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Crypto regulation concerns make decentralized stablecoins attractive to DeFi investors

January 7, 2022No Comments

Stablecoins have become a critical part of the cryptocurrency ecosystem in recent years due to their ability to provide cryptocurrency traders with an outlet in times of volatility and their widespread integration with decentralized finance (DeFi). These are necessary for the health of the ecosystem as a whole.

Currently, Tether (USDT) and USD currency (USDC) are the dominant stablecoins in the market, but their centralized nature and the lingering threat of stablecoin regulation have led many in the crypto community to avoid them and seek decentralized alternatives.

Top 9 stablecoins by reported market capitalization. Source: Mesari

Binance USD (BUSD) is the third-largest stablecoin and is controlled by cryptocurrency exchange Binance. DAI, the top-ranked decentralized stablecoin, has 38% of its supply backed by USDC, again raising questions about its "decentralization."

Investors' turn towards decentralized stablecoins can be seen by the growing market capitalizations and the number of DeFi platforms that comprise TerraUSD (UST), FRAX (FRAX), and Magic Internet Money (MIM).

Here's a look at some of the factors supporting the growth of each stablecoin.

Terra USD

TerraUSD (UST) is an interest-bearing algorithmic stablecoin that is part of Terra (MOON) and is designed to maintain its value pegged to the United States dollar.

To generate new USTs, users must interact with Anchor Protocol and burn an equivalent value of the network's native LUNA token or block an equivalent amount of Ether (ETH) As collateral.

The addition of Ether as a form of collateral really helped speed things up for UST because it allowed some of the retained value in Ether to migrate to the Terra ecosystem and this resulted in an increase in the circulating supply of UST.

As a result of UST's growth, the Terra network recently exceeded Binance Smart Chain in terms of total blocked value (TVL) on the protocol, which now stands at $ 17.43 billion, according to data from DefiLlama.

Terra has also been adopted by the Curve stablecoin ecosystem, further assisting its distribution across numerous DeFi protocols. This also gives UST holders another way to earn a return alongside the 19.5% Annual Percentage Yield (APY) offered to users who stake their UST on Anchor Protocol.

FRAX

FRAX (FRAX) is the first fractional algorithmic stablecoin of its kind developed by Frax Protocol. It is partially backed by collateral and the remainder is algorithmically stabilized.

The true story behind the growth of FRAX begins with its adoption by the DeFi community within multiple well-known projects and decentralized autonomous organizations (DAOs) voting to add support for the stablecoin within their ecosystems and treasuries.

FRAX was adopted from the beginning by the OlympusDAO overrun protocol as a form of collateral that could be linked to obtain the platform's native OHM token. It also became the stablecoin of choice within the recently launched TempleDAO protocol.

On December 22, 2021, FRAX was added to Convex Finance (CVX) and immediately became embroiled in ongoing Curve Wars, where a handful of major DeFi protocols are scrambling to accumulate CVX and Curve (CRV) for voting power. over the Curve network. and increase your stablecoin yield.

This week, Curve Wars received a new entrant after Tokemak members voted to add FRAX and Frax Share (FXS) to their Token Reactor, swearing to "take the struggle to a new massive scale."

Magic money from the internet

Magic Internet Money (MIM) is a collateral-backed stablecoin issued by a popular DeFi protocol called Abracadabra.Money. What sets this coin apart is that it is "invoked" when users deposit one of the 16 supported cryptocurrencies in "cauldrons" that support MIM.

There are limitations on the amount that can be borrowed from Abracadabra-backed assets and this is part of the protocol effort to avoid the issues faced by MakerDAO (DAI). Namely, the presence of too many centralized stablecoins and the history of catastrophic liquidations during market volatility.

Some of the popular chips available to promise as collateral to coin MIM include Enveloped Ether (wETH), Ether, Shiba Inu (SHIB), FTX token (FTT) and Fantom (FTM).

MIM has also been integrated into the Curve Finance groups, further highlighting the important role that Curve plays for stablecoins within the DeFi ecosystem and underscoring the incentives to participate in Curve Wars.

MIM's cross-platform, centralized exchange integration, including its long list of collateral options, has increased its circulating supply to $ 1.933 billion, making it the sixth-ranked stablecoin in terms of market capitalization.

While the amount of value held in these decentralized stablecoins is only a fraction of that held in USDT and USDC, they will likely continue to see their market share increase in the coming months as advocates of decentralization choose them over their centralized counterparts.

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