically, crvUSD can continue to incubate more crvUSD cannon fodder with the help of curve finance and convex ecology. This is a potential that other stablecoins do not inherently have. The cooperation between AAVE and balancer is theoretically intended to replicate Curve Finances extremely ecological success path, but there is still a long way to go.


Abracadabra is a stablecoin protocol that was born during the bull market and was specifically designed to increase leverage. It mainly uses various yield bearing assets with low liquidity as collateral to mint various stablecoins and use them through the MIM-stablecoin secondary pool. Maintain price stability. Currently, most of MIMs liquidity is built on Curve, and MIM_spell officially maintains the stablecoin pool in two ways:

  • Use $spell to bribe veCRV to vote for the MIM-stablecoin pool

  • Additional spell token incentives to MIM-stablecoin LP pool

In fact, what Abracadabra did in the last bull market cycle is likely to be repeated in the next bull market cycle. During the bull market period, users have a large demand for leverage. They are eager to obtain stablecoins with good liquidity without losing the interest-earning income of the interest-bearing assets themselves and paying a certain interest rate, and use the stablecoins to perform various leverage operations. . The above model has two pain points: one is how to find popular and large interest-bearing assets, and the other is how to maintain the liquidity of newly minted stablecoins.

Abracadabras strategy at the end of 21 is to look for assets with larger asset sizes and wider user needs as collateral, and by building a secondary liquidity pool, users who make mortgages can quickly achieve leverage. Under the circumstances at that time, Yearn Finances yETH pool was at its peak, and the TVL of the yETH pool was very large. Therefore, abracadabra took advantage of the situation and used yETH as collateral to mint the stablecoin $MIM, and achieve leverage through the stablecoin liquidity pool of MIM-stablecoin.

Since the main purpose of users using abracadebra is to leverage MIM-stablecoin, this means that the depth of the secondary liquidity pool is very important. abracadabra is achieved by incentivizing MIM - stablecoin LP like crazy. The $spell used to incentivize MIM - stablecoin LP comes from Abracadebras repurchase of $spell from the secondary market and the ecological incentives of abracade.

Why can the value of $spell soar 100 times in a short period of time? There are two main reasons:

  • All interest income is used to directly repurchase $spell, and there is a large amount of buying

  • $spell’s currency price is high enough to support abundant secondary liquidity, allowing the product to continue to operate.

This means that from the perspective of active market making and objective market making, $Spell has the power to be pulled.

Abracadabra is a very classic case of the quasi-DeFi ecological cycle. In a sense, this model can win repeatedly in the bull market. However, the problem is that the main reason for Abracadabras rise in the last cycle is that it happened to take over a large number of yield bearing assets from Convex Finance and Yearn Finance. After a bear market test, new asset classes may emerge in the next bull market cycle, thereby weakening the positions of Convex and Yearn in the current DeFi field. Therefore, for the Abracadabra team, timely attention to possible changes in yield bearing assets in the market and making adjustments to the market direction is the only way to maintain the liquidity advantage of the entire chain.

Judging from the current strategic direction adjustment, Abracadabra still retains its friendly relationship with Yearn Finance, but is also continuing to explore opportunities in GMX and Kava Chain. Whether the dead wood can be revived depends on whether MIM can discover newer and more potential market opportunities before the market.


There is essentially no dark side in the design of the stablecoin model. However, when the model becomes a casino where people invest real money, its dark attributes as a financial game will become apparent; excluding its dark side, if you look at the users leverage and liquidity Looking at stablecoins from a different perspective, they truly meet user needs. The matching of products and user needs is the halal aspect of the stablecoin protocol in Web3.

For stablecoins, maintaining yields in bear markets and increasing leverage in bull markets may be the right path for stablecoin protocols. The rise of Lybra Finance in the bear market reflects the above logic. However, the bear market will not last forever, and procyclical adjustments at the protocol level must also keep up in time. The bear market has lasted too long, and DeFi and stablecoin protocols, which require high capital amounts, have been silent for too long. However, with the arrival of the bull market cycle, abundant liquidity and capital will surely irrigate DeFi liquidity, which is now close to drying up. The gears of history will continue to rotate along the original track, we will wait and see...

About Foresight Ventures

Foresight Ventures is betting on the innovation process of cryptocurrency in the next few decades. It manages multiple funds: VC funds, secondary active management funds, multi-strategy FOF, and special purpose S fund Foresight Secondary Fund l. The total asset management scale exceeds 4 One hundred million U.S. dollars. Foresight Ventures adheres to the concept of Unique, Independent, Aggressive, Long-term and provides extensive support for projects through strong ecological power. Its team comes from senior people from top financial and technology companies including Sequoia China, CICC, Google, Bitmain and other top financial and technology companies.

Original article, author:Foresight。Reprint/Content Collaboration/For Reporting, Please Contact;Illegal reprinting must be punished by law.

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