With the recent failure of certain stablecoins, the conversation on what makes a good stablecoin continues. Let’s take a look at the next generation of decentralized Stables.
The recent explosion of activity in the decentralized finance (DeFi) space has brought with it a renewed focus on stablecoins. These digital assets (Stablecoins), which are pegged to the value of a fiat currency such as the US dollar, have become an essential part of the DeFi ecosystem, providing a stable store of value that can be used for transactions, lending, and more.
However, the leading stablecoins in the market today, such as USDT (Tether), BUSD (Binance), and USDC, are all centralized. This means that a central authority controls them, and as such, they are subject to the same risks as any centralized financial system. For example, they can be frozen, governments can regulate them, and users must trust that they are backed up 1:1.
This has led to a renewed push for decentralized stablecoins, which are designed to be free from the control of any central authority. One example of this is the upcoming launch of a new generation of decentralized stablecoins, which are backed by some of the biggest names in the DeFi space. These new stablecoins will feature mechanisms that we haven’t seen before, such as algorithmic stabilization and collateralization, which will help to ensure that their value remains stable.
In the article, we will be talking about two upcoming decentralized stablecoins as examples, GHO, and crvUSD.
Aave’s GHO
GHO is the token of Aave, the biggest lending protocol in DeFi, and it is backed by a system of facilitators and buckets.
Facilitators are entities who can mint and burn GHO tokens, while “Bucket” is the maximum amount of GHO a facilitator can mint. Aave governance will decide who can be a facilitator and their Bucket, and Aave protocol will be the first facilitator. This system will allow GHO to grow using many different strategies, such as over-collateralized lending and lending against real-world assets.
Curve Finance’s crvUSD
crvUSD, on the other hand, is a stablecoin from Curve Finance, the go-to DEX for pegged assets. It uses a unique mechanism called LLAMMA (Lending Liquidating AMM Algorithm) to create a dedicated market between collateral and crvUSD.
Users can deposit collateral to LLAMMA market to mint/borrow crvUSD, and the algorithm will constantly convert between collateral and crvUSD in response to changes in the collateral price. This can be seen as gradual liquidations and liquidations that are automatically done by the algorithm. The benefit of this mechanism is that users won’t have the risk of their entire position getting liquidated, but there is also a cost as LLAMMA rebalancing can result in loss.
Final Thoughts
The stablecoin wars are heating up, and it will be interesting to see how these new decentralized stablecoins perform in the market. With big names behind them and innovative mechanisms in place, they have the potential to shake up the stablecoin market and provide a truly decentralized alternative to the centralized stablecoins that currently dominate the market.