Stablecoin Focus
While Captain Verance is by far the smoothest pilot we have in the STSCV fleet, some turbulence and volatility is all but guaranteed on the Path to Crypcadia. However we do have some tools that help us make the ride hopefully a little less bumpy.
Stablecoins were created so we’d have some form of certainty over digital assets. The most common cryptocurrencies like Bitcoin & Ethereum can fluctuate greatly in value when equated in traditional FIAT currency like US dollars or Japanese yen. We may want to cash out of our crypto positions, but keep those funds on the exchanges or transfer between them without being exposed to that market volatility during the process.
Introducing the stablecoin, which is usually pegged to the price of $1 USD. There are other types pegged to the price of gold or other currencies for example, but for the purpose of simplicity we’ll try to discuss mostly USD pegged coins. (but no promises on that!)
With stablecoins we can transfer our crypto on DEXES/CEXES into the equivalent of US dollars, the world reserve currency. So if you owned one Bitcoin and the market price was $60,000 USD, you could exchange that into $60,000 USDT for example(minus any fees). You would not be exposed to the ups/downs of the crypto market volatility, but instead the relatively safe value of the USD, the world reserve currency. This would also make it straightforward to transfer a stable USD amount from wallet to wallet, whereas the value of Bitcoin could change sharply due to volatility.
It’s important to know some background info and uses of stablecoins...
...so read on for some real world backed stabilized CadiaGems.
Tether
The most popular stablecoin is Tether (USDT). It is by far the most used and well known of all stable coins, but not for all the right reasons. There have long been questions about whether Tether is truly backed 1USDT:1USD in their reserves. It’s known that Tether lied about its reserves from 2016-2018. Also it was admitted by Tether that they have vast exposure to commercial paper, and they paid a fine of $18.5M USD to the New York Attorney General’s Office. They are connected to the crypto exchange Bitfinex who have had many issues, and agreed to cease trading with New Yorkers as part of that same settlement.
Yet despite all of the above it has still been the most widely used stablecoin by market cap for quite a length of time. However if more serious issues, such as exposure to Chinese companies like Evergrande were ever to come to light, the negative effect on the greater crypto market could be quite impactful.
There are now alternatives have you heard?
CadiaGem 1. ‘Good news, this isn’t 2019 anymore and you can diversify amongst various stablecoins’
USDC
Another well known stablecoin brought to us by Coinbase and partner Circle is USDC. As of August 2021 they moved all their reserves into cash & treasuries, avoiding riskier investments like those of Tether. This theoretically makes them a safer choice, as if everyone all of a sudden wanted to cash in their USDC for a real US dollar that could be deposited in a bank account they could. Tether might have serious problems in that same bank run scenario.
However if Coinbase or Circle had any issues this could also affect USDC. Being based in the United States they are already subject to further regulation than companies like Tether.
Look for US stablecoin regulation and insurance up to 250K in the future which might help legitimize the crypto industry as a whole.
If this comes to pass, the FDIC(Federal Deposit Insurance Corporation) would provide insurance for funds held in American banks or CEXES up to 250K. This would have an extremely positive effect on the crypto market and likely bring a lot of new people into the space that may have been scared of some risk. It’s also a step away from the SEC and Gary Gensler accepting and regulating stablecoins themselves.
Our pal Gary has referred to them as casino chips on more than one occasion. He also said that they could “undermine the traditional banking systems...if not brought inside the remit of banking.” This all sounds like mainstream acceptance and regulation in the USA is on the way, and is something to watch for closely in 2022. He’s recently been asking exchanges to come “Work with us”.
As governments worldwide increasingly investigate the prospect of CBDC’s, stablecoins remain one of the most utilized cryptocurrencies out there, especially in DeFi.
CadiaGem 2. ‘In some jurisdictions borrowing against your long term HODLs and receiving stable coins in risk managed positions can have tax benefits’
One way we’ve previously discussed to make best use of your assets is through borrowing & lending. DeFi protocols such as Compound and AAVE offer you the ability to take out a loan paid in stablecoins, which you can then use as you wish. For example you could take some of your Bitcoin or Ethereum you were planning to HODL long term anyways and borrow stablecoins in return.
You can then use the borrowed stablecoins for your living costs never having sold the original asset. The stablecoins could also be used in liquidity pools, yield farms or for purchases of other coins. In many jurisdictions if the asset isn’t sold there’s no taxable event that takes place, so for some people it’s a way to live off of their gains. But you must seek professional advice for your own personal situation, because we aren’t tax advisors.
You must also be aware this is a form of leveraged position. I.e. The price of the asset which has been borrowed goes below the agreed level and therefore ability to repay the amount borrowed. Therefore you must practice good risk management to ensure you don’t get liquidated. There’s also the same risk of exploits as when interacting with DeFi or CEXs to consider.
If you’re happy with the various avenues of risk then it’s a way to maximize the use of your assets.
Take a look back at our first DeFi article for more on borrowing/lending and other potential options here: DeFi Conventional Logic - Crypcadia (substack.com)
Stablecoins are also useful for equal value paired liquidity pools to use in protocols such as Curve Finance to minimize risk like impermanent loss as we discussed in our 2nd DeFi article here: DemistiFi Liquidity - Crypcadia (substack.com)
As long as you can repay the borrowed amount of stablecoins, you will get back your original asset which was borrowed against.
Ser, Wen Decentralized Stablecoins?
Glad you asked that!
As you probably know by now we like the decentralized approach to things as we’re BUIDLing on our Path to Crypcadia. Stablecoins are no exception, and there are decentralized options available & being developed now. We mentioned DAI already from MakerDAO in our first DeFi article (link above). DAI gives us an overcollateralized stablecoin by using ETH to back and mint their new DAI.
So we no longer need to trust centralized teams, but instead can use overcollateralized & algorithmic stablecoins!
TerraLUNA (UST)
The quite well known blockchain protocol Terra is, among other things, building a platform based around various stablecoins such as TerraUSD (UST) for USD & TerraKRW (KRT) pegged to the Korean Won. Based out of Korea they offer more than just stablecoins, but an entire DeFi ecosystem with cross-chain bridges and wormholes connecting the biggest blockchains and allowing transfers of various tokens and even NFTs!.
Their aim is to remove all the middlemen and inefficiencies in the legacy TradFi system & pass those benefits onto the community including the end user. They have an online protocol called Anchor that offers up to 20% yield, as well as an integrated blockchain payment system called Chai that is used by 5% of Koreans now. Chai allows customers to use decentralized assets to buy goods with a physical card while earning rewards, and retailers to accept them while also connecting to Korean banks. Where traditional credit card processors might charge 3% fees, Terra is able to facilitate cutting those in half already!
Terra employs an algorithmic/seigniorage approach rather than a fiat backed(USDT/USDC) or crypto collateralized model such as DAI. Algorithmic means that it maintains its value peg through a predefined set of rules and through the use of real world price data delivered from an oracle such as Chainlink.
It uses the TerraLUNA native governance token in a collateralized role to balance the USD peg, as well as taking into account seigniorage factors. Seigniorage is the newly minted currency minus the cost of producing said currency.
Terra then reinvests the seigniorage amount back into the ecosystem to benefit the community in various ways to fund projects and reward users.
If the market price of UST drops below $1, say to $0.97, traders are incentivized with an opportunity to quickly buy UST & trade it for $1 of LUNA which is newly created. This drains the excess quantity of UST supply available bringing the price back to a dollar, and the trader earns a 3 cent profit in the process. Arbitrage traders and bots can take advantage of this all while supporting the stability of the peg in a win-win scenario.
Co founder Do Kwon realized that in order to fulfil Bitcoin’s original vision of being P2P electronic cash the value of the asset would need to be pegged to a fiat currency while being decentralized so it would not be subject to the whims, issues, and regulations of governments or centralized forces. Otherwise, stablecoins may be held hostage to these powers, making him believe that decentralized stablecoins are the most important innovation in crypto. If all that wasn’t enough, he also has one of the best and most appropriate twitter handle names of all time IMHO: @StableKwon
https://twitter.com/stablekwon
Terra - powering the innovation of money
Wormhole Token Bridge (wormholebridge.com)
Frax Protocol (FRAX)
Frax is another stablecoin which is available. It’s open sourced, permissionless, & entirely on-chain. It’s appropriately named as it uses a hybrid “fractional-algorithmic” model that combines the dual approach of being partially backed by collateral and partially stabilized by an algorithm. The collateral includes USDC, along with a mixed variety of defi pools as you can see in the graphics below:
If Frax is trading above one dollar, the protocol will decrease the amount of collateral. If Frax is trading below one dollar the protocol will increase the amount of collateral. These smart contract mechanisms allow it to remain tied to a dollar. Expanding on the fractional-algorithmic concept, part of the “collateralized” portion is in fact managed by algorithmic investment pools called AMOs(Algorithmic Market Operations Controllers) that help recollateralize and decolatteralize the protocol as needed to help FRAX retain equilibrium and keep it’s peg.
This all acts as a form of treasury reserve, which backs and matches the circulating supply of FRAX. You can only mint, redeem, and perform other actions when the price has come far enough off the peg that it allows you to complete these actions.
Frax Cryptocurrency - The first fractional-reserve, algorithmic stablecoin
Magic Internet Money (MIM)
Not to be confused with the book of the same name, about Bitcoin which is sometimes referred to as “magic internet money”. This MIM is a stablecoin pegged to the USD and looking to match and surpass the rates and impact of MakerDAO who they accuse of being too centralized due to their recent acceptance of USDC and its exposure to US government regulations. However we’ll leave their OccupyDeFi movement aside for now, but just point out that they want decentralized options to remain truly decentralized.
The platform where users(AKA Spellcasters) can farm, borrow, stake and swap for MIM is called Abracadabra, and connects with Ethereum, BSC, Fantom, Avalanche and Arbitrum networks. MIM is simply a collateralized decentralized stablecoin.
The big draw here is that you can take your interest bearing tokens(ibTKNs) from other places, mainly Yearn Vault tokens(yvUSDT, yvUSDC, yvWETH, yvYFI) and xSUSHI and borrow MIM stablecoin against these assets. Now you can take your MIM and swap on Curve finance for other stablecoins such as DAI/USDT/USDC. Just make sure you keep an eye on your liquidation points frequently so you don’t get liquidated!
Here’s an example of how you can use(and reuse) your MIM to do some yield farming:
Deposit USDT into yEarn and receive the interest bearing token yvUSDT
Deposit yvUSDT as collateral through the Abracadabra platform
Borrow MIM in return
Swap those MIM back to USDT on Curve
Repeat process from step 1 using USDT increasing your potential yield
N.B. Again to emphasize this is not a risk-free strategy, it’s a form of leverage which should anything happen to the peg of MIM leave you exposed to liquidation.
There is also a governance token called SPELL which is used to vote on platform proposals and can be staked as well. SPELL stakers receive 75% of the interest paid on loans through Abracadabra and rewarded with more SPELL tokens. These high fees make it a much more attractive proposition than DAI/MakerDAO offers, and Abracadabra/MIM have grown quite fast over the past year due to this.
Olympus DAO (OHM)
OHM is the native token of the OlympusDAO protocol, and here’s where we really steer off our Crypcadian path of standard USD pegged stablecoins. So buckle up and buckle in!
OHM does not aim to be a stablecoin per se, although it’s often referred to as one. In fact, it aims to be the new fractional reserve currency. Think of it as a new gold standard.
That being said, OHM is backed(not pegged to) at least 1DAI or 1FRAX in the OHM treasury along with other crypto assets such as ETH & SUSHI. This means that each OHM is backed by at least 1USD stablecoin at all times PLUS a premium based on the other assets in the treasury. So the lowest floor price of each OHM should be equal to at least 1DAI/1FRAX($1USD) but in reality it’s that plus extra when factoring in what’s in the reserves.
OHM protocol and community employs game theory to encourage users to both stake and bond their OHM rather than selling with the popular “3,3 together” meme. You can see this illustrated in the chart below from the OHM whitepaper:
This has also caused OHM to be labeled a pyramid or ponzi scheme, but it’s really up to the community and market to decide that along with its value. Also, when new OHM is minted the protocol will automatically increase the amount of staked OHM that stakers are holding with a “rebase” mechanism so that 1 SOHM is always redeemable for 1 OHM. Rebase means that the circulating supply of a token is adjusted automatically according to market conditions.
The benefit of a protocol like OHM is the high APY and compounding interest rewards offered to stakers, while trying to become a true store of value that is always growing.
Olympus DAO | The Decentralized Reserve Currency
As you can see, there are some great new decentralized stablecoin options and many more out there are being created as you’re reading this, bringing us to our next big takeaway point:
CadiaGem 3. ‘Don’t be short-sighted (or lazy!), see the value in the decentralized options’
If you believe in the original vision of DeFi, see the value in decentralized options. If you truly want decentralized cash & options then don’t solely rely on Tether and support the new alternatives to some degree.
There are different risks in all of these so it’s up to you to quantify which is best for your personal situation. But at Crypcadia we always recommend diversification and this too applies to stablecoins. If there’s an exploit/incident with a protocol or service then you don’t lose everything when you’ve spread your risk!
CadiaGem 4. ‘The 25-Stay Alive Strategy’
At Crypcadia we use our 25-Stay Alive strategy.
We spread our risk equally across 4 categories of stablecoins as follows:
To equate protocol risk then think of the equation as:
Age x Total Value Locked = stress test
Because the longer it’s been deployed and the higher the TVL the more likely the protocol will of already been targeted and tested by hackers. But this isn’t a perfect metric as there is no way to really know how much a protocol has been targeted.
Over time we’ll adjust the categories of 25-Stay Alive according to changes in protocol risk, regulatory developments or age of the protocol.
The proportions don’t have to be exact, but do bear in mind how the different coins or assets may interact with each other. E.g. OHM holds DAI in its treasury, so if you hold a lot of OHM you may want to lower your exposure to DAI, or vice versa.
“Crypto is the new shadow bank. It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system," - Elizabeth Warren
Like most detractors, Ms. Warren holds some valid concerns. However, we also know that inflation is a serious issue affecting everyone these days, and governments and legacy TradFi systems are extremely flawed and biased themselves, not necessarily holding the public’s best interests in mind and favoring corporations and the rich.
Tether should in fact be held accountable if they say that they are fully backed 1:1. Lying or misrepresenting the truth isn’t acceptable of course. But if the government is working on a fractional reserve system itself, I do find it somewhat hypocritical that they would condemn the use of a similar fractional reserve system set up by a crypto company. Especially when you consider that the entire financial system itself is based on a complex web of borrowing, lending, credit, debt and trust itself. You can see a great illustration of our global economy here: All of the World's Money and Markets in One Visualization - 2020 Edition (visualcapitalist.com)
Why is it important to have decentralized options, you might be thinking. Well, if we’re only reliant on the likes of Tether, USDC, BUSD(from Binance), etc., then we are once again at the mercy of what happens with these companies & how they operate and back their USD. They’re also becoming increasingly closer to regulators: Tether: Work With Policymakers On Stablecoin Transparency (forkast.news)
Decentralized options allow us to control the process of how digital assets are created and connected to their real world pegs, and potentially avoid some of the issues that come along with it, such as inflation. Of course if the TradFi economy has issues, or something happens to the USD itself the crypto community will have to deal with the ramifications of that.
However, that might be the day when cryptocurrency truly shows its own value as the new currency or store of value that’s been talked about for years now, and 1BTC=1BTC/1ETH=1ETH or another token(OHM?) becomes the new paradigm standard all others are compared to as a reserve currency/true store of value. A healthy decentralized digital economy needs a stable form of money in order to properly function.
This will take time to sort itself out...but the Prophets are willing to wait and be patient while taking action and learning as much as they can on the Path to Crypcadia.