Dear Bankless Nation,
Stablecoins account for more than 10% of crypto’s total market cap and nearly 25% if you exclude ETH and BTC.
Why are they so popular?
- Close to 0 volatility
- Easily bridgeable to TradFi
- Basic building block for more complex financial products
- Familiar method to transfer capital and store value
Stablecoins are a real-world use case with product-market fit.
And there’s a battle brewing between them. An epic battle for market share.
The war for market share
As with many things in DeFi, the story starts with liquidity.
Stablecoins are deeply rooted in every single DeFi protocol, explicitly or implicitly. This means there’s a strong demand for deep stablecoin liquidity - the ability to regularly move millions with no slippage.
Enter Curve.
The Curve 3pool is a vital DeFi building block. It’s a stablecoin liquidity pool made of DAI, USDC, and UDST with over 3 billion in TVL. Even other stablecoins use the 3pool as a common base pair—FRAX-3CRV is one example.
As the largest stablecoin Curve pool, the 3pool enjoys the benefit of large CRV emissions, making it a great place to earn low-risk yield on stablecoins, further increasing liquidity depth and entrenching the 3pool in the DeFi stack.
The 3pool looked unassailable.
That’s why Do Kwon’s announcement of a new 4pool took this sector by surprise.
Designed to compete with the 3pool, the 4pool is comprised of USDT, USDC, UST, and FRAX.
By pooling CVX holdings, an alliance of Terra, Frax Finance, and [REDACTED] Cartel intend to drive CRV emissions to the 4pool and effectively starve the 3pool and drive LPs to deposit into the 4pool if they want to earn returns.
Notably absent in the pool is of course DAI, and for a strategic reason. 👇
A classic wartime strategy—divide and conquer.
The stablecoin market
Last year, we saw a Cambrian explosion in stablecoins, notably experimentation around algorithmic stablecoins.
With more than 7 stablecoins over $1B in market cap competition is stiff. Today, DAI makes up 27.6% of all non-fiat-collateralized stablecoins while UST leads at 52%.
Recently, Terra has been making big moves to protect UST’s peg.
In mid-March, Terra started to execute plans to acquire $10 billion of Bitcoin as a reserve to backstop UST. This week saw another accumulation of $231 million in addition to buying $100 million in AVAX two days prior.
While many are skeptical of the long-term safety and decentralization prospects of UST, this is a savvy wartime move. Backing UST with BTC and AVAX creates alliances between Terra and the Bitcoin and Avalanche communities, incentivizing greater adoption. Market share continues to be UST’s number 1 goal.
Upon seeing UST’s success other chains are entering the fray. This week NEAR protocol announced plans to launch its own NEAR-backed algorithmic stablecoin. We expect to see many follow.
Meanwhile, MakerDAO isn’t resting on its laurels. MakerDAO has consistently pursued a strategy to diversify its collateral reserves into real-world assets and imbue further utility into DAI with the off-chain world.
This week saw Tesla close a $7.8 million financing deal with MakerDAO, with the latter extending a line of credit to fund Tesla’s repair facilities.
Who will win?
It’s too early to tell.
Acquiring market share is one major test of a stablecoin’s prowess. But the harder tests involve resistance to market shocks, centralization, and regulatory capture.
Can we really say any of these new stablecoins have passed these tests?
To hear more listen to our incredible debate on the Bull vs Bear case for UST. 📺
It’s never a dull week in crypto! Here’s next week: 👇
- How to be early with Olaf Carlson-Wee of PolyChain (early access)
- A guide to the hottest opportunities on Arbitrum
- Don’t sleep on these Five DeFi tokens
Take it easy this weekend.
- Bankless Team