When joining the crypto market, probably the first cryptocurrency pair you know and trade is a stablecoin, it can is USDT or BUSD – a cryptocurrency with a stable value. So have you ever wondered why stablecoins are needed in this market, and what if stablecoins don’t keep their stability. Let’s find more details with Coincu the working mechanism of stablecoins and some stablecoins that are losing their value like Terra’s UST.
What Is Stablecoin?
Stablecoins are cryptocurrencies the value of which is pegged to a currency like the U.S. dollar or to the price of a commodity such as gold. The pursue price stability by maintaining reserve assets as collateral or through algorithmic formulas that are supposed to control supply, an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made such investments less suitable for wide use in transactions.
Stablecoins have become a key component of a developing class of products known as DeFi, or decentralized finance, in which transactions can be carried out without a middleman such as a bank or broker. And some stable coins, such as Tether and USDC, BUSD are among those with the highest market capitalizations on the cryptocurrency market.
- The bridge between fiat money and crypto currentcy
- Usually the peg price is based on USD, JPY, EUR..
- Also a cryptocurrency circulating on the blockchain
How does stablecoins work?
As we know about Stablecoin is the most stable coin in crypto, so how to create Stablecoin and be trusted by everyone? Here are some ways to generate this coin.
As the name suggests, backed by fiat currency pegged to the value of fiat such as US dollar or EUR. It means that to issue a certain number of tokens of a given cryptocurrency, the issuer must offer dollar reserves worth the same amount as collateral. Commodities such as gold can also be used here. The reserves are often maintained by custodians that function independently and are audited for compliance on a regular basis.
Tether (USDT): The Tether stablecoin (USDT) is pegged to the U.S. dollar. which were developed by the crypto exchange BitFinex, are the native tokens of the Tether network and trade under the USDT symbol.
- Market Cap: $81,413,248,183
- Rank: #3
USD Coin (USDC): The USDC stablecoin is fully backed by assets in reserve and is exchangeable for USD on a 1:1 basis. USDC is governed by a membership-based consortium known as Centre. This body sets technical, financial, and policy standards for the stablecoin.
- Market Cap: $48,917,415,917
- Rank: #4
Binance USD (BUSD): Traders can purchase the BUSD stablecoin on the Binance exchange platform. This stablecoin is issued in partnership with Paxos Trust Company, which is responsible for holding the USD collateral in reserve that backs BUSD.
- Market Cap: $16,999,723,154
- Rank: #7
Crypto-collateralized stablecoins are backed by other cryptocurrencies. Because the reserve cryptocurrency may also be prone to high volatility, such stablecoins are over-collateralized—that is, the value of cryptocurrency held in reserves exceeds the value of the stablecoins issued. This structure provides a buffer against price fluctuations caused by the underlying collateral. To receive a crypto-collateralized stablecoin, you must lock your collateral tokens in a smart contract. The collateral is retrievable at a later date by paying stablecoins back into the smart contract, thus liquidating the position.
MakerDAO (DAI): MakerDAO uses smart contracts called Maker collateral vaults to collateralize and issue DAI tokens. To retrieve the original collateral, you pay the DAI stablecoin back into the smart contract. DAI is a popular crypto-collateralized stablecoin and has previously achieved a top-three position in the broader stablecoin market. Dai can also be pegged to different cryptocurrencies, such as Ether, USD Coin (USDC) and others that can be used as collateral.
- Market Cap: $6,387,798,703
- Rank: #15
The price stability results from algorithms and smart contracts that manage the supply of tokens in circulation. An algorithmic stablecoin system will reduce the number of tokens in circulation when the price falls below the desired price. Alternatively, if the token price exceeds that desired price, more tokens are issued to adjust the stablecoin value downward, in accordance with the principles of supply and demand.
TerraUSD (UST): Is a stablecoin pegged to the US dollar. Built by Terra Protocol, UST use between chains and aims to solve scalability issues by use the Algorithmic Stablecoins and of course without any actual cash held in a reserve to back it.
- Market Cap: $6,273,600,638
- Rank: #16
Ampleforth (AMPL): The Ampleforth platform incentivizes on-chain liquidity, issuing AMPL tokens as a reward for providing liquidity to automated market-making platforms (AMMs) like Uniswap. The more liquidity you provide, the greater your share of the AMPL pool. The Ampleforth protocol adjusts the supply of AMPL in response to demand, resulting in its stablecoin designation. These supply adjustments are universal and proportional to your ownership percentage.
- Market Cap: $72,693,667
- Rank: #304
Compare the stablecoin mechanism of Luna (UST), Tron (USDD) and Near (USN coin)
TerraUSD (UST) is the decentralized and algorithmic stablecoin of the Terra blockchain. It is a scalable, yield-bearing coin that is value-pegged to the US Dollar. Terra wants to create an ecosystem around Luna and UST.
Mechanism and the current issue UST faces
Case 1: Peg 1:1 => Achieve target
Case 2: UST > 1 USD
Use luna as collateral to mint UST; when mint UST, the quantity increases, making the peg return 1:1. At the same time, the mechanism will burn the collateral Luna causing the supply of Luna to decrease and then increase in value.
Case 3: UST < 1 USD
Burn UST to reduce the quality, then peg back to 1:1 ( You can understand that the smaller quantity – the more value will increase, so the UST value will return to 1U), and when burning UST, a corresponding amount of Luna will be minted. This is an issue UST is facing.
According to Terra CEO they will do anything to save UST, the consequence is that they will try to burn as much UST as possible to Peg return 1:1. However, doing so means that Luna’s supply continues to increase without limit. So no one knows where Luna’s bottom is; even project owner Do Kwon doesn’t know.
why does this model fail?
In our opinion, the main reason is the interest rate that UST commits to pay. According to UST’s commitment, when you provide liquidity to Anchor (Lending platform with TVL more 1/2 total TVL of Terra ecosystem), you will receive 19.12% per year, and when you borrow UST on Anchor, you have to pay interest rate is 5.06%. With such an attractive interest rate, the number of UST provided in the pool is 5-8 times compared to the quantity borrowed. So the question is where does Anchor take to pay interest to investors?
The answer is: When you deposit assets into Anchor, they will use that amount of tokens or coins to continue staking to earn interest. Specifically, stake at Lido finance. However, the highest interest rate they receive is 8.3% per year. So whether this mechanism is successful or not, the answer is now answered.
USDD – TRON Network’s stablecoin
- The way USDD works is similar to Terra’s UST Stablecoin, which is an Algorithmic Stablecoin backed by TRX.
- TRON uses Oracle with the following mechanism: Super Representatives (SRs) grant Oracle the USDD price on the TRON Network. They will submit a coupon about the current exchange rate of USDD in USD.
- The TRX ecosystem doesn’t have stablecoin-supporting pieces like Terra.
- Community trust in TRX is not appreciated.
USN – a NEAR native Stablecoin
- $USN is a NEAR-native stablecoin soft-pegged to the US Dollar, backed by a Reserve Fund that contains $NEAR, as well as $USDT initially. $USN’s core stability mechanisms consist of on-chain arbitrage and the Reserve Fund based on the Currency Board principle.
- Decentral Bank is the DAO developing and supporting NEAR-native stablecoins, the first of which is $USN. Decentral Bank DAO manages the smart contracts of $USN and its Reserve Fund. One of the functions behind the DAO is the governance over the $NEAR part of the Reserve Fund. The DAO can vote to stake the $NEAR from the Reserve Fund and distribute the staking rewards to the users of protocols that integrate $USN.
How does $USN maintain its peg?
$USN’s peg to the US Dollar is secured through on-chain arbitrage and the Reserve Fund, a portion of which is deposited as liquidity in the StableSwap pools
- On-chain arbitrage: $USN maintains its peg through a smart contract which allows for the exchange of $NEAR<>$USN with 0 slippage and minimal commissions. As soon as $USN loses its peg, arbitrageurs will exploit the price difference until $USN returns to its peg.
- Reserve Fund: $USN is initially double-collateralized by $NEAR and $USDT via the $USN Reserve Fund. The first 1 billion USN in circulation will be backed 1:1 in USDT and the $1 billion worth of NEAR that is staked into the USN Decentral Bank Protocol, ensuring safe over-collateralization for the USN even in the event of NEAR price fluctuates strongly.
- StableSwap on Ref Finance. At launch, Decentral Bank will seed the $USN< >$USDT pool on Ref Finance’s StableSwap. This offers additional stabilization of $USN in the open market. In the future, $USN can be supported by a tri- or quadri-pool of stablecoins.
How does $USN compare to other stablecoins?
$USN combines some of the best approaches to stablecoins as a semi-algorithmic stablecoin with an on-chain arbitrage mechanism backed by $NEAR, as well as $USDT at launch. Through an on-chain arbitrage model, $USN taps the growth potential of $UST, have self balancing reserve. Furthermore, while the $USN Reserve Fund is initially double-collateralized by $NEAR and $USDT, there is no overcollateralization on the part of the user; 1 $USN will always be minted for $1 worth of $NEAR.
What makes $USN interesting?
- Cheap and fast: cross-border transactions leveraging NEAR Protocol’s infrastructure
- Ease of access: directly mint $USN through the Web wallets using $NEAR
- On-chain arbitrage: opportunities: when $USN de-pegs from the dollar, profit from the price discrepancy through on-chain arbitrage and contribute to its re-pegging
- Yield opportunities: through third party DeFi protocols: The Decentral Bank DAO can potentially stake the $NEAR from the Reserve Fund and distribute the staking rewards to the users of the protocols that integrate $USN
So unlike UST: You need to burn LUNA to mint UST, and burning UST will create Luna. USN is minted in a “swap” process with NEAR. NEAR is used to mint USN, which is then staked on the NEAR blockchain to generate a staking reward, which will be distributed to USN holders. Importantly, USN minting does not change the supply of NEAR, so the underlying economic security of NEAR is improved by distributed staking from the Decentral Bank Reserve.
Above is information about Stable Coin and the fail of Luna and UST. As well as there is a brief comparison of stable coin between LUNA, TRX and NEAR. Coincu hopes the above information will be useful to you in your research and investment decisions.
Find more information about these projects:
TerraUSD (UST): https://www.terra.money/
USN COIN : https://near.org/
If you have any questions, comments, suggestions, or ideas about the project, please email [email protected].
DISCLAIMER: The Information on this website is provided as general market commentary, and does not constitute investment advice. We encourage you to do your own research before investing.