Why are Aave, Curve and other protocols creating their own stable currencies?

By: Blockworks Research& Westie

The launch of $GHO and $crvUSD is just around the corner. Is the agreement specific stable currency the next big story?

Among all types of cryptocurrencies, stable currencies still have the largest product market fit.

This is because they allow investors to use dollar exposure in DeFi to trade, pay, store value, or earn income.

Today, the market value of all stable currencies has grown to more than 150 billion dollars.

In view of the massive adoption of stable coins and the expectation of protocol innovation and providing value for its token holders and users, the protocol specific stable coins began to show signs.

lately,Aave and Curve plan to launch GHO and crvUSD

Why does the agreement seek to create its own stable currency?

The first main reason is to increase income。 In the over collateralized model, the agreement calculates revenue based on the dollar amount of outstanding loans.

In order to let people know how the stable currency helps the agreement gain revenue growth, we can predict that the growth of Aave is due to the launch of GHO.

Suppose that the reserve coefficient of stable currency is 10%, the optimal loan interest rate is 4%, and the interest rate of GHO is 3%.

This income is kept entirely by agreement. Up to now, about $18 million of Aave's total interest of about $150 million has been retained by the agreement and allocated to the DAO. Therefore, if the supply of GHO grows to about $700 million, it will double the revenue of the agreement.

In addition to revenue, the agreement can also use stable coins as a way to increase the value accumulation and utility of governance tokens。 For example, the holders of stkAAVE will be able to forge GHOs at the interest rate favorable to ordinary borrowers, giving users the incentive to purchase and pledge AAVE.

These agreements also have the ability to expand and contract the supply or use of collateral for certain strategies。 For example, stable currency issuers can establish direct deposit modules with other lending markets, or deposit collateral in AMM LP (for example, Maker's D3M and FRAX AMO).

Finally, an agreement that can issue its own stable currency increases its moat of competition and reduces its sensitivity to bifurcations or vampire attacks

All this sounds good, but what are the risks?

The main risk is the increase of protocol complexity, which is also the carrier of attacks。 In recent years, there have been many loopholes in the stable currency (Cashio, Acala, Bean, etc.), leading to the complete bankruptcy of the agreement.

The competition in the field of stable coins is also very fierce. Some decentralized stable coins have established a huge moat (such as Frax and Curve) in terms of liquidity on the chain and cooperation with other agreements.

It may be difficult or expensive to obtain deep liquidity for the agreement stable currency

In addition, it can be seen from Maker's PSM that it is very difficult to maintain decentralization while maintaining a strong linkage capability, and regulatory or OFAC sanctions may make it very difficult to create and maintain an agreement stable currency.

last,A very important consideration is the liquidation procedure。 If they are not properly implemented, the agreement may eventually result in substantial losses on their balance sheets. Because of its importance, crvUSD has specially designed a new clearing mechanism.

So, in a future where there are multiple agreement stable currencies, who will become the final winner?

In addition to those who successfully created their own stable currency, other beneficiaries are those projects that directly benefit from the increase of stable currency and the provision of liquidity demand: Curve and Frax

  • Any stable currency issuer needs to use Curve to ensure sufficient liquidity on the chain——This will bring more revenue and TVL to Curve.

  • Frax is also integrated into the flywheel of Curve through CVX accumulation, and its FraxBP pool will become the main pair of liquidity.

In addition to Aave and Curve, which projects will establish their own stable currency?

The most likely projects are those that have achieved strong product market fit and accumulated a lot of TVL or user deposits: Compound, Lido, and Uniswap.