Unseating the King: Alternatives to USD-Backed Stablecoins
The world of crypto is a hotbed of innovation, teeming with projects that propose new ideas and challenge traditional norms. One such project that has recently caught our attention at NGMI Lab is the GSU Protocol. It boldly presents a new type of stablecoin, claiming superior stability than even the USD. The twist? This stablecoin isn’t tethered to any specific fiat currency but derives its value from the broader equilibrium of the global economy. As intriguing as this sounds, the burning question is: can this innovative approach weather the inherent turbulence of the crypto ecosystem and navigate the regulatory storm ahead?
To assess GSU’s potential and impending challenges, it is important to first dissect the established landscape of stablecoins. Firstly, there are four main types of stablecoin: commodity-backed (eg. gold-backed PAXG), fiat-backed (eg.USDT/USDC), crypto-backed (eg. DAI backed by Ethereum and Bitcoin), and algorithmic (FRAX/ UST).
Commodity-backed stablecoins are anchored to assets such as gold. Fiat-backed ones are pegged to traditional currencies like the USD or Euro. Crypto-backed stablecoins are collateralized by other cryptocurrencies like Bitcoin or Ethereum. Lastly, algorithmic stablecoins are bound to an on-chain protocol or crypto asset that determines its value through a computer algorithm based on supply and demand dynamics.
This variation in stablecoin types, however, doesn’t translate into diversity in the market. The stablecoin sector is overwhelmingly dominated by fiat-backed, USD-denominated offerings. As of January 31, 2023, USD stablecoins hold a whopping 98.9% share of the market, amounting to $137 billion in value. This dominance points to a market that is highly exposed to the dynamics of a single fiat currency – a precarious position if there ever was one.
On top of that, USDC and USDT lead the pack in market capitalisation. During the recent banking failures, the depegging of USDC threatened the very existence of the DeFi ecosystem and exposed a heavy reliance on stablecoins intrinsically tied to the traditional financial system.
Another recent development in the stablecoin arena is the emergence of institutional stablecoins, highlighted by the introduction of Societe Generale’s new stablecoin, EUR CoinVertible (EURCV), launched in April of this year. This stablecoin, pegged to the euro and based on the Ethereum blockchain, stands out as the first such asset issued by a banking institution on a public blockchain. Unlike the stablecoins issued by companies outside Europe like Tether’s EURT and Stasis’s EURS, EURCV is a certified European bank’s effort to respond to client demand for crypto assets. This trend could prompt more traditional banking institutions to venture into issuing their own on-chain assets, completely reshaping the stablecoin market dynamics.
Given these dynamics, it’s hard not to see the urgent need for a more diversified and decentralised stablecoin market. Indeed, the over-reliance on a single currency-based stablecoin not only leaves the market vulnerable to the economic fluctuations of that particular currency (for example, a government inflating supply) but also stifles competition and innovation. Furthermore, this concentration in one specific currency raises regulatory concerns, as any legal changes impacting that currency could reverberate throughout the entire stablecoin market. The introduction of GSU Protocol offers a compelling alternative. But as with all things crypto, it comes with its own set of risks and challenges. Let’s dive into it.
Global Standard Unit, or GSU protocol is a new over-collateralised, crypto-backed stablecoin built off a fork of Maker Dao. It offers a novel approach to creating a stablecoin by basing its value on a calculation called the ‘Global Point of Balance (POB)’, rather than a single fiat currency like USD. GSU uses an algorithm that examines capital flows between over 30 countries and their trading partners to represent a broad picture of the global economy. By reflecting this holistic economic landscape, the value of GSU stablecoin becomes less vulnerable to the economic fluctuations of any single country, offering a more stable and diversified option for users.
While GSU’s innovative approach is undoubtedly noteworthy, the potential risks should be carefully considered. Though not technically an algorithmic stablecoin, GSU does rely on a very experimental algorithm to arrive at its value. In general algorithmic stablecoins have recently been under fire due to the collapse of Terra’s UST, causing widespread distrust in this particular type of stablecoin. This reputational risk raises the bar for GSU to educate the masses and establish credibility and ensure user adoption.
Next, the complexity of GSU’s mechanism adds an extra layer of risk. The task of maintaining a consistently accurate and updated index of the global economy is a herculean task. Any slip-ups in this process could potentially destabilise the coin. Moreover, the need for users to collateralise their assets to mint GSU coins exposes them to additional risk if the value of their collateral takes a downturn.
Finally, the rapidly changing regulatory landscape presents another significant challenge. As cryptocurrencies attract more mainstream attention, they’re also drawing increased regulatory scrutiny. GSU, with its unique structure, may face regulatory hurdles that are yet to be clearly defined. These regulatory risks could have a considerable impact on its adoption and functionality.
While the risks of GSU and similar decentralised stablecoin solutions are apparent, it’s crucial not to lose sight of the potential opportunities they present. In fact, the need for such innovation in the stablecoin market might be more pressing than ever for several reasons.
Firstly, as some governments around the world become more adversarial towards cryptocurrencies, there’s a growing need for stablecoins that can withstand potential attempts to dismantle the current crypto infrastructure. Decentralised stablecoins like GSU might offer a vital buffer against such regulatory hostility.
Secondly, the over-reliance on a single currency or company forms a monopoly, which poses its own set of risks in the market. In a monopolistic scenario, a single point of failure could potentially destabilise the entire system. Diversification and decentralisation could help in averting such risks, underscoring the importance of alternatives like GSU protocol.
Moreover, fostering competition and innovation is the cornerstone of any thriving market. If we standstill with the current stablecoin options, we may risk missing out on potential breakthroughs that could enhance stability, security, and inclusivity in the crypto market. As such, even as we remain aware of the risks, it’s essential to continue supporting and scrutinising novel stablecoin models like GSU protocol.
Lastly, the ongoing innovation in the stablecoin space could lead to more resilient financial systems. Decentralised finance (DeFi) has already shown its potential in offering alternatives to traditional banking systems. Novel stablecoin models could further this cause, making financial systems more democratic, accessible, and resistant to single points of failure.
Indeed, the road ahead for stablecoins like GSU protocol is filled with challenges and opportunities. It’s clear that the market needs to diversify away from the dominance of USD-backed stablecoins to mitigate risk and encourage healthy competition. As crypto gains momentum worldwide, more scrutiny and regulation will inevitably follow, necessitating robust, decentralised solutions.
Finally, in assessing GSU Protocol or any stablecoin, it’s not just about the stability it promises, but also about the adoption it can inspire. The GSU team’s main task lies in convincing the DeFi ecosystem about its unique value as a stable safe haven against currency volatility. Their success depends on their ability to penetrate diverse DeFi protocols, moving from theoretical innovation to practical utility. As we evaluate the potential of GSU protocol and similar projects, we must remember that a stablecoin’s effectiveness is ultimately judged by its acceptance in the marketplace, regardless of its inherent design.
NGMI Lab members can find the full analysis of GSU Protocol at https://ngmilab.com/reports/55
