Stablecoin Diversification using Set
These past few weeks, we’ve seen major developments in the stablecoin space, which include Tether losing its 1:1 peg with the US Dollar and the launch of numerous fiat-backed stablecoins including Coinbase/Circle, Gemini, and Paxos.
Trust is inherently hard to establish and easy to lose. Fiat-backed stablecoins require users to trust that the centralized issuing authority is transparent and solvent. Crypto-backed stablecoins such as Dai require users to trust that the underlying cryptoasset will not crash. Algorithm-backed stablecoins such as Basis require that users trust that its algorithm will withstand attacks to break its peg and handle systemic lost of trust.
Ultimately, users desire a dependable, non-volatile asset to park their funds and use for commerce.
Basketing as a solution
In traditional finance, basketing has always been important in diversifying away asset-specific risk and serving as a standard index to measure overall market health. Specifically, currency baskets have served the purpose of being a standard, less volatile unit of account, with the International Monetary Fund’s (IMF) Special Drawing Basket (SDR) being the most prominent today.
Introduced in 1969, the SDR is a redeemable currency basket composed of USD, Yen, Euro, Yuan, and Pound. It serves as the official unit of account in the IMF and is used to supplement all 189 of its members’ official reserves. Currently, this basket is weighted as follows:
We are already beginning to see attempts to diversify away the risks of holding a single stablecoin.
Huobi, the 3rd largest crypto exchange in the world, recently launched its stablecoin solution, which automatically converts deposited stablecoins such as Paxos, Gemini Dollar, USD Coin and TrueUSD into HUSD for use on the exchange. And, during withdrawals, users can specify what stablecoin listed above to convert to.
We believe there needs to be more solutions and that basketing is a vital next step to bringing stablecoin usage mainstream.
Enter StableSet
This past May, we launched StableSet, a basket composed of 50% Dai and 50% TrueUSD to demonstrate the potential of bundling stablecoins.
Similar to the how the IMF’s SDR diversified away relying entirely on the US Dollar, StableSets diversify away the reliance on any single stablecoin. Advantages of using this new construct are:
- Reduced Day-to-Day Price Volatility by averaging out price movements across Stablecoins. Using data gathered from Coinmarketcap, we graphed price movement of our upcoming StableSet vs its stablecoin components in the past 2 weeks. We saw that the StableSet had the lowest variance around the dollar peg.
- Diversified impact of failure: Catastrophic failure of a single stablecoin does not result in a complete loss of capital. Although the StableSet actually increases overall exposure to failure, the expected value of loss decreases proportionate to member allocation
Whats Next
As we launch onto MainNet, we plan on updating StableSet with a comprehensive composition which will include TrueUSD, Dai, Gemini Dollar, USDC and PAX. We’re excited about StableSets serving many use cases including:
- Serving as a base pair on centralized and decentralized exchanges
- Becoming a standard for non-volatile collateral in dApps, especially in #DeFi projects from debt financing to derivatives trading
- Being used for day to day transactions in the global digital economy
For those who desire a Stablecoin with alternative risk and volatility properties, users can use Set Protocol to:
- Design and create their own stablecoin basket with varying risk tolerances and preferences
- Update their stablecoin basket based on their current views of the optimal composition
If you’re interested in chatting about StableSet compositions, start a conversation with our team any time on Telegram. Also, if you find what we’re doing exciting, we’re hiring. Check out our openings here.
