{"id":78909,"date":"2023-05-18T07:00:00","date_gmt":"2023-05-18T04:00:00","guid":{"rendered":"https:\/\/forklog.com\/en\/?p=78909"},"modified":"2025-09-11T08:04:18","modified_gmt":"2025-09-11T05:04:18","slug":"crvusd-gho-and-dai-is-there-a-future-for-decentralized-stablecoins","status":"publish","type":"post","link":"https:\/\/forklog.com\/en\/crvusd-gho-and-dai-is-there-a-future-for-decentralized-stablecoins\/","title":{"rendered":"crvUSD, GHO and DAI: Is there a future for decentralized stablecoins?"},"content":{"rendered":"<p>To spite <a href=\"https:\/\/forklog.com\/en\/news\/bitcoin-maximalists-are-a-dying-breed-says-developer\">Bitcoin maximalists<\/a> <a href=\"https:\/\/forklog.com\/en\/news\/what-are-stablecoins\">stablecoins<\/a> have become an integral part of the crypto industry.<\/p>\n<p>Stablecoins account for a lion&#8217;s share of exchange trading volumes; they play a key role in the rapidly developing decentralized finance. As a store of value in a volatile market, stablecoins serve an important link between fiat and digital currencies.<\/p>\n<p>In recent years there has been a trend toward greater dominance of centralized coins like USDT and USDC, backed by traditional financial assets. Given <a href=\"https:\/\/forklog.com\/en\/news\/the-silicon-valley-bank-case-could-a-dao-have-saved-the-bank-from-collapse\">the state of the U.S. banking system<\/a>, this state of affairs not only undermines trust in the crypto industry but also threatens market development.<\/p>\n<div class=\"wp-block-text-wrappers-keypoints article_keypoints\">\n<ul class=\"wp-block-list\">\n<li>Despite the theoretical advantages of decentralized stablecoins \u2014 transparency of collateral and censorship-resistance \u2014 the market share of centralized instruments <a href=\"https:\/\/www.theblock.co\/data\/decentralized-finance\/stablecoins\/total-stablecoin-supply\">is noticeably higher<\/a>.<\/li>\n<li>Historically, most decentralized &#8220;stablecoins&#8221; have struggled to hold their price at the target level.<\/li>\n<li>The segment is evolving dynamically \u2014 new protocols are replacing the old, offering different mechanisms to sustain price stability. Hopes are raised by projects primed for full launches from major platforms \u2014 Aave and Curve Finance.<\/li>\n<\/ul>\n<\/div>\n<h2 class=\"wp-block-heading\">A Tough Year for Centralised Stablecoins<\/h2>\n<h3 class=\"wp-block-heading\">USDC<\/h3>\n<p>In March 2023, <a href=\"https:\/\/www.coingecko.com\/en\/categories\/stablecoins\">the second-largest stablecoin<\/a> USDC <span class=\"old_tooltip\" data-descr=\"Commodity Futures Trading Commission\">CFTC<\/span>  underlined its peg to the U.S. dollar. It later emerged that its co-emitter Circle held $3.3 billion in reserves at the regulator-shuttered Silicon Valley Bank.<\/p>\n<p>On-chain data vividly illustrate the fall in the stablecoin&#8217;s price. The chart below shows the dynamics of the Curve 3pool on <a href=\"https:\/\/forklog.com\/en\/news\/what-is-curve\">Curve<\/a> against the backdrop of events several months earlier \u2014 when users were selling USDC and DAI for USDT.<\/p>\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"560\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/Curve-3pool-Composition-1024x560.png\" alt=\"Curve-3pool-Composition\" class=\"wp-image-207116\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/Curve-3pool-Composition-1024x560.png 1024w, https:\/\/forklog.com\/wp-content\/uploads\/Curve-3pool-Composition-300x164.png 300w, https:\/\/forklog.com\/wp-content\/uploads\/Curve-3pool-Composition-768x420.png 768w, https:\/\/forklog.com\/wp-content\/uploads\/Curve-3pool-Composition.png 1218w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>Data: Kaiko, <a href=\"https:\/\/www.coindesk.com\/consensus-magazine\/2023\/04\/17\/centralized-stablecoins-are-problematic-is-a-decentralized-alternative-on-the-way\/\">CoinDesk<\/a>.<\/figcaption><\/figure>\n<p>In other words, there was an exit from relatively transparent stablecoins to USDT, the issuer of which at the time did not report reserves and had even been <span data-descr=\"Commodity Futures Trading Commission\" class=\"old_tooltip\">CFTC<\/span> <span class=\"old_tooltip\" data-descr=\"lost a significant share of the market\">lost a significant share of the market<\/span>. <\/p>\n<p>Although USDC later managed to restore parity with the U.S. dollar, the coin <span class=\"old_tooltip\" data-descr=\"lost a significant share of the market\">lost a significant share of the market<\/span>.<\/p>\n<h3 class=\"wp-block-heading\">BUSD<\/h3>\n<p>In February the New York State Department of Financial Services (NYDFS) <span class=\"old_tooltip\" data-descr=\"began an investigation\">began an investigation<\/span> into Paxos, the infrastructure company and issuer of stablecoins. In complying with regulator requirements, Paxos halted the issuance of BUSD tied to Binance.<\/p>\n<p>Shortly after, journalists <span class=\"old_tooltip\" data-descr=\"learned\">learned<\/span> that Circle had filed a complaint with NYDFS, pointing to inadequate backing for BUSD.<\/p>\n<p>Paxos also issues USDP and Pax Gold. The former is backed by U.S. Treasuries and deposits in commercial banks, the latter by physical gold.\u00a0<\/p>\n<p>A month after the NYDFS inquiry began, BUSD\u2019s market capitalisation <span class=\"old_tooltip\" data-descr=\"fell below $10 billion\">fell below $10 billion<\/span>. By writing (12.05.2023) the figure stood at $5.68 billion, in line with mid-April 2021 levels.<\/p>\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/BUSDcap.webp\" alt=\"BUSDcap\" class=\"wp-image-207117\"\/><figcaption>Data: <a href=\"https:\/\/www.coingecko.com\/en\/coins\/binance-usd\">CoinGecko<\/a>.<\/figcaption><\/figure>\n<p>In CoinGecko&#8217;s stablecoin rankings the asset nevertheless sits in third place, behind only USDT and USDC.<\/p>\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"522\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/BUSD_coingecko-1024x522.png\" alt=\"BUSD_coingecko\" class=\"wp-image-207118\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/BUSD_coingecko-1024x522.png 1024w, https:\/\/forklog.com\/wp-content\/uploads\/BUSD_coingecko-300x153.png 300w, https:\/\/forklog.com\/wp-content\/uploads\/BUSD_coingecko-768x391.png 768w, https:\/\/forklog.com\/wp-content\/uploads\/BUSD_coingecko.png 1293w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>Data: <a href=\"https:\/\/www.coingecko.com\/en\/categories\/stablecoins\">CoinGecko<\/a>.<\/figcaption><\/figure>\n<h2 class=\"wp-block-heading\">A Decentralised Alternative<\/h2>\n<p>Decentralised stablecoins are crypto-assets that use blockchain technology to maintain price stability. The latter is usually pegged to a fiat currency such as the U.S. dollar or the euro.<\/p>\n<p>Such protocols rely on mathematical algorithms that adjust the number of coins in circulation in response to market demand.<\/p>\n<p>The assets mentioned \u2014 USDT, USDC and BUSD \u2014 are controlled by a central organisation. Alternatives such as DAI, and in development, Curve&#8217;s crvUSD and Aave&#8217;s GHO, use decentralised mechanisms to govern the supply of coins and uphold the peg. Theoretically, this makes them more resilient and secure, as these instruments do not depend on a single point of control and can be created and used without permission from centralised entities.<\/p>\n<p>Experts at CoinGecko classify decentralised stablecoins into four types:<\/p>\n<ul class=\"wp-block-list\">\n<li>overcollateralised;<\/li>\n<li>algorithmic;<\/li>\n<li>partially collateralised with a native token;<\/li>\n<li>unbacked by the value of assets or &#8220;low-volatility tokens&#8221;.<\/li>\n<\/ul>\n<p>Let us briefly consider each category.<\/p>\n<h3 class=\"wp-block-heading\">Overcollateralised Stablecoins<\/h3>\n<p>To maintain price stability, such coins rely on excessive collateralisation across various crypto assets, for example Ethereum.<\/p>\n<h4 class=\"wp-block-heading\">DAI from MakerDAO<\/h4>\n<p>DAI was the first overcollateralised stablecoin. Unlike centralised projects, it is entirely built on Ethereum smart contracts.<\/p>\n<p>DAI is minted by protocol users themselves. To do this they must lock a certain amount of crypto assets as collateral in a special smart contract known as a Vault.<\/p>\n<p>In return, market participants receive some amount of DAI in a given ratio to the collateral posted. The value of the collateral must be higher than the value of the minted stablecoins.<\/p>\n<p>DAI borrowed can be used like any other crypto asset. The asset is issued at a set interest rate (Stability Fee).<\/p>\n<p><iframe loading=\"lazy\" src=\"https:\/\/player.vimeo.com\/video\/427849477?h=ae74bfc0d9\" width=\"640\" height=\"360\" frameborder=\"0\" allow=\"autoplay; fullscreen; picture-in-picture\" allowfullscreen=\"\"><\/iframe><\/p>\n<p><a href=\"https:\/\/vimeo.com\/427849477\">How to Open a Maker Vault<\/a> from <a href=\"https:\/\/vimeo.com\/user68499451\">MakerDAO<\/a> on <a href=\"https:\/\/vimeo.com\">Vimeo<\/a>.<\/p>\n<p>When a user repays the issued DAI and accrued interest, the collateral is released, and the stablecoins are <span class=\"old_tooltip\" data-descr=\"liquidation penalty\">burned<\/span>. <\/p>\n<p>The Maker protocol is governed by a <span class=\"old_tooltip\" data-descr=\"DAO\">DAO<\/span>. MKR holders can vote on the governance portal for various proposals from the community.<\/p>\n<p>To safeguard the system&#8217;s stability there is a liquidation process \u2014 selling collateral to cover funds in the stablecoin that users mint beyond the value of the locked assets.<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201cDAI coins minted through collateral auctions are used to cover the vault\u2019s outstanding debt, as well as to pay the <span class=\"old_tooltip\" data-descr=\"liquidation penalty\">liquidation penalty<\/span> set by the MKR token holders for that type of collateral in the vault,\u201d the Maker documentation states.<\/p>\n<\/blockquote>\n<p><em>Liquidation price<\/em> is the price at which a Vault is liquidated. Users can lower this parameter by adding more collateral or returning DAI to the Vault.<\/p>\n<p>In the first version of MakerDAO, only ETH could be posted as collateral, and the collateral ratio stood at 150%. That meant $150 of ETH could back $100 of DAI.<\/p>\n<p>In November 2019 the project community decided to move to a multi-collateral system \u2014 allowing market participants to deposit different cryptocurrencies as collateral for DAI loans.<\/p>\n<p>In July 2022 MakerDAO <span class=\"old_tooltip\" data-descr=\"became the first DeFi protocol to accept U.S. Treasuries and corporate bonds as collateral\">became<\/span> the first DeFi protocol to accept U.S. Treasuries and corporate bonds as collateral.<\/p>\n<p>According to <a href=\"https:\/\/daistats.com\/#\/overview\">Dai Stats<\/a>, as of 13.05.2023 more than 33% of DAI collateral is USDC centralized, with Ethereum accounting for only 12.1%.<\/p>\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" loading=\"lazy\" decoding=\"\" width=\"1024\" height=\"380\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/DAIstats-1-1024x380.png\" alt=\"DAIstats-1\" class=\"wp-image-207119\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/DAIstats-1-1024x-380.png 1024w, https:\/\/forklog.com\/wp-content\/uploads\/DAIstats-1-300x111.png 300w, https:\/\/forklog.com\/wp-content\/uploads\/DAIstats-1-768x285.png 768w, https:\/\/forklog.com\/wp-content\/uploads\/DAIstats-1.png 1045w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>Data: <a href=\"https:\/\/defillama.com\/\">Dai Stats<\/a>.<\/figcaption><\/figure>\n<p>By its blocked liquidity metric, MakerDAO ranks <a href=\"https:\/\/defillama.com\/\">second<\/a> among all DeFi projects in DeFi Llama.<\/p>\n<p>Among decentralised stablecoins, DAI stands out for relatively low price volatility.<\/p>\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" decoding=\"\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/DAI-Price-Chart.webp\" alt=\"DAI-Price-Chart\" class=\"wp-image-207120\"\/><figcaption>DAI price dynamics. Data: <a href=\"https:\/\/www.coingecko.com\/en\/coins\/dai\">CoinGecko<\/a>.<\/figcaption><\/figure>\n<p>Against the backdrop of the problems described above, USDC\u2019s peg to the U.S. dollar <span class=\"old_tooltip\" data-descr=\"lost its peg\">slipped<\/span>; evidently, Circle\u2019s dominance in collateral was to blame. Nevertheless, the system soon rebalanced, and DAI returned to parity with the dollar.<\/p>\n<p>Moves taken in a crisis mode to tighten parameters, aimed at limiting USDC\u2019s influence on DAI, may have aided the protocol.<\/p>\n<p>They envisage reducing the maximum number of stablecoins that can be borrowed against a given collateral. The change also caps daily issuance of the stablecoin at $250 million and raises the issuance fee against USDC collateral from 0% to 1%.<\/p>\n<p>MakerDAO believes the measures will help avert a \u201cdangerous dump\u201d of USD Coin into the <span class=\"old_tooltip\" data-descr=\"Peg stability module\">PSM<\/span> and mitigate risks for other DeFi protocols that interact with DAI.<\/p>\n<h4 class=\"wp-block-heading\">LUSD from Liquity<\/h4>\n<p><a href=\"https:\/\/www.liquity.org\/\">Liquity<\/a> is a MakerDAO-like protocol where only ETH can be used as collateral to borrow the stablecoin LUSD.<\/p>\n<p>The project site proclaims that loans are interest-free. It also highlights the platform&#8217;s impressive <span class=\"old_tooltip\" data-descr=\"total value locked\">TVL<\/span> \u2014 more than $700 million.<\/p>\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"820\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/Liquity-1024x820.png\" alt=\"Liquity\" class=\"wp-image-207121\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/Liquity-1024x820.png 1024w, https:\/\/forklog.com\/wp-content\/uploads\/Liquity-300x240.png 300w, https:\/\/forklog.com\/wp-content\/uploads\/Liquity-768x615.png 768w, https:\/\/forklog.com\/wp-content\/uploads\/Liquity.png 1136w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>Data: <a href=\"https:\/\/www.liquity.org\/\">Liquity<\/a>.<\/figcaption><\/figure>\n<p>The loan-to-value ratio for borrowers stands at 110%. That means with $100 of collateral you can generate up to 90 LUSD. Such capital efficiency is an undeniable advantage compared with similar services. It opens wide possibilities for executing various DeFi strategies using leverage.<\/p>\n<p><iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/RcnMe7ScnNA\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" allowfullscreen=\"\"><\/iframe><\/p>\n<p>Liquity <a href=\"https:\/\/docs.liquity.org\/\">uses<\/a> a unique stability mechanism for LUSD based on stability pools. The pools serve as a source of liquidity to liquidate debt during Trove liquidations \u2014 the Liquity analogues of Maker&#8217;s Vaults.<\/p>\n<p>The algorithm envisions regular LUSD liquidations, during which users are rewarded with ETH and the LQTY governance token pro rata.<\/p>\n<p>If the collateral value falls below the collateral ratio, a stabilization mechanism is triggered. The system automatically liquidates a portion of the user\u2019s locked funds to repay the debt in LUSD.<\/p>\n<p>Collateral is sold at a discount at auctions to those able to repay the loan. This approach helps LUSD stay over-collateralised, and the protocol remains solvent and liquid.<\/p>\n<p>Holders of LQTY can lock tokens in staking to receive a share of protocol fees in Ethereum and LUSD (as of 13.05.2023 <a href=\"https:\/\/dune.com\/dani\/Liquity\">the rate is 4.91%<\/a>).<\/p>\n<p>Liquity&#8217;s TVL mirrors that of major lending project Venus on BNB Chain.<\/p>\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" loading=\"lazy\" decoding=\"\" width=\"1024\" height=\"383\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/Liquity-DeFi-Llama-1024x383.png\" alt=\"Liquity-DeFi-Llama\" class=\"wp-image-207122\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/Liquity-DeFi-Llama-1024x383.png 1024w, https:\/\/forklog.com\/wp-content\/uploads\/Liquity-DeFi-Llama-300x112.png 300w, https:\/\/forklog.com\/wp-content\/uploads\/Liquity-DeFi-Llama-768x287.png 768w, https:\/\/forklog.com\/wp-content\/uploads\/Liquity-DeFi-Llama.png 1619w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>Data: <a href=\"https:\/\/defillama.com\/\">DeFi Llama<\/a>.<\/figcaption><\/figure>\n<p>Shortly after <a href=\"https:\/\/forklog.com\/en\/news\/liquity-defi-protocol-launches-on-ethereum-mainnet\">the protocol launched in 2021<\/a>, the volume of liquidity locked in it surpassed $4.5 billion. But amid a broader market correction the figure fell sharply. Since early 2023 TVL has been gradually recovering.<\/p>\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" loading=\"lazy\" decoding=\"\" width=\"1024\" height=\"299\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/Liquity-TVL-dynamics-1024x299.png\" alt=\"Liquity-TVL-dynamics\" class=\"wp-image-207123\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/Liquity-TVL-dynamics-1024x299.png 1024w, https:\/\/forklog.com\/wp-content\/uploads\/Liquity-TVL-dynamics-300x88.png 300w, https:\/\/forklog.com\/wp-content\/uploads\/Liquity-TVL-dynamics-768x224.png 768w, https:\/\/forklog.com\/wp-content\/uploads\/Liquity-TVL-dynamics.png 1620w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>Data: <a href=\"https:\/\/defillama.com\/protocol\/liquity\">DeFi Llama<\/a>.<\/figcaption><\/figure>\n<p>Utility token LQTY is traded on the world&#8217;s largest exchange, Binance, and <a href=\"https:\/\/www.coingecko.com\/en\/coins\/liquity\">ranks 252nd by market cap<\/a> in CoinGecko&#8217;s tally, with a value of $108.7 million (as of 13.05.2023).<\/p>\n<p>The chart below shows that LUSD does not exhibit high stability \u2014 by comparison with DAI. Yet the token&#8217;s price has hardly ever deviated by more than 10% from parity with the U.S. dollar.<\/p>\n<figure class=\"wp-block-image size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/LUSD-Price-Chart-1024x616.png\" alt=\"LUSD-Price-Chart\" class=\"wp-image-207124\" width=\"840\" height=\"505\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/LUSD-Price-Chart-1024x616.png 1024w, https:\/\/forklog.com\/wp-content\/uploads\/LUSD-Price-Chart-300x180.png 300w, https:\/\/forklog.com\/wp-content\/uploads\/LUSD-Price-Chart-768x462.png 768w, https:\/\/forklog.com\/wp-content\/uploads\/LUSD-Price-Chart.png 1269w\" sizes=\"auto, (max-width: 840px) 100vw, 840px\" \/><figcaption>Data: <a href=\"https:\/\/www.coingecko.com\/en\/coins\/liquity-usd\">CoinGecko<\/a>.<\/figcaption><\/figure>\n<h4 class=\"wp-block-heading\">GHO from Aave<\/h4>\n<p>Aave \u2014 a decentralised lending protocol. It enables earning interest on deposited funds and borrowing crypto assets. The project sits in third place on the DeFi Llama TVL ranking with a figure of $5.1 billion (as of 13.05.2023).<\/p>\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"536\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/Aave-TVL-1024x536.png\" alt=\"Aave-TVL\" class=\"wp-image-207125\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/Aave-TVL-1024x536.png 1024w, https:\/\/forklog.com\/wp-content\/uploads\/Aave-TVL-300x157.png 300w, https:\/\/forklog.com\/wp-content\/uploads\/Aave-TVL-768x402.png 768w, https:\/\/forklog.com\/wp-content\/uploads\/Aave-TVL-1536x804.png 1536w, https:\/\/forklog.com\/wp-content\/uploads\/Aave-TVL.png 1600w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>Data: <a href=\"https:\/\/defillama.com\/\">DeFi Llama<\/a>.<\/figcaption><\/figure>\n<p>In July 2022 the developers <span class=\"old_tooltip\" data-descr=\"proposed a decentralized governance path\">proposed<\/span> to launch a native multi-collateral stablecoin for the ecosystem, <a href=\"https:\/\/github.com\/aave\/gho-core\">GHO<\/a>, pegged to the dollar.<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201cAs a decentralised stablecoin on the Ethereum network, GHO will be minted by users. As with all borrowings in the Aave protocol, collateral (in a defined ratio) must be provided to be able to issue GHO,\u201d the team explained.<\/p>\n<\/blockquote>\n<p>As collateral, a diversified set of crypto assets is supported by the protocol. Users will continue to earn interest on the collateralized tokens.<\/p>\n<p>All decisions concerning the stablecoin, including rates, collateral level and more, will be made by the DAO, the team noted.<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201cThe introduction of GHO will make borrowing in stablecoins on the Aave protocol more competitive, provide more opportunities for users, and give additional income to the Aave DAO, directing all interest payments from GHO loans to the DAO treasury,\u201d the developers added.<\/p>\n<\/blockquote>\n<p>They also proposed offering a discount on issuing the stablecoin to AAVE stakers, arguing that this would spur stkAAVE growth and bolster protocol security.<\/p>\n<p>It is envisaged that community-approved facilitators will control the issuance and burning of GHO, within an emission cap.<\/p>\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"512\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/Aave-Governance-1024x512.png\" alt=\"Aave-Governance\" class=\"wp-image-207126\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/Aave-Governance-1024x512.png 1024w, https:\/\/forklog.com\/wp-content\/uploads\/Aave-Governance-300x150.png 300w, https:\/\/forklog.com\/wp-content\/uploads\/Aave-Governance-768x384.png 768w, https:\/\/forklog.com\/wp-content\/uploads\/Aave-Governance-1536x768.png 1536w, https:\/\/forklog.com\/wp-content\/uploads\/Aave-Governance.png 1600w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>Data: <a href=\"https:\/\/governance.aave.com\/t\/introducing-gho\/8730\">Aave Governance<\/a>.<\/figcaption><\/figure>\n<p>In February the Aave Companies <span class=\"old_tooltip\" data-descr=\"launched\">launched<\/span> GHO on the Goerli Ethereum testnet.<\/p>\n<p>The mechanism of GHO mirrors that of other decentralised products. To issue GHO, a user must post collateral. When the debt position is repaid (or liquidated), the stablecoin is returned to the Aave pool and burned. However, accrued interest flows straight to the DAO treasury.<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201cWith current market conditions, the adoption of decentralised stablecoins remains constrained, and the segment nevertheless holds growth potential,\u201d the developers noted.<\/p>\n<\/blockquote>\n<h4 class=\"wp-block-heading\">crvUSD from Curve<\/h4>\n<p>At the end of 2022, the team behind the popular non-custodial AMM-exchange Curve published a white paper for the decentralised stablecoin crvUSD. News of the project had appeared several months earlier.<\/p>\n<p>In May of the following year the developers <span class=\"old_tooltip\" data-descr=\"deployed\">deployed<\/span> on the Sepolia test network the smart contracts for the new stablecoin, which also features an overcollateralisation model like DAI.<\/p>\n<p>Soon followed a mainnet launch on Ethereum. Not all went smoothly \u2014 the developers <span class=\"old_tooltip\" data-descr=\"redeployed\">redeployed<\/span> the contracts after \u201csome expert review.\u201d<\/p>\n<p>The discovered bug prevented Curve (veCRV) holders from earning rewards from liquidity pools containing the stablecoin.<\/p>\n<p>crvUSD is built on an LLAMMA algorithm \u2014 Lending-Liquidating AMM \u2014 which continuously liquidates and automatically deposits collateral to manage risk and uphold parity with the dollar.<\/p>\n<p>Curve Finance specialises in trading between stablecoins and other tokens of equal value with minimal slippage and fees.<\/p>\n<p>The protocol <a href=\"https:\/\/defillama.com\/\">occupies fourth place<\/a> by TVL in the DeFi Llama ranking, with about $4.19 billion (as of 14.05.2023). The platform, however, leads among <span class=\"old_tooltip\" data-descr=\"DEX\">DEX<\/span>.<\/p>\n<h3 class=\"wp-block-heading\">Algorithmic Stablecoins<\/h3>\n<p>Such protocols are programmed to respond to shifts in supply-and-demand to maintain the pegged price and stability of the coins.<\/p>\n<p>Most of these products operate in two-token systems: the stablecoin itself and a volatile crypto asset that helps sustain parity with the target asset.<\/p>\n<p>Examples of popular algorithmic stablecoins:<\/p>\n<ul class=\"wp-block-list\">\n<li><a href=\"https:\/\/www.coingecko.com\/en\/coins\/usdd\">USDD<\/a> from Tron;<\/li>\n<li>the collapsed <span class=\"old_tooltip\" data-descr=\"Terra's collapse\">UST from Terra<\/span> which was later renamed to TerraClassicUSD (<a href=\"https:\/\/www.coingecko.com\/en\/coins\/terraclassicusd\">USTC<\/a>).<\/li>\n<\/ul>\n<p>The issuance of such stablecoins involves burning the corresponding value of the volatile assets backing them. For example, when issuing 10 USDD the system burns $10 worth of TRON (<a href=\"https:\/\/www.coingecko.com\/en\/coins\/tron\">TRX<\/a>).<\/p>\n<p>Price fluctuations attract arbitrageurs. When a stablecoin trades below its peg, many market participants may want to buy the stablecoin at a discount and then redeem it for the volatile asset, such as TRX or LUNC (formerly LUNA), at around $1.<\/p>\n<p>For example, if USDD trades at $0.95, a trader could buy it at that price and then burn the &#8220;stablecoins&#8221; in exchange for TRX, earning about $0.05 per coin. Another example: a stablecoin at $1.01 enables users to swap $1 of TRX for 1 USDD and earn about $0.01 per coin.<\/p>\n<p>Unlike UST (USTC), which never fully regained trust, USDD has remained near its peg at around $1, though it has experienced some deep drops, notably amid the USDC turmoil in March.<\/p>\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/USDD-Price-Chart.webp\" alt=\"USDD-Price-Chart\" class=\"wp-image-207128\"\/><figcaption>Data: <a href=\"https:\/\/www.coingecko.com\/en\/coins\/usdd\">CoinGecko<\/a>.<\/figcaption><\/figure>\n<p>The Terra debacle underscored a key lesson for algorithmic stablecoins: trust is central. When trust erodes, stability mechanisms fail and reviving the system through multi-million-reserve burning is not guaranteed.<\/p>\n<h3 class=\"wp-block-heading\">Partially Collateralised Stablecoins<\/h3>\n<p>One example of such protocols is Frax Finance. Partially collateralised stablecoins rely on a mix of algorithms and partial reserve backing.<\/p>\n<p>The stablecoin FRAX is backed by two types of collateral:<\/p>\n<ul class=\"wp-block-list\">\n<li>a centralised stablecoin USDC;<\/li>\n<li>the project\u2019s native token \u2014 Frax Share (FXS).<\/li>\n<\/ul>\n<p>Collateral parameters are governed by the Proportional Integral Derivative (PID) mechanism and depend on the ratio of FXS liquidity to the total FRAX supply.<\/p>\n<p>When FRAX trades above $1, the PID lowers collateral; when the price is below $1, it raises it.<\/p>\n<p>Arbitrageurs can buy or mint FRAX, preserving its peg at $1.<\/p>\n<p>For FRAX issuance a user provides collateral in USDC and FXS. The collateral ratio determines the mix of these two tokens used in its creation. A higher ratio means more FXS is locked up during the issuance process. <span class=\"old_tooltip\" data-descr=\"veFXS\">veFXS<\/span> is used to allocate a portion of the protocol&#8217;s revenue to FXS stakers.<\/p>\n<p>There is also Frax&#8217;s other asset \u2014 <a href=\"https:\/\/docs.frax.finance\/frax-price-index\/overview-cpi-peg-and-mechanics\">FPI<\/a>, indexed to the US consumer price index and governed by a separate DAO with its own token \u2014 Frax Price Index Share (FPIS).<\/p>\n<p>In February Frax Finance community <span class=\"old_tooltip\" data-descr=\"decided\">decided<\/span> to gradually move FRAX from algorithmic backings toward full reserve backing. A corresponding <a href=\"https:\/\/gov.frax.finance\/t\/fip-188-increase-cr-to-100\/2147\">proposal<\/a> was approved by 42 million FXS (98.08%).<\/p>\n<p>The move away from a hybrid model would entail:<\/p>\n<ul class=\"wp-block-list\">\n<li>the abandonment of FXS issuance and the decollateralise function; <\/li>\n<li>a pause in FXS buybacks; <\/li>\n<li>using protocol revenue to raise the collateral ratio (CR).<\/li>\n<\/ul>\n<p>The community also approved purchases of Frax Ether (frxETH) up to $3 million monthly to bolster reserve sufficiency. The asset is tied to ETH liquidity in the ecosystem.<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201cCosts arising from incomplete backing currently far outweigh the benefits, as this could undermine the perceived safety of FRAX. A gradual move to 100% CR is the best path for the protocol&#8217;s long-term functioning and growth,\u201d the proposal states.<\/p>\n<\/blockquote>\n<p>In fact, the idea of moving to full backing may have arisen in light of the NYDFS&#8217;s earlier complaints about BUSD&#8217;s issuer.<\/p>\n<p>As of 14.05.2023 Frax&#8217;s market capitalisation stood at around $1 billion. The chart below shows the stablecoin&#8217;s price rarely deviated by more than $0.02 from the $1 peg, indicating the effectiveness of the project&#8217;s partial reserve model.<\/p>\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/FRAX-Price-Chart.webp\" alt=\"FRAX-Price-Chart\" class=\"wp-image-207130\"\/><figcaption>Data: <a href=\"https:\/\/www.coingecko.com\/en\/coins\/frax\">CoinGecko<\/a>.<\/figcaption><\/figure>\n<h3 class=\"wp-block-heading\">Low-Volatility Tokens<\/h3>\n<p><a href=\"https:\/\/www.coingecko.com\/en\/coins\/rai\">RAI<\/a> from Reflexer Labs is an overcollateralised Ethereum-backed experimental \u201cstablecoin\u201d not pegged to any token or fiat. To mint it, you lock a quantity of ETH and pay a 2% fee.<\/p>\n<p>The currency does not rely on Vaults or a fixed peg. The exchange rate of the token is entirely determined by supply and demand. The two sides are the users of SAFE (who mint the coins from their ETH) and the token holders who use RAI in other protocols and applications.<\/p>\n<p>Depending on market conditions, the two sides gain incentives to mint or repay RAI. That approach stabilises the system.<\/p>\n<p>Because of its design, the market price of RAI is volatile. The asset&#8217;s all-time high reached <a href=\"https:\/\/www.coingecko.com\/en\/coins\/rai\">$4.19<\/a>, with a low around $2.47. Yet the token has shown far less volatility than ETH, used as collateral.<\/p>\n<p>Ethereum co-founder Vitalik Buterin <span class=\"old_tooltip\" data-descr=\"earned\">managed to earn<\/span> money on RAI price changes. He held a short position on the &#8220;low-volatility token&#8221; for seven months, then closed it, earning $92,000 in profit.<\/p>\n<p>Buterin began trading in May 2022. He borrowed 400,000 RAI, then sold them for DAI worth $1.2 million, creating a kind of short position on RAI. <\/p>\n<p>The co-founder closed the short on 22 January 2023, selling DAI and ETH for $1.13 million against RAI. On-chain researcher kyoronut notes that the open was at 3.053 RAI\/DAI and the close at 2.786 DAI\/RAI (-8.7%). The expert added that since mid\u2011May the price of the \u201clow\u2011volatility token\u201d has fallen another 7.6%. And Yet, Buterin sold the token at local price peaks.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">Since the position opening (2022-05-15), RAI\u2019s redemption price decreased by 7.6% (dune: <a href=\"https:\/\/t.co\/wnC6higSYO\">https:\/\/t.co\/wnC6higSYO<\/a> ).<\/p>\n<p>He sold RAI at some spikes of the market price ( <a href=\"https:\/\/t.co\/AvYdywXU51\">https:\/\/t.co\/AvYdywXU51<\/a>) . <a href=\"https:\/\/t.co\/Z0VQ0CAz5H\">pic.twitter.com\/Z0VQ0CAz5H<\/a><\/p>\n<p>\u2014 kyoronut?\ufe0f | \u304d\u3087\u308d\u30ca\u30c3\u30c4 (@kyoronut) <a href=\"https:\/\/twitter.com\/kyoronut\/status\/1616958060974735360?ref_src=twsrc%5Etfw\">January 22, 2023<\/a><\/p><\/blockquote>\n<p> <script async=\"\" src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>Co\u2011founder of Reflexer Labs Amin Solaimani, now leading SpankChain, cited Buterin\u2019s trades in support of the argument that the design of a \u201clow\u2011volatility token\u201d is imperfect.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">ETH-only RAI was a mistake<\/p>\n<p>the ETH staking yield means that borrowing RAI against pure ETH will always have some % opportunity cost<\/p>\n<p>the RAI redemption rate should almost always be negative to reflect this opportunity cost<\/p>\n<p>decentralization is expensive, people don\u2019t want to pay <a href=\"https:\/\/t.co\/rMCs1tCFlN\">pic.twitter.com\/rMCs1tCFlN<\/a><\/p>\n<p>\u2014 Ameen Soleimani (@ameensol) <a href=\"https:\/\/twitter.com\/ameensol\/status\/1617582677833699330?ref_src=twsrc%5Etfw\">January 23, 2023<\/a><\/p><\/blockquote>\n<p> <script async=\"\" src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>Co\u2011founder of Ethereum, Vitalik Buterin\u2019s contribution to RAI\u2019s short was cited by Solaimani as evidence of flaws in the low\u2011volatility design.<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201cRAI, based solely on ETH, was a mistake,\u201d<\/p>\n<\/blockquote>\n<p>The main drawback to the asset is that users do not receive staking rewards on ETH used as collateral. Thus, RAI issuance comes with an opportunity cost, helping explain the token\u2019s downward trajectory. <\/p>\n<p>According to Solaimani, solving the problem may require restarting the protocol with stETH from <span class=\"old_tooltip\" data-descr=\"Lido\">Lido<\/span> as collateral.<\/p>\n<h2 class=\"wp-block-heading\">Conclusions<\/h2>\n<p>Decentralised stablecoins are censorship\u2011resistant and far more transparent than centralised alternatives \u2014 on\u2011chain tools and services allow users to verify the collateral structure themselves, without third\u2011party auditors.<\/p>\n<p>These assets are still at the outset of their development and many projects in the segment have faded. Yet promising new projects are emerging with somewhat different stability mechanisms.<\/p>\n<p>Most algorithmic stablecoins have not demonstrated themselves as reliable stores of value. Terra\u2019s collapse proved this; another example is <span class=\"old_tooltip\" data-descr=\"Neutrino USD\u2019s depeg\">the depegging of Neutrino USD (USDN)<\/span> from the dollar amid WAVES&#8217; price declines.\u00a0<\/p>\n<p>Tron founder Justin Sun was forced to raise USDD\u2019s collateral to 200% to sustain the peg.\u00a0<\/p>\n<p>Regulatory obstacles also hinder the segment \u2014 not surprisingly, the Frax Finance community decided to gradually move FRAX from algorithmic backing toward full reserve backing.<\/p>\n<p>There is considerable hope in stablecoins from giants like Aave and Curve Finance. The launch of new products is not far off, but how these assets will perform on the market remains to be seen.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Stablecoins account for a lion&#8217;s share of exchange trading volumes; they play a key role in the rapidly developing decentralized finance.<\/p>\n","protected":false},"author":1,"featured_media":78910,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"select":"1","news_style_id":"5","cryptorium_level":"","_short_excerpt_text":"","creation_source":"","_metatest_mainpost_news_update":false,"footnotes":""},"categories":[1144],"tags":[1212,1426,1099,807],"class_list":["post-78909","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-longreads","tag-aave","tag-curve-crv","tag-dai","tag-stablecoins"],"aioseo_notices":[],"amp_enabled":true,"views":"41","promo_type":"1","layout_type":"5","short_excerpt":"","is_update":"","_links":{"self":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/78909","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/comments?post=78909"}],"version-history":[{"count":1,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/78909\/revisions"}],"predecessor-version":[{"id":78911,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/78909\/revisions\/78911"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/media\/78910"}],"wp:attachment":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/media?parent=78909"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/categories?post=78909"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/tags?post=78909"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}