USDC replaces USDT? The battle of stablecoins has begun

As an indispensable part of the digital currency ecosystem, stablecoins have always attracted public attention. After entering 2022, the stablecoin USDC began to attack in full force. It is reported that on January 14, the circulation of USDC on Ethereum exceeded USDT for the first time, becoming the most circulated stablecoin on Ethereum. According to data from OKEx Chain Master, the current total circulation of stablecoins on Ethereum is US$108.6 billion. Among them, the circulation of ERC-20 USDC is US$39.829 billion, and the circulation of ERC-20 USDT is US$39.828 billion.

Looking back at 2021, the stablecoin market grew by nearly 400%, from $29 billion in January to more than $140 billion by the end of December. At the time, many analysts were optimistic about stablecoins in 2022. Jump Capital analyst Peter Johnson once believed that by the end of 2022, the stablecoin market could rise to more than $500 billion.

As the use of stablecoins in DeFi applications increases, a war for stablecoins is still on the way, and all are striving to secure a certain market share in this war and increase the market adoption of their stablecoins. In this article, we will make an in-depth analysis of the current stablecoin market landscape and introduce in detail the market status of those stablecoin players at the forefront of the war.

Source: Medium

Author: Westie

Compiled by: Chen Yiwanfeng

Due to the growth of the stablecoin market and competition for users within the DeFi space, a war has broken out between stablecoins. The "armies" that have formed around each stablecoin have gone all out to ensure that their stablecoin gains market share and adoption over other stablecoins. The goal of each army is simple, which is to increase demand for their stablecoin.

army

Centralized Stablecoins

The first stablecoins on the market were the so-called centralized stablecoins. In order to mint one of these stablecoins, one must provide a dollar to a centralized entity to hold its reserves and receive tokens in return. The most widely used examples of centralized stablecoins include Tether (USDT) and Circle (USDC), which are almost identical in structure and way of fighting, so they can be classified in the same category. The armies fighting for these options are the companies that issue stablecoins or partners of these companies.

DAI

DAI is the first form of decentralized stablecoin, known as a collateralized debt position (CDP) stablecoin. In order to mint one of these stablecoins, someone must post collateral and essentially take out a loan payable in DAI. The DAI army is made up of the MakerDAO core team and those who hold the MKR governance token.

Magic Internet Money (MIM)

MIM is structured similarly to DAI, a CDP stablecoin where users can deposit collateral and receive loans in newly minted MIM. The army of this option is the Abracadabra team and those who hold the SPELL governance token.

TerraUSD (UST)

UST is an algorithmic stablecoin that is not backed by explicit collateral or bank deposits. Instead, it uses a process called seigniorage to maintain its peg to one dollar, where anyone can burn 1 dollar in LUNA to mint 1 UST and vice versa. The army of this option is the Terraform Labs team, any developer on Terra, and anyone holding Terra's native asset, LUNA.

FRAX

FRAX is an algorithmic stablecoin. In order to mint FRAX, users must provide $1.00 worth of value and receive FRAX in return, which can come from a combination of certain selected assets and the FXS governance token. The army of this option is the FRAX core team and those who hold FXS (the governance and part-collateral token of the protocol).

Current stablecoin market capitalization and changes in one year Source: CoinGecko

While Tether has so far received the highest adoption in terms of market capitalization, other options are also rising. Given USDC’s more open communication with the public and US regulators, it is quickly climbing the ranks and becoming the most trusted option on the market. However, this war is mainly being waged by decentralized stablecoins. This is because they do not have to deal with slow-moving corporate structures and have better networks with those building in the DeFi space.

Additionally, many of these stablecoins have a governance token that benefits from the adoption of the stablecoin, so there are many package holders who have an incentive to see others use and adopt their stablecoin over others. For decentralized options, UST has seen parabolic growth in 2021, increasing by more than 5,000%. And newer options MIM and FRAX have shown great potential and quickly achieved billions of dollars in value.

Battlefield 1: Curve

The liquidity war is heating up, and at the center of the action is Curve, an automated market maker (AMM) focused on stablecoins and related asset pairs. Curve currently has over $23 billion in TVL, the largest of all DeFi protocols.

Source: DeFi Llama

Since this is the main place where people trade stablecoins and provide liquidity, Curve has also become the main place where stablecoins compete for access. If your stablecoin has higher liquidity, it means that a larger number of traders are more likely to swap into your options and ultimately increase the supply in the market.

How Curve solves the liquidity maximization problem, and how stablecoin issuers strive to increase liquidity for their tokens, is through the CRV token design and the introduction of Convex.

CRV and veCRV

CRV is the platform's governance token, which is given as a reward to those who provide liquidity. However, in order to actually have voting rights in governance, holders must lock their CRV in the form of veCRV. The longer the CRV is locked, the more veCRV the holder receives and the higher the voting rights they have. In addition, owning veCRV increases the number of rewards the holder receives for providing liquidity.

Therefore, users have a strong incentive to lock their CRV tokens for longer periods of time. Voting is particularly powerful in the context of Curve, as voters ultimately decide how much CRV rewards are allocated to each pool. In theory, if the holder is an LP with a lot of funds, it would be in the best interest to buy and lock up a lot of CRV and vote to increase the rewards in the pool the user plans to use. Due to the powerful effect of locking up CRV, protocols began to offer services on top of this design, including Convex.

Convex

Convex is built on Curve as a way to increase efficiency and reward those who try to provide liquidity. They buy and lock veCRV into the protocol and take advantage of the increased yield on behalf of others.

For liquidity providers, they can get higher yields as in addition to CVX rewards they also have veCRV so they can get higher returns than otherwise.

As a result, Convex began collecting the majority of liquidity on Curve and became the largest holder of veCRV, acquiring 85% of Curve’s TVL and close to owning 50% of all veCRV. This puts them in a position of significant influence due to their large voting power on Curve. While there are many different derivative tokens launched due to Convex, the one worth noting here is vICVX, which represents CVX tokens that have been locked for 16 weeks and 2 days. These tokens are able to utilize Convex’s veCRV governance capabilities to vote on where rewards go.

"bribe"

This is where stablecoins come into play, as they can leverage veCRV voting power to get others to vote in the pool their tokens are in for higher rewards. They are able to do this in the form of a “bribe” where they give their own rewards to veCRV token holders who vote on their behalf. While this initially only worked for those who owned veCRV themselves, as Convex gained more voting power, this evolved into bribing those who locked up CNX into vICVX.

As of now, FRAX has the most CVX, Wonderland (MIM) is growing fast, and Terra (UST) is climbing the rankings after a large purchase on January 1. This allows them to lock their tokens into vICVX and vote for their pool rewards.

Source: Delphi Digital

Due to CVX ownership and various “bribes” we see the desired pool receiving higher rewards for providing FRAX, UST, and MIM than the 3 pools containing USDC and USDT.

Source: Curve.fi

Given FRAX’s ambitious efforts to purchase CVX tokens, this has largely contributed to their recent growth, as 64% ($1.35 billion) of the total supply is in the FRAX Curve pool. Similar efforts have also increased UST’s Ethereum liquidity, especially when paired with MIM, due to Terraform Labs and Abracadabra’s strategic partnership in this regard.

Similar protocols to Curve have been launched on other networks that may take similar actions. This includes Sabre on Solana, Astroport on Terra, and even the mysterious ve(3,3) Andre Cronje project. Where stablecoin liquidity tends to cluster is where we will continue to see this battle play out in the future.

Battlefield 2: Alternative Layer 1

Once again, the goal of any stablecoin operation is to increase usage and liquidity of their token. There is a strong incentive to push your stablecoin as far as possible. This is especially true as the multi-chain future begins to take shape. By having liquidity for your stablecoin on many different chains, you open the way to more users and potential use cases in the future. While most of the battle over Ethereum has taken place in Curve, other chains are beginning to see adoption as well.

Solana is one of the places where the battle is starting to pick up speed. This started in April 2021 when Circle partnered with Solana to offer native USDC to its network. Since no other stablecoins existed on Solana at the time, USDC was quickly adopted by users who needed to use a stablecoin. As of now, $4.7 billion worth of native USDC is available on the network and growing. However, slowly wrapped USDT began to emerge and began to be used as a liquidity pair option in many AMMs and as a lending option on Solend, with a value of $2.2 billion. Recently, support was given to another stablecoin: UST. The Wormhole Bridge allows users to transfer their UST from Terra and will be the first widely used decentralized option on the network. The only applications to incorporate UST are Sabre and Solend, who control a total of $53 million in funds, but many other applications are also expected to merge with UST soon.

The battle of stablecoins has also emerged on EVM chains such as Avalanche and Fantom. USDC is once again leading on Avalanche with $1 billion, but MIM has been fighting hard recently and is not far behind with $817 million. This is due to Abracadabra’s ability to spread MIM across blockchains in many different environments, the spread of memes throughout social media, and the introduction of MIM as support for Wonderland (TIME). This has led to MIM’s usage growing from non-existent in September to today. For Avalanche, Tether and DAI both have a market cap of around $600 million. On Fantom, MIM has also been growing in popularity, growing to $296 million in just a few months, while USDC and DAI are in the top two with $601 million and $318 respectively. While Fantom has not had as much traction as other ecosystems so far, they have begun to grow in popularity and usage in 2022, and we can expect this battle to gain more traction in the coming months.

Below is the current stablecoin adoption by chain, including both native and wrapped versions.

Source: Etherscan, Solana Explorer, AvaScan, FTMScan

While these are where most of the battles are currently being fought, new and emerging blockchains are emerging. USDC and USDT always seem to be the first choice on any blockchain, but UST is doing its best to change that. Terra has a direct bridge to Harmony, and there have been recent governance proposals trying to get UST into Aurora on NEAR and Oasis on Cosmos. Additionally, new Ethereum L2s have begun to emerge, including Arbitrum and Optimism, and ZK solutions are coming soon, so we can expect many EVM-dominated stablecoins to fight for control there. As new blockchains emerge, whether they are Layer 1 or Layer 2, they will definitely become new battlegrounds for stablecoins to compete for first-mover advantage.

Battlefield 3: Fixed Income Products

One of the main use cases for stablecoins is that users are able to earn higher returns than traditional banks. The national average for bank deposits in the United States is currently around 0.06%, with the best deposit rate being around 0.5%.

Given the easy lending capabilities of stablecoins and the high demand for leverage in the trading space, the popularity of fixed income products on stablecoins has skyrocketed. Things can get competitive for stablecoins in this space as they can compete for higher yields, so users are more likely to choose their options over others.

For centralized stablecoins, many of the highest interest rate options exist on centralized exchanges that have TradFi partners willing to borrow at such high rates. Abra is 14% for USDT, YouHodler is 12.3% for USDT, Voyager is 9% for USDC, BlockFi is 9.5% for USDT , all centralized options on Celsius are 8.5%, and many others are emerging. Every platform and every stablecoin wants to get as many users as possible at attractive rates. Given that these rates are offered by centralized parties, we have no public information on how much funds are being used in these cases. It is also questionable whether these gains will be sustainable over time, but we can safely assume that they are high enough to attract users now.

The top fixed-income product for decentralized stablecoins is Anchor Protocol, which offers an annual yield of approximately 19.5%. This high yield is achieved through Anchor’s design, where borrowers can post PoS assets as collateral, with collateral yield directed to depositors in the form of UST. Anchor has since surpassed $10 billion in TVL, with $5 billion in deposits in just 9 months of operation, representing 50% of the total UST supply. This has been a major driver of UST adoption, as they have been able to outperform any other DeFi fixed-rate yield option by a large margin. In terms of competition, DAI has a whopping 12% share on platforms like YouHodler and Nexo, while MIM and FRAX have yet to see any similar adoption. While this play is a bit riskier than centralized exchanges, the yield is very attractive to users due to the risks of smart contracts.

Given Anchor’s high returns, will competing platforms for other decentralized stablecoins begin to form? Will centralized exchanges begin to incorporate Anchor into their backends, allowing more users to flock to UST over centralized options? Can Anchor’s yields be sustained in the long term? We’ll see how this battlefield plays out.

Battlefield 4: Twitter

Since Twitter is a major hub for cryptocurrency discussion, it is also where people express their opinions on stablecoins. There have been many heated discussions or pointed threads about the viability of many stablecoin options.

Tether has been under fire on Twitter for years. Poulo Ardoino, the CTO of Tether and Bitfinex, has essentially turned his Twitter into a Tether FUD blocking machine. Twitter accounts like Bitfinex’ed and Bennett Tomlin have been notorious for accusing Tether of potentially fraudulent reserves and sketchy activity, and have been doing so since 2017.

For UST, we have seen many LUNA holders express their opinion that UST is a superior stablecoin to others. Simply post a Twitter poll that does not include UST as an option and you will definitely see the results (see the responses below as an example).

Recently, with the rapid popularity of UST and MIM and the excitement surrounding these tokens, the founders of MakerDAO began to express their concerns about these new options, which caused a number of different stablecoins to break out.

Anywhere on Twitter you can find yourself criticizing a particular option, whether it’s Tether being backed by Circle reserves, DAI or FRAX being heavily backed by USDC, or UST and MIM being unsustainable in the long run, etc.

Post about your personal preferred stablecoins and their growth potential. As certain options begin to gain more adoption than others, we can expect them to receive more attention and therefore constitute more social discussion. If there is enough social consensus on whether a certain stablecoin is a security or risk and what use cases they can provide, this could affect the degree to which they are adopted over time.

Where will the battle continue?

While these are the main battlegrounds in the stablecoin wars, we can imagine that there will be more clashes along the way as the market grows towards $500 billion or even $1 trillion. One of the places we may see a battle is on centralized exchanges. Since Tether was created in 2015 and all the way through 2020, it has had a near monopoly on liquidity on exchanges, easily becoming the preferred stablecoin pairing. Given Tether’s many claims of not having sufficient reserves, and the massive growth of these other options, we are starting to see Tether slowly being replaced, and we are even seeing DAI and UST pairs appear on many exchanges, including Binance and Kucoin. Given their demand for DeFi and less potential regulatory pressure, will decentralized options become the norm?

In fact, we are only at the beginning of the war at this stage, and another place we may see the battle is in real-world use cases. This may include payment infrastructure, new banks, fintech integration, real-world lending, etc. So far, although stablecoins act as the de facto medium of exchange for cryptocurrencies, there has not been much improvement in this regard. There are currently many debit cards created by exchanges that allow users to use their USDT, USDC or DAI, but these have not yet been widely adopted.

Terra is the only blockchain currently being used by the general public, as it underpins the Chai payment app in South Korea. There are many other teams working on neobank and debit card payment solutions for UST that are not yet available. As crypto becomes more integrated into our daily lives, we can expect stablecoins to play a major role.

There are a lot of potential uses for stablecoins that we haven’t seen yet. The first is uncollateralized lending, or using real-world assets as collateral. This could open up stablecoins to large TAMs, and whichever option is incorporated into a solution that works at scale will gain a huge competitive advantage. Additionally, while all notable stablecoins are denominated in USD, we may see the rise of stablecoins that are pegged to other fiat currencies, or not pegged to any specific currency at all. There are many opportunities for stablecoin adoption in a variety of contexts, and it will be interesting to see these use cases emerge over time.

It’s clear that the stablecoin wars are really only heating up. We can expect many new battles to arise in the coming months and years, and potentially some new players. We certainly wouldn’t bet against the rise of stablecoins over the next decade, as they have truly become the killer app for crypto, something you can expect to rise in either a bull or bear market. If you’re one of these armies, sharpen your swords and get ready for the battle ahead.