It’s hard to believe that we’re already a year into Terra’s death spiral. With tens of billions of dollars in wealth evaporated, the impact of UST is still felt.

Today, we take a look at the state of stablecoins one year after the UST collapse.

One year after UST’s collapse, what has the market learned?

The death spiral of Terra USD (UST) and the corresponding collapse of LUNA crushed the cryptocurrency market’s hopes of setting new all-time highs in 2022, toppling the first (of many) leveraged dominoes that were propped up by cheap money, hype, and outright fraud. Users who pinned their hopes on UST’s idealistic algorithmic design saw billions of dollars and untold fortunes wiped out in a matter of days.

Many early supporters of the Terra ecosystem were fascinated by the concept of a fully decentralized stablecoin. While UST’s architecture ultimately proved to be unsustainable, some would argue that the idea that DeFi users should completely isolate themselves from traditional systems is a very worthy goal.

A year later, when we reflected, we asked ourselves: “What have we learned?” and “Where are we now?”

While algorithmic (“algo”) stablecoins have fallen out of favor (USTC still has a market cap of $150 million despite having a market cap of just 1.5 cents), the broader stablecoin industry has continued to solidify its product-market fit. Whether as a medium of exchange or a store of value during bear markets, today’s DeFi market is awash with stablecoins.

The only problem? We were going in the wrong direction.

While many relish their USDC and scoff at those who hold Terra, DeFi got a reality check in March when USDC for all of DeFi dropped below 90 cents after it was discovered that Circle’s funds were tied up with the now-defunct Silicon Valley Bank, sending users flocking to the relative “safety” of USDT (let’s just say it didn’t feel right).

By comparison, in April 2022, the stablecoin market cap was about 82% centralized stablecoins (primarily USDT, USDC, BUSD, and TUSD). Today, we are at 95% centralized. After USDC depegged, Tether (USDT) alone surged from 44% of all stablecoins to over 63% today. Not a good look.

So on one hand, we have algorithmic stablecoins, which, while decentralized, are vulnerable to death spirals. On the other hand, we have centralized fiat-backed stablecoins, which are open to both bank failures and censorship. How do we reconcile this?

Fortunately for us, bear markets have been ideal environments for practitioners to pause and do what they do best – innovate.

In today’s post, we’ll take a look at some of the new decentralized stablecoin projects that we’re excited about. Not only are these new projects improving the antifragility of their token designs – new mechanisms and truly innovative use cases for stablecoins are coming that have the potential to undercut Tether’s dominance and provide some much-needed decentralization to the market.

1. Curve’s crvUSD

Curve Finance is the preferred platform for stablecoin trading in DeFi.

Curve has had a huge impact on the market since entering the space. Whether it is innovating stable funds pools on the AMM model or reinventing token design with their voting custody architecture and subsequent metering mechanism, the entire ecosystem is built on this pillar.

Just like 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 upon DAI’s tried-and-true Collateralized Debt Position (CDP = “loan”) stablecoin design.

Here is the ELI5 version of why crvUSD liquidation can be a big improvement over the traditional design:

• Collateral is liquidated gradually over a certain price range, rather than immediately when the liquidation price is reached. This reduces the possibility of large-scale liquidations causing market volatility.

• crvUSD is designed to provide lower prices for Curve’s AMM, thereby incentivizing liquidators to arbitrage on external DEXs. In addition, the gradual liquidation strategy reduces the demand for external DEX liquidity, thereby reducing the possibility of bad debt accumulation.

• If the price rebounds above the liquidation price, the liquidation can be reversed. This means that “scams” ​​will not be a major concern for borrowers.

2. TapiocaDAO’s USDO

Liquidity is the lifeblood of financial markets – without it, incentives dry up and economic activity languishes.

Today, stablecoin liquidity exists in a small bubble around decentralized DeFi. While we can say that there are $130 billion worth of stablecoins, not all ecosystems are created equal. If your protocol exists in a market with low capital allocation, you are fighting gravity.

TapiocaDAO is building a full-chain decentralized bank - users can seamlessly borrow, lend and mint their stablecoin (USDO) on approximately 17 EVM and non-EVM chains (and counting) - all without the need for a bridge. Tapioca does this by leveraging LayerZero's universal messaging network as its full-chain infrastructure, with the goal of building a strong stablecoin for our multi-chain future.

USDO is another CDP design that uses network gas tokens (such as ETH, MATIC, etc.) and its LSD as collateral. In addition to simple fund transfers, full-chain lending and leverage are also possible. For example, you can:

• Mint USDO on Berachain by opening a Collateralized Debt Position (CDP = “Loan”) against your stMATIC on Polygon and use up to 5x leverage with a single click

• Use your yielding jGLP on Arbitrum as collateral to borrow USDO on Starknet and your yield will help repay your loan

• Lend your USDO from zkSync to users on any of the 17+ chains supported by LayerZero — a huge improvement in capital efficiency over traditional lending platforms

The problem 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 Poster MONEY

Redacted Cartel, best known for building meta-governance and the unrivaled bribery marketplace Hidden Hand, has entered the world of stablecoins and LSD with the much-anticipated announcement of the Dinero project.

The initial paper published in April revealed the basic design and motivation behind Dinero. Essentially, Dinero aims to provide users with premium Ethereum block space through private RPC (remote procedure call), called Redacted Relayer. RPC sends transaction data from dApp/wallet to the blockchain.

Using Redacted Relayer provides some advantages over using the default RPC for transactions:

• Prevent malicious actors from exploiting MEV opportunities (Hi Jared!)

• Meta transactions - ability to pay gas fees using DINERO stablecoin instead of ETH

• Additional use cases like private trading and payment for order flow become possible once a certain scale is achieved

The DINERO stablecoin itself is a CDP overcollateralized by a combination of USDC and Redacted’s own LSD pxETH, where the ETH used to mint pxETH is used to run Redacted’s validators. This closed-loop system allows Redacted to create a cozy blockspace ecosystem. By marketing DINERO as a medium of exchange and gas token on their blockspace island, Redacted is turning the tables - offering a unique new use case for stablecoins.

The future trend is on-chain and over-collateralization

For the decentralists among us (myself included), 2023 is shaping up to be an exciting year for stablecoin innovation.

As most projects shy away from algorithmic design and move towards over-collateralization, the likelihood of a UST-style death spiral decreases with subsequent code commits.

Even Frax — whose own name refers to its decentralized architecture — decided to go fully collateralized — suggesting that the market’s appetite for “unstable stablecoins” is at an all-time low. We’ve also observed experiments with non-pegged DeFi native assets, like Reflexer’s RAI, pushing the boundaries of the centralized/decentralized dichotomy.

Overall, we see DeFi users excited about having a decentralized stablecoin fully backed by on-chain assets. Whether the future is dominated by crvUSD, USDO, DINERO, FRAX, RAI, or something new, at least we can all agree that it is better than Tether.

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