[Market Info] Overview of Asset-backed Stablecoin

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Coinmonks

9 min readApr 28, 2021

With the recent hype of algo stablecoins, we have neglected some traditional stablecoins. Time to revisit them! Coingecko has listed a total of 47 stablecoins, with a total market cap of $84 billion. This is only 4% of the total market capitalisation of the cryptocurrency of $2.1 trillion. To give a rough (but not very accurate) idea of the composition, we have used a chart in Coin360. USDT dominance is still high, but recently BUSD and other 2-tier stablecoins are rising as well. New stablecoins like Fei and Lquity USD are joining the race, too.

To give more accurate data on the top 10, here’s the Coingecko’s screenshot:

We have enlisted 18 stablecoins that are fully or largely backed by assets and have a market cap of at least $10m. The largest is USDT of course, and the smallest is DUSD. We categorise them into 5 categories below:

100% USD Fiat Backed

One USDT (USD Tether) is backed by $1 USD, and administrated by Tether. Tether started on Omni network of Bitcoin and was popular as a medium of transaction, as BTC was too volatile for any meaningful course. Later, USDT had a version on Ethereum and boomed as Ethereum’s user base and product offerings grew explosively. There’s always a question mark on whether the USDTs in circulation are actually FULLY backed by USD. There has been a much pro-longed investigation by New York Attorney General on Tether (and its parent company Bitfinex), but it concluded in Feb this year, with a minimal penalty. As of today, there are 50 billion USDT in circulation, almost 7x from a year ago.

USDT has one of the largest cryptoexchange behind them, Bitfinex. It’s not surprising that cryptoexchanges have their own stablecoins. Similarly, thepopular ones:

Binance: BUSD
Gemini: GUSD
Huobi: HUSD
OKEX: USDK
Paxos: PAX

Stablecoins released by cryptoexchanges are all fully backed by USD. Amongst other motivations, stablecoins give the exchange flexibility in extending the business and managing liquidity. With the boom of Binance Smart Chain, BUSD’s circulation doubled in the last 30 days.

There are two other independent entities that issued stablecoins, USDC by Circle (US digital payment company that managing Circle Pay), and TUSD by TrustToken. USDC, the second largest stablecoin in circulation, is licensed by New York State Department of Financial Services, and audited monthly by Grant Thornton LLP.

As these stablecoins are fully backed by USD, they are as credible as their respective issuer. In this sense, we can argue that they are stable in terms of pegging, but not so much in line with the spirit of decentralisation.

Over 100% Crpytocurrency Collatoralised

Some other collateralised stablecoins are purely built on chain, the most popular one being DAI by MakerDao. Any user with a wallet can create a vault with MakerDao’s Oasis, borrowing DAI by pledging some ETH (or other accepted coins). Conceptually, it’s similar to a mortgage loan: pledging your house for USD. For MakerDao, there’s an interest (Stability Fee), a liquidation penalty (liquidation fee) if the value of your house drops, and a ratio to decide how much you can borrow. Depending on the interest rates, you can borrow 100 DAI (worth $100 usually) with $130 to $175 worth of ETH pledged.

In the event that the collateral, ETH in this case, drops significantly and it bursts the liquidation ratio (say your $150 ETH is now less than $100, for the 100 DAI you borrowed). The vault will be liquidated (before the values of ETH drops below $100) and ETH will be sold in the market to cover your DAI borrowing.

There’s not a guarantee like USD Fiat back stablecoins that each DAI will get $1 worth of USD or anything back. It’s more of a market consensus that users believe that DAI is $1, and trade accordingly. When DAI is lower than $1, arbitrageurs will buy up DAI. As there’s an interest to borrow and use DAI, borrowers of DAI from MakerDAO will be incentivised to buy back the DAI they spent earlier, when DAI is cheaper.

If we look at the Binance Smart Chain version of MakerDAO (maybe Maker+Compound to be precise), Venus, its stablecoin VAI, has often traded below $1 significantly for an extended periods, despite that VAI has the same mechanism as DAI.

There’s also a fork of MakerDao, Unit Protocol that offers USDP as stablecoin. Since its launch in Nov 2020, its price was under $1 but stabilized towards $1 now. And not to forget SUSD by Synthetix, where you can deposit $SNX to mint $sUSD amongst other synthetic crpytocurrencies.

Therefore, the credibility of crypto over-collateralised stablecoins is a matter of consensus, which is then a combined result of the stablecoin’s history, user base, market cap and liquidity, platform quality; and maybe a bit of market sentiment as well.

100% Major Cryptocurrency Backed

You might have realised that from the above two categories of asset-backed stablecoins have their shortfalls:

Fiat backed: not decentralised
Crypto collateralised: over-collateralization is not efficient

Therefore, there’s another class of asset-back stablecoins, that can be minted and burnt with another cryptocurrency. The biggest of them is Terra USD or UST, by Terra Money, a Korean blockchain company that runs the Terra Chain ($luna, if this sounds more familiar). UST can be minted or burnt either way by any user at $1, using Terra Chain’s native token LUNA. Please refer to this article for details. Therefore, as long as LUNA is liquid, and has a large market cap than UST, UST can be maintained at $1.

Similarly, another stablecoin Neutrino USD, or USDN, by Waves Technologies, has the same design. USDN and WAVE token can be exchanges at the $ price of WAVE, therefore maintaining the price of USDN to be $1.

Compared to VAI, the price of USDN, is much more stable since its launch. These two stablecoins are comparable as they were launched both end of last year and had close market caps.

We also not that UST has a smaller volatility compared to USDN. In view of their designs, we can conclude that 100% Major Cryptocurrency Backed stablecoins are as credible as the market cap and liquidity of the token backing them, and also the platform quality of the exchange bridge.

100% Stablecoin Backed

Some stablecoins are a collection of other stablecoins. For instance, MUSD by mStable, is a collection of sUSD, DAI, USDC and USDT. mStable assumes each coin is always $1 and can be exchanged as long as the platform has liquidity to support the transaction. As a result, MUSD is then a collection of the cheapest coin of the four at any point of time.

Further, borrowing the concept of Curve’s 3pool, mStable offers mUSD-GUSD and mUSD-BUSD pools to provide liquidity to BUSD and GUSD. So effectively, MUSD is backed by 6 other stablecoins.

A similar project is DefiDollar, with its DUSD being effectively the y-pool of Curve. Having said that, DefiDollar has two innovations:

It’s modular, so that the governance can vote to add other stablecoin products like y-pool to the DUSD basket.
DUSD can be saved, and savers of DUSD benefit from protocol earnings like y-pool’s rewards, but also take the first cut of devaluation of y-pool. This is to ensure the other DUSD in circulation will have a cushion in the event of a price drop of other stablecoins.

We can view 100% Stablecoin Backed as safe derivatives of stablecoins, and they are as credible as the stablecoins in their basket, as well as their platform quality.

Partially Stablecoin Backed / Other Designs

Lastly, defi is a space where innovation never stops. As all of the above stablecoins are all not perfect, many talented teams aim to improve the design of stablecoins. In this sense, algorithms stablecoins are the biggest field of innovation — but somehow it’s again economic principles and none has succeeded (defined as how stable they are to $1) so far.

On the other hand, some teams seek to relinquish the idea of 100% asset backing and some progress has been made. A more practical and widely accepted stablecoin is FRAX, by Frax Finance, advised by economist Stephen Moore. FRAX is backed by partially major stablecoins and partially FXS, its platform token. The ratio as to how much of one FRAX is backed by stablecoins and how much is FXS, is decided by algorithm. Please see our article on Frax Finance for details.

This might seem to be redundant, but it does explore a possibility that if a large stablecoin can be sustained without 100% asset backing or supported by another crypto with smaller market cap. Frax has used a combination of both and one more step more from here might lead to something amazing.

Another example of innovative design of stablecoin is FEI by Fei Protocol, indirectly backed by founders of AAVE and Compound. Despite its recent media turmoil, FEI is designed to be backed by a pool of ETH and achieves pegs by dynamically adjusting a Uniswap FEI-ETH pool. Please refer to our article on Fei Protocol for more details. Whilst the design is grand, as it achieves under-collateralisation, it might or might not work in practice.

For partially stablecoin backed or other designs, we conclude that the overall goal is to achieve under-collateralisation, but all new concepts have to be market-tested and time-honoured.

Appendix: Table of Summary

100% USD Backed: $USDT, $usdc, $busd, $husd, $gusd, $tusd, $pax, $usdk

Over 100% Cryptocurrency Collatoralised: $dai, $usdp, $vai, $sUSD

100% Major Cryptocurrency Backed: $ust, $usdn

100% Stablecoin Backed: $musd, $dusd

Partially Stablecoin Backed / Other Design: $frax $fei

(Serenity Team, 28 April 2021, Twitter: https://twitter.com/SerenityFund)

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