A Comprehensive Comparison of Mainstream Stablecoins: Understanding Stablecoins in One Article

Comparison of Mainstream Stablecoins: Understanding Them All in One Article

Since LUNA’s flash crash, the Silicon Valley Bank’s failure causing the world’s second largest cryptocurrency stablecoin USDC to decouple, and a series of other Black Swan events, the market seems to have reached a threshold of distrust for the stablecoin concept.

Whether it is centralized stablecoins, algorithmic stablecoins, or partially decentralized stablecoins, they are all to some extent regarded as fierce beasts: tokens that are known for their stability are no longer stable, so what can we trust?

In fact, stablecoins are just one way that cryptocurrencies can be expressed. Their value is often maintained within a roughly controllable exchange range with the anchored currency (such as the US dollar) through anchoring to a real-world currency or algorithmic regulation. But this does not mean that stablecoins themselves can avoid volatility. When faced with huge Black Swan events, stablecoins will also decouple from the pegged currency, meaning that they will deviate from their pegged value.

The key issue is not whether stablecoins will fluctuate, but whether stablecoins themselves have a scientific and reasonable self-correction mechanism that can repair risks in the face of unknowable risks and maintain reasonable value.

Therefore, the veDAO Research Institute has compiled several common stablecoins on the market, analyzed stablecoins, and interpreted the mechanisms and response methods of different stablecoins when facing risks.

Centralized Stablecoins

Currently, the stablecoin race is mainly divided into three categories: centralized stablecoins, algorithmic stablecoins, and decentralized stablecoins. So far, centralized stablecoins are still the mainstream of the market and can even be called the cornerstone of the crypto world to some extent.

USDC, USDT, and BUSD are currently the three largest centralized stablecoins. They are all issued by off-chain entities and claim to be backed 1:1 by fiat collateral (i.e., “real” dollars).

As of now, USDT, USDC, and BUSD account for more than 80% of the entire stablecoin market. According to Dune data, USDT is still the undisputed leader, with a market share of 46.2%; USDC closely follows at 36.7%; and BUSD is at 9%. Although centralized stablecoins have a huge market share and the best scalability in the industry (almost all projects have built-in USDT or USDC trading pairs), this stablecoin design is opaque and completely centralized, and it cannot be audited on the chain. This also means that we cannot know whether the number of centralized stablecoins issued and the number of collateralized assets match, and all we can do is trust that centralized stablecoins really follow their promises.

For example, USDT, although Tether has always claimed that USDT is supported by equivalent assets (including cash and bonds) held, it has never provided appropriate audits and only “proves” its ability to fulfill obligations.

However, the audit in June 2022 showed that the proportion of cash collateral for USDT is not high.

Overall, there are differences in the liquidity of collateral for centralized stablecoins, and there is a certain risk that the collateral for USDT can be redeemed in a short time if an extreme event triggers a run. Also, due to the user group’s distrust of excessive centralization, a new demand has emerged in the market: algorithmic stablecoins.

Algorithmic Stablecoins

Algorithmic stablecoins represented by UST and OHM maintain stability by floating minting and burning mechanisms and have no external collateral support. For example, when the trading price of UST is higher than its anchor exchange rate (i.e., $1), market participants have an incentive to expand the supply and reduce the price by minting new UST, and vice versa.

The fatal weakness of algorithmic stablecoins is the downward spiral. For AMPL, when the coin price enters the downward range, holders expect the number of coins to decrease and may choose to sell AMPL, causing the AMPL price to further decline until it reaches a very low level. For UST, we have witnessed the historical moment of the death spiral. As for FRAX, a partially algorithmic stablecoin supported by some USDC, whether it can avoid the death cycle during sharp declines still needs to be verified over time.

The core issue with algorithmic stablecoins is that they have no value collateral, so they are more like speculative products and are difficult to fulfill the role of stablecoins in applications such as trading and DeFi.

Finally, there are decentralized stablecoins, which are gradually gaining market favor.

Decentralized Stablecoins

Decentralized stablecoins, represented by DAI, are decentralized and pegged to the US dollar. DAI is issued by Maker DAO. DAI is based on the excess collateral mechanism, and users can deposit different forms of collateral (such as ETH) into the vault to mint DAI stablecoins. Users must maintain their collateral position as excess collateral, as when the collateral falls below a set collateralization ratio (which varies depending on the collateral asset), the collateral can be liquidated.

Compared to centralized stablecoins, decentralized stablecoins have several advantages:

  • Anyone has the opportunity to participate in the minting of decentralized stablecoins.

  • The collateral status is on the blockchain, publicly transparent, tamper-proof, and non-transferable.

  • The possibility of human manipulation is low, and the blockchain protocol is the main executor.

  • Using DAO (decentralized autonomous organization) is more in line with the interests of holders.

  • Decentralized stablecoins issued based on blockchain protocols face lower regulatory risks.

At the same time, decentralized stablecoins also have some shortcomings:

  • Mostly adopt over-collateralization, which reduces the efficiency of capital use.

  • Having a liquidation mechanism somewhat increases the barrier to entry for participants.

  • It is impossible to completely separate from centralized stablecoins. Centralized stablecoins are an important component of collateral in decentralized stablecoins. When Silicon Valley Bank collapsed in March 2023, USDC was unanchored, and DAI continued to be unanchored for several days as a result.

Decentralized and Distributed, the New Player in Stablecoins: HOPE

In response to the existing problems with decentralized stablecoins, HOPE, as a newcomer, has made some improvements. In the official definition, HOPE is a “pricing token supported by BTC and ETH reserves that evolves into a distributed stablecoin through a multi-stage growth plan.”

The specific operating logic will be divided into three stages:

  • Phase I: In the early stages of development, HOPE will be supported by BTC and ETH, and token minting and burning will be carried out. For each HOPE generated, a certain amount of BTC and ETH reserves must be correspondingly reserved. During this process, HOPE will also obtain the opening price, highest & lowest price, and closing price of BTC and ETH every minute from Binance, OKEx, and Coinbase, and use the mean value calculation to determine the actual price of HOPE.

Currently, due to the existence of a hard cap in HOPE prices, and the unlimited imagination of the amount of BTCÐ collateral and collateral market value, the value overflow of the HOPE ecosystem based on collateral market value will be carried by LT, and the source of LT itself comes from users’ HOPE token holdings and pledge behavior based on their optimism towards the market and the HOPE ecosystem.

In other words, if users want to get more income from LT, they need to hold more HOPE and actively participate in the governance of the ecosystem (veLT exercise can also get LT rewards), which in turn promotes the operation of the entire HOPE ecosystem’s positive flywheel.

In addition, HOPE has launched four main protocols, providing a complete and rich set of application scenarios including exchange, lending, and margin around HOPE and stHOPE, and incentivizing users to participate in ecosystem applications and community governance through $LT.

  • HopeSwap: It is an AMM Swap built on Ethereum and is a portal for users to enter the HOPE ecosystem. Users can quickly trade between $HOPE, $stHOPE, $LT, and other assets, or provide liquidity for trading pairs to obtain $LT rewards and fee sharing.

  • HopeLend: It is a non-custodial lending protocol with multiple liquidity pools. The lender can earn interest by depositing liquidity, while the borrower can provide collateral assets to obtain excess collateral loans.

  • HopeConnect: Users can trade derivatives on CEX through HopeConnect without centralized asset custody.

  • HopeEcho: Synthetic assets that track the prices of real-world assets (RWA), including stock indices, fixed income instruments, commodities, and foreign exchange, reducing the threshold for obtaining TradFi services.

Currently, HOPE’s appearance has drawn on some mechanisms of other products in the industry, and based on this, has its own innovations, mainly providing a practical solution to the problem that users must over-collateralize and have low capital utilization efficiency. Summary:

In fact, while classic stablecoins have been questioned one after another, a new batch of stablecoin projects have emerged in the industry, such as HOPE, which advocates decentralized price distribution and distributed collateral, ANGLE, which chooses to anchor the euro and deeply imitate Curve, and Reflexer, which is favored by V God and sets a dynamic redemption rate. However, the latter two have not escaped the inherent logic of individual over-collateralization of users. In this regard, HOPE has done relatively better.

However, at the same time, we should also note that as a newcomer among stablecoins, HOPE is impressive, but also raises some questions for consideration. For example, HOPE proposes an overall excess mortgage and a distributed storage method for mortgage assets, but may need to provide more clear explanations on how to prove the association between the publicly hosted address and the HOPE ecosystem. In addition, since HOPE itself places the actual mortgage market value of BTC and Ð on the HOPE stablecoin and governance token LT, whether this will cause users to concentrate their attention on LT and overlook the scalability and innovation of HOPE’s stablecoin itself remains to be seen.

Finally, there is a common problem encountered by all decentralized stablecoins: how to obtain more market share and user base? This issue is a long and difficult road for emerging stablecoin projects. However, with the market picking up and BTC returning to the $30,000 mark, we can remain optimistic about the future development of HOPE.