Stablecoins are tokens that are pegged to the price of another asset, such as the U.S. dollar. The first stablecoin to be created was Tether USDT, and despite years of rumours, gossip and a shadowy track record that is still not publicly audited, it is still the market-dominating token to this day. The U.S. dollar stablecoin was a very unique product when it was launched, bringing innovation to the entire crypto economy.
Stablecoins make it easier for professional traders, such as day traders, to get serious about investing in the cryptocurrency space because they provide an inexpensive way for investors to switch between cryptocurrencies and U.S. dollars as the market fluctuates. Since stablecoins are cryptocurrencies, they are also easily transferable between wallets and cryptocurrency exchanges, greatly increasing the liquidity of the wider cryptocurrency economy and even making it easier for investors to take advantage of arbitrage opportunities between exchanges.
The huge DeFi boom that began in 2020 would not have taken off with the same momentum without a sizable pool of dollar-pegged stablecoins that allow users to easily transfer funds between decentralized applications, wallets, and now various blockchains. way, especially in the area of borrowing and lending in the decentralized finance economy. Because there is demand for stablecoins, there is usually a high lending rate. Any user can earn interest on the stablecoin by depositing into the lending pool, where the smart contract acts as a traditional bank and savers provide liquidity to borrowers
While stablecoins aim to provide stable tokens, they do still involve varying degrees of risk depending on the mechanism by which the peg is maintained. There are currently three major types of stablecoins: fiat-pegged stablecoins, cryptocurrency-backed stablecoins, and algorithmic stablecoins. Fiat-backed stablecoins are cryptocurrencies that are collateralized 1:1 with fiat currency; crypto-backed stablecoins are backed by a specific cryptocurrency; and algorithmic currencies use complex smart contracts that link the price to another asset. match.
The first two types of stablecoins are the most mature, but the third type, the algorithmic stablecoin, is considered by many to be the “holy grail” of stablecoinism. If a project can launch a reliable, scalable, decentralized, and fully auditable stablecoin that cannot be manipulated or controlled by central authorities, it can quickly become the main stablecoin of the cryptocurrency economy, leapfrogging centralized exchanges, DEXs, DeFi apps, GameFi, and the Metaverse.
So let’s take a quick look at some of the algorithmic stablecoin projects that have made some headway so far.
UST
Terra is a blockchain protocol designed to enable more scalable experiences in the decentralized economy through its interchain and interest-bearing stablecoin UST, powered by its native LUNA token. Since its launch in September 2020, UST has seen rapid mass adoption and is currently the fourth largest stablecoin with a market cap of $10 billion.
As an algorithmic stablecoin, UST uses LUNA as an asset to absorb short-term fluctuations linked to the stablecoin. The peg mechanism is designed to ensure that the cost of minting UST will always be equal to the face value of the minted stablecoin. To mint a UST, you only need to burn LUNA worth $1. When UST falls below or above the $1 mark, LUNA holders can exchange their tokens for equivalent UST, and this creates an arbitrage opportunity, which in turn keeps the price of UST under control.
Stablecoins have played a role in the success of the Anchor Protocol, one of the leading decentralized applications on the Terra blockchain. The app is a savings protocol that offers its users low-volatility yields of around 20%. Anchor is gaining massive traction in the DeFi space. It reached a TVL (Total Value Locked) of more than $750 million just one month after its launch, and the current TVL is 11 billion.
UXD
The UXD protocol is a newer algorithmic stablecoin minted on the Solana blockchain that automatically generates interest. The project is backed by Alameda Research, Defiance Capital, CMS Holdings, Solana Foundation, Mercurial Finance, Solana founders Anatoly Yakovenko and Raj Gokal, and Saber founder Dylan Macalinao.
UXD is taking a very novel approach to creating a price peg mechanism. The peg mechanism is backed by Delta-neutral orders, a hedging strategy derived from portfolio management using multiple orders with a balanced positive and negative Delta, the degree to which an option is created based on the price movement of the underlying asset.
The Delta-neutral order that supports UXD coins is a long bitcoin spot order and a short bitcoin perpetual swap order. As an added bonus, UXD is also an interest-bearing stablecoin because when a user creates a Delta neutral order, you receive a funding rate from the perpetual swap when the price of the perpetual swap is higher than the spot price. UXD coins are still in beta on the Solana blockchain, but our thinking is that this rate of return will eventually go directly to the wallets of UXD holders, which should average out to around 10% APR.
FEI
FEI is also another algorithmic stablecoin to watch. One of the biggest differences is that it does not have a mechanism for exchanging collateral for stablecoins. Instead, crypto assets enter the system by utilizing the Bonding Curve, selling FEI in exchange for ETH. The crypto asset then remains locked in the protocol controlled value, or PCV, which is basically a collateralized pool of stablecoins.
PCV helps maintain the peg by managing liquidity on DEXs like Uniswap. FEI aims to avoid a "death spiral" situation due to restrictions on seller liquidity. The FEI protocol utilizes its TRIBE governance token, enabling holders to participate in voting, such as adding new bonding curves to sell additional FEI, determining how PCV value is distributed, and other governance parameter modifications.
About AAX
About AAX
AAX is an international cryptocurrency exchange with more than two million users worldwide. AAX uses the LSEG technology of the London Stock Exchange to provide users with one-stop cryptocurrency services, including contract trading, 120+ spot trading pairs, P2P cash trading, wealth management products and professional-level API trading, etc.
