Alternatives: Existing Stablecoins

How to achieve scalability, censorship resistance and stability via derivatives

TLDR

Native yield derived from proof-of-stake assets alongside a liquid derivatives market presents the first opportunity to utilize derivative infrastructure at scale to create scalable permissionless money, for a global independent financial settlement layer.

Existential Importance to the Space

Stablecoins are the single most important instrument in crypto. All major trading pairs across spot and futures markets in centralized and decentralized venues are denominated in stablecoin pairs with >90% of orderbook trades and >70% of onchain settlements being stablecoin denominated. Stablecoins settled >$12 trillion onchain in 2023, constitute 2 out of the 5 of the largest assets in the space, >40% of TVL in DeFi, and are by far the most utilized assets across decentralized money markets.

Stablecoins are not only the foundation of the entire industry, but are also arguably the only crypto asset to have (i) found true product-market fit globally with more than 100m users, (ii) the largest addressable market, and (iii) the greatest potential for revenue generation.

Centralized Challenges

Stablecoins dependent on traditional financial infrastructure, such as USDC or USDT, provide stability and capital efficiency, but they introduce:

  • Unhedgeable custodial risk with bond collateral in regulated bank accounts which are prone to censorship.

  • A critical reliance upon the existing banking infrastructure and country-specific evolving regulations.

  • A "return-free" risk for the user as the issuer internalizes yield generated utilizing backing assets whilst exporting the risk of depeg to users.

Decentralized Fragility and Lack of Scale

"Decentralized" stablecoins - those with designs not incorporating or relying on traditional banking or financial infrastructure - have historically experienced a number of issues relating to scalability, mechanism design, and a lack of incentives to users.

  • "Overcollateralized stablecoins" have historically experienced issues scaling as their growth was inexorably tied to the on-chain growth in leverage demand for Ethereum. Lately, some stablecoins have resorted to onboarding Treasuries in an effort to improve scalability, at the cost of censorship resistance.

  • "Algorithmic stablecoins" have faced challenges with their mechanism design which were found to be inherently fragile and unstable. Such designs are unlikely to be sustainably scalable.

  • Prior "delta-neutral synthetic dollars " struggled to scale due to a critical reliance on decentralized trading venues that lack sufficient liquidity and are exposed to smart contract exploits.

The Solution is Now Possible

Question: How does one construct a trust-minimized, scalable, and reasonably stable asset which is both unreliant on the banking system and systemically creates economic protocol-level returns that can be passed to ecosystem participants?

Answer: Through the use of derivatives on backing assets (including liquid staked assets with inherent yield) on deep and liquid centralized venues, USDe aims to directly address the scalability "stablecoin trilemma" that previous decentralized stablecoins designs have encountered, as well as the custodial risk deficiencies of centralized stablecoins.

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