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# System prepended metadata

title: Stablecoins
tags: [EN-TheSmith's-Collection]

---

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Author: https://twitter.com/guiribabrb
Original Article: https://odysee.com/@ShapeShiftDAObr:a/smart-contracts:be
---

# Stablecoins

![](https://i.imgur.com/xzYkqNl.png)


Reference: [Gemini](https://www.gemini.com/cryptopedia/what-are-stablecoins-how-do-they-work)

The volatility of the cryptoassets market is a feature known even to those who don’t use it. Because it’s a new market – the “oldest” cryptoasset is Bitcoin, with 12 years of existence – and with innovations emerging daily, the change in asset pricing is something natural, either because it detains numerous speculators investing, or because many of the assets have little liquidity in their trading.

The demand for a stable financial instrument brought the development of cryptoassets backed to currencies in countries – EUR, USD, AUD, YEN, and others –, highlighting the strong presence of the dollar in this market. On the other hand, some projects elaborated ways to bring stability to the volatility of cryptoassets. Regardless of the model, cryptoassets who aim to maintain a stable value are defined as stablecoins.

Reaching a volume of [US$411 billion in November](https://dune.xyz/hagaetc/stablecoins), they have become essential for the market’s livelihood, being an important instrument in centralized exchanges for trading cryptoassets and an indispensable tool for DeFi protocols.

![](https://hackmd.io/_uploads/r1bexsIsF.png)

Reference: [Dune Analytics](https://dune.xyz/queries/37459/74275)

In this market, there are different criteria set by developers before its conception. These must be analyzed and understood to be aware of the advantages and risks associated with each one of the existing stablecoins.

## **Strategy used to maintain value stability**

In order to be able to keep the value of the designed cryptoassets stable, developers need to use different mechanisms to accomplish this task. The way chosen to keep its stability will define the level and type of risk which the holders of stablecoin will be subject to.

### **Deposit of third-party cryptoassets as collateral¹ for issuance of stablecoins**

For users to have access to stable tokens, depositing cryptoassets is required, allowing them to borrow. Usually, users demand to leave custody in the *dapp* a higher percentage than the one borrowed.

MakerDAO, issuer of DAI, uses this concept: those interested in acquiring DAI from the protocol, need to deposit in their smart contracts a percentage of the higher amount which will be loaned. Only then, users are allowed mint more DAI.

With this mechanism, if the value of assets deposited as ETH drops in price quickly due to a negative event in the market, it’ll still be enough to guarantee the value borrowed in stablecoins. However, with a drop of high proportions like the one that took place in March 2020, many users could be liquidated. Mass liquidation could incur the loss of parity of stablecoin and, in turn, damage to all its holders.

### **Deposit of native cryptoassets as collateral to issue stablecoins**

Despite being very similar to the strategy used by dapps such as MakerDAO – mainly the search for stability based on depositing assets for overcollateralized loans –, the protocols that adopt the use of a native token as collateral for issuing their own **stablecoins have advantages and disadvantages.

As an example, let’s use [Terra](https://www.terra.money/): as it owns all of LUNA’s issuance, burning, circulation tokens or liquidity mechanisms, Terra manages to have greater control over the tokens used as collateral for the issuance of the UST. Thus, it’s not exposed to failures, rug pulls, etc. in protocol tokens used as collateral. However, in order to maintain the stability of the value of its stablecoin, Terra needs to use efficient algorithms, capable of keeping the UST stable and at parity with the dollar, using its own mechanisms developed by the protocol. Any error in the code created by the developers may incur loss of parity and, consequently, damage to the token holders.

This type of stablecoin is called algorithmic.

In June of that year, Iron Finance went through a similar case, demonstrating to the market the risk adopted by protocols for the creation of stablecoins to the market.

### **Assets held in custody to collateralize the issuance of stablecoins**

MakerDAO was the first protocol to issue an equally decentralized native stablecoin*.* In the beginning, the ETH deposit was only accepted from users in order to be able to mint DAI, in other words, the only risk to stablecoin*’* stability was the drop in the value of the crypstoasset. However, with the creation of other competing protocols attracting the liquidity that previously existed in the Maker, it was forced to insert more collateral options to ensure a better experience for users and, of course, raise more money for their vaults. Today, dapp **has [UNI/USDC LP deposits at Lido, BTC and other cryptoassets.](https://oasis.app/pt)

Abracadabra Money is another dapp that brings different proposals for issuing its stablecoin, MIM – Magic Internet Money. Unlike its direct competitor mentioned above, Abracadabra seeks not only to use cryptoassets of the most diverse possible, but also their representations in pools of other protocols.

*Quickly, for the sake of understanding: Abracadabra Money has a collateral called cvxtricrypto2. This is not a token acquired on a DEX. To obtain it, you need to deposit USDT, WBTC and/or WETH in Curve Finance's tricrypto2 pool; and, instead of depositing your 3CrvCrypto2 – representation of the deposit of money at Curve² – custody them at Convex Finance. When depositing these tokens at Convex, the user will receive cvxtricrypto2 in his wallet and will be able to use it as collateral to issue Abracadabra's stablecoin, the MIM.*

![](https://hackmd.io/_uploads/ryTZxjUit.png)


Reference: [Abracadabra Money](https://abracadabra.money/pool/16)

The innovation present in DeFi allows the creation of numerous forms of interaction between protocols, justifying why they are called money legos. Even though the usefulness developed by dapps is interesting, it should be noted that the more protocols involved in providing collateral, the more risks users and the issuer of the protocol will be subject to. Good governance and constant monitoring of all involved is required to ensure **stablecoin value parity is maintained

However, the concern with custodian assets to ensure the stability of the value of stablecoins isn’t restricted to decentralized protocols. On the contrary, the emergence of new tokens with parity to the dollar occurred precisely because of the distrust in the coffers of the main issuer in the market: Tether (USDT). For a long time, Bitfinex, Tether's "partner" company, was one of the few companies in the market to provide stablecoins to users. The latter always maintained the claim that all USDTs issued held the same dollar amount in Tether's custody. Over time, the company went through several problems, from hacks, regulatory pressure and, most importantly, that its *stablecoins* were not collateralized by dollars, but by several letters of credit of questionable quality.

It is important to bring up this situation to make it clear: it’s not just decentralized protocols that can be subject to risks. Centralized entities, if not managed correctly, cause even greater harm to users. Other centralized companies responsible for issuing *stablecoins*, such as Circle - USDC -, Paxos - USDP and BUSD - keep on their websites constant information that they keep dollars and bonds that guarantee the value of the tokens issued.

## **Structuring of decision mechanisms related to *stablecoins* characteristics**

Here, we differentiate between two types of stablecoin issuers: centralized and decentralized:

![](https://hackmd.io/_uploads/BJZmxoLjY.jpg)


Reference: [Developers DAO](https://www.developerdao.com/pt-BR)

Tether, Circle, Paxos and Gemini are all responsible for issuing dollar-par tokens backed by dollars, government bonds and other assets from the traditional finance world. Clarity is not always a feature present in many of them, and all decisions taken to maintain the stability of tokens are taken by company employees. Therefore, the control of all mechanisms inherent to stablecoin are under the ownership of its issuers and holders of USDT, USDC, BUSD, USDP and GUSD don’t have any influence or opinion on the best practices for companies.

However, with the advent of DAOs, decentralization of decisions is a striking feature in many protocols. MakerDAO, issuer of DAI, defines important criteria for its functioning such as percentage of collateralization, interest on loan or listing of new cryptoassets based on votes made via governance by holders of the MKR, its native token. Everyone can propose ideas to MakerDAO users, and they can vote on their approval or not. The same logic applies to other stablecoin issuers, such as Abracadabra Money, for example.

Here, the importance lies mainly in choosing to use stablecoins that are transparent in terms of their decisions and the quality/amount of assets held in custody. Fortunately, thanks to blockchain, DeFi protocols bring transparency at their core and are better alternatives when it comes to stablecoins.

## **Stablecoins parity to assets other than fiat currencies**

This last criterion must be observed only for new stable token models that have appeared in the crypto universe. With regulatory pressure on dollar-backed cryptoassets, developers have introduced a new model of *stablecoin*: backed to non-stable cryptoassets². [Reflexer Labs](https://reflexer.finance/) is one of them and proposes a different type of stability: this does not represent the value of a fiat currency, but it considerably reduces the volatility of cryptoassets such as ETH. The logic is very similar to the MakerDAO: users deposit ETH in Reflexer Labs coffers and lie to RAI, their *stablecoin*. The difference is that, instead of having parity with the dollar, it aims to ease the volatility of the ETH, that is, in positive and negative market variations, RAI will not increase or decrease in value abruptly.

![](https://hackmd.io/_uploads/ByLEeiIiF.jpg)


Reference: [One of the memes](https://memes.reflexer.finance/share/?u=p5P6uooLL61rCru.VCru&v=K&t=&m=&f=) created by the Reflexer Labs community

Its intention, throughout the project, is to develop WBTC, UNI and AAVE vaults, to provide indices similar to RAI, but collateralized from other non-stable cryptoassets.

Mechanisms for mitigating volatility are somewhat complex, but it is worth [checking the documentation to improve understanding of the project.](https://medium.com/reflexer-labs/stability-without-pegs-8c6a1cbc7fbd)

## **The release of the Shape Shift DAO stablecoin**

Through a partnership with ICHI, a protocol specialized in developing *stablecoins* for communities, ShapeShift DAO launched in November its native token with dollar parity: [oneFOX!](https://medium.com/ichifarm/introducing-stable-fox-for-the-shapeshift-economy-6a5f595fecd3)

![](https://hackmd.io/_uploads/HyWLxsLsF.png)


Reference: [ShapeShiftDAO](https://medium.com/ichifarm/introducing-stable-fox-for-the-shapeshift-economy-6a5f595fecd3)

Through a partnership with ICHI, a protocol specialized in developing *stablecoins* for communities, Shape Shift launched in November its native token with dollar parity: oneFOX!

ShapeShift DAO's *stablecoin* is, a priori, decentralized. [Any necessary changes to the oneFOX structure must be made through a proposal to be accepted via governance](https://medium.com/ichifarm/introducing-stable-fox-for-the-shapeshift-economy-6a5f595fecd3). Maintaining its value stability is maintained with the use of two collaterals: 80% USDC and 20% FOX. With this, Shape Shift *stablecoin* holders will not only have a stable token collateralized by a native DAO cryptoasset, but also the USDC, one of the main *stablecoins* in the crypto universe.

[Using ICHI's DEX](https://app.ichi.org/mint?name=onefox&collateral=USDC), users will be able to mint their oneFOX at an 80/20 ratio: 80% USDC and 20% FOX. Under the custody of their oneFOX, their holders can deposit them in the pool that exists within the ICHI, with the aim of providing liquidity to the protocol. [In return, users will receive rewards in ICHI, with a return of ~70% APR.](https://app.ichi.org/deposit?poolId=1015&back=deposit)

The inventiveness of the DeFi sector constantly develops new *stablecoin* models and is a promising sector for those interested not only in holding stable cryptoassets, but those seeking to obtain passive profitability without exposing themselves to volatility. For an in-depth reading on the subject, we recommend reading [How to DeFi Advanced](https://www.amazon.com.br/How-DeFi-Advanced-Lucius-Fang/dp/B098H215P3), an e-book produced by Coingecko, used as a source for information brought here. Do you know other types of *stablecoins* that weren't brought here? Let us know in the comments!

¹Collateral is the name given to the asset deposited as collateral for the issuance of *stablecoins* or loans.

²This type of stablecoin has been called stableasset.

###### tags: `EN-TheSmith's-Collection`
