Stablecoin projects need to take a extra collaborative strategy to develop one another’s liquidity and the ecosystem as a complete, says Sam Kazemian, the founder of Frax Finance.
Speaking to Cointelegraph, Kazemian defined that so long as stablecoin “liquidity is growing proportionally with each other” by way of shared liquidity swimming pools and collateral schemes, there gained’t ever be true competitors between stablecoins.
Kazemian’s FRAX stablecoin is a fractional-algorithmic stablecoin with components of its provide backed by collateral and different components backed algorithmically.
Kazemian defined that development within the stablecoin ecosystem is not a “zero-sum game” as every token is more and more intertwined and reliant on one another’s efficiency.
FRAX makes use of Circle’s USD Coin (USDC) as a portion of its collateral. DAI, a decentralized stablecoin maintained by the Maker Protocol, additionally makes use of USDC as collateral for greater than half of the tokens in circulation. As FRAX and DAI proceed to broaden their market caps, they are going to seemingly need extra USDC collateral.
However, Kazemian identified that if one venture decides to dump one other, it might have destructive results on the ecosystem.
“It’s not a popular thing to say, but if Maker dumped its USDC, it would be bad for Circle because of the yield they’re earning from them.”
USDC is vital
The present prime three stablecoins by marketcap so as from the highest are Tether (USDT), USDC, and Binance USD (BUSD). DAI and FRAX are each decentralized stablecoins that take the fourth and fifth locations among the many prime.
USDC has had the biggest development over the previous yr of all three, with market cap greater than doubling final July to $55 billion, bringing it almost inside arm’s attain of USDT in keeping with CoinGecko.
Kazemian feels that USDC’s proliferation throughout the trade and arguably larger transparency about its reserves ought to make it probably the most invaluable stablecoin for collaboration throughout the ecosystem.
He referred to as USDC a “low-risk and low-innovation project,” and acknowledged that it serves as the bottom layer for additional innovation from different stablecoins. He stated:
“We and DAI are the innovation layer on top of USDC, like the decentralized bank on top of a classical bank.”
Algo stablecoins don’t work
Though the FRAX stablecoin is partially stabilized algorithmically, Kazemian says that pure algorithmic stablecoins ”simply don’t work.”
Algorithmic stablecoins like Terra USD (UST), which collapsed in a dramatic vogue in May, keep their peg by way of sophisticated algorithms that modify provide primarily based on market situations reasonably than conventional collateral.
“In order to have a decentralized on-chain stablecoin it needs to have collateral. Doesn’t need to be overcollateralized like Maker, but it needs exogenous collateral.”
The loss of life spiral in Terra’s ecosystem turned evident when UST, which is now referred to as USTC, misplaced its peg.
The protocol began minting new LUNA tokens to make sure there have been sufficient tokens backing the stablecoin. Rapid minting drove down the value of LUNA, now referred to as LUNC, which sparked an entire retail sell-off of tokens, dooming any hopes of re-peg.
Related: Liquidity protocol makes use of stablecoins to make sure zero impermanent loss
In the weeks main as much as the UST depeg, Terraform Labs founder Do Kwon said that his venture wanted to fractionally again the stablecoin with totally different types of collateral, particularly BTC.
“At the end, even Terra realized that their model wouldn’t work,” Kazemian added, “so they started buying up other tokens.”
By the top of May, Terra had bought almost all of its $3.5 billion value of BTC.
Terra took down different projects in its wake, together with fellow algo stablecoin DEI from Deus Finance, which additionally has did not return to the greenback peg as of the time of writing.
