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Decentralized stablecoins are broken, long live decentralized stablecoins

7 min read - by Sogipec

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A few days ago I wrote this article.
I outlined how the multiplication of stablecoins could be detrimental for the space as a whole and what case I still saw for decentralized stablecoins, even those that simply wrap centralized assets. In order to really serve the ecosystem, decentralized stablecoins must primarily focus on being DeFi facilitators otherwise they are extracting more value than they are creating.

Building agEUR and developing a thorough stablecoin infrastructure, we now have a clearer overview of the current state of the decentralized stablecoin space.

What is going fine or improving

This one is obvious, so let's start by it. Many decentralized stablecoins have been able to leverage the uniqueness of the infrastructure on which they are built and propose somehow censorship resistant and trustless protocols.

The transparency of many decentralized stablecoins systems is also a plus, and many are starting to offer in real-time their balance sheet so everyone can assess on its own the state of the reserves. This is a 0→1 improvement with respect to many decentralized stablecoins but there are still a lot of efforts to be done further in this direction though.

Many decentralized stablecoins have shown their ability to maintain a peg for long periods of time. There was in the first place nothing obvious in having systems with crypto assets as an input able to produce stable assets as an output.
Thanks to all the experiments and new systems proposed over the last few years, there is now a higher degree of clarity on what is a good design for a stablecoin system.

Typically, if you launch a CDP stablecoin, you need a mechanism able to absorb people selling the stablecoin to take leverage, whether it is a redemption system à la Liquity, deep liquidity pools relying on expensive incentives à la Abracadabra or a price stability module à la Maker.

Stablecoins have also shown their ability to enhance the DeFi experience for their users, providing them access to some products they wouldn't have been able to get otherwise, or eliminating some frictions here and there.

The emergence of savings solution, pioneered first by decentralized stablecoins have given people access to a yield that is otherwise hardly accessible or for which the upfront fees are greater in other circumstances.
Those who rely on CDP systems have managed to provide neat borrowing experiences for their users by keeping the volatility on the rates limited.

If we look into bridging, the stablecoins (decentralized or not) that incorporate native burning on a chain to mint on another one have improved the experience of going from one chain to another and reduced the fees all across the board.

What needs improvement

Limited learnings

Compared from 2 years ago, we do have significantly more data to know what works, what does not and also what did not work in the past. Yet, the space does not seem to have fully learned and taken advantage of the big learnings made over the past years.

There are still some CDP stablecoins that when they launch discover by surprise that without a stability mechanism, they're going to struggle to keep a tight peg.
Even in more established stablecoins, no one seems to have taken the measure of the USDC stablecoin depeg and implemented fallback scenario to increase their resilience in such situations (e.g provide a claim on the underlying collateral), when there is recent research (from Gyroscope or Angle Transmuter) with concrete and enforceable solutions.

The space deserves more than just the old tech that has been here for a while.

Incomplete experience

As it becomes clear what the current key functionalities where decentralized stablecoins can do good are, it's a shame not to see more stablecoins providing a holistic approach.

Most CDP stablecoins are just limited to being CDPs. Some yield stablecoins only give yield.

More complete ones like Maker are also failing in some parts where they can be facilitators for instance when it comes to the bridging experience, as they have not taken care of making sure that DAI can be bridged with no fees from any chain to any chain.

In fact, while there are many primitives on which decentralized stablecoins have historically been improving over a state with just centralized stablecoins, there is no stablecoin (that is not functionally insolvent) that supports all these key primitives at once.

The decentralized stablecoin space is limited in what it offers even though there is no technical overhead for already offering more, based on the current primitives already in place elsewhere.

How can they actually provide value?

Towards core primitives

A successful stablecoin shouldn't have to reinvent the wheel. Why redevelop your own lending infrastructure when you can fully delegate this to a form permissionless lending infrastructure like Morpho Blue or Euler V2?

A lot of the value for a decentralized stablecoin lies in connecting key stablecoin primitives and enshrining them into the core of the product.

It's of course crucial to keep improving main primitives, whether it concerns lending, price stability modules, bridging, yield, trading... For instance, the contribution of teams like Ethena exploring derivatives-backed primitives are crucial to push the overall ecosystem forward, even if the approach may be considered risky.

But as everything tends to become commoditized, the key focus for stablecoins should be less the primitive per se but rather how all these primitives are connected with one another. It's about plugging cables, managing the risk in the balance sheet, not constraining itself to a small set of primitives, otherwise the value added with respect to a state of the space with a small set of centralized stablecoins is really minimal.

Why restrict the free market and force people to use your unit of account when you can just ask them to use another well distributed USD stablecoin?

Doing a CDP system to onboard new exotic collateral assets is very similar to doing a lending protocol setup with these collateral assets people lending USDC.

Here, if you combine the stablecoin from this CDP system with another yield infrastructure investing in tokenized securities, a bridging infrastructure and a form of price stability module/diversification component, then you get into an area which is actually more interesting than the simple lending protocol, and most likely more valuable all across the board than having all of these as isolated protocols built around USDC.

In this case for instance, you're on the one hand reducing the cost of capital to create borrowable liquidity by connecting these borrowers with people simply interested in earning a yield on their stablecoin derived from tokenized securities and other USD stablecoins and borrowing interests.

Thinking broader

Very often, innovations on stablecoin primitives can be generalized as more global protocols, not necessarily focused on the stablecoin only in itself.

Abstracting stablecoin systems is an effort that all stablecoins should look into. This means trying to see how you can apply their findings to systems that do not work with a single stablecoin asset, but that can be built around any asset (and not necessarily a stablecoin they control).

Typically Angle transmuter can be seen as a price stability module for a stablecoin, but you can also see a more general use for it, as an efficient way to build an index of several crypto assets.

Towards more primitives

For decentralized stablecoin to actually provide value they need to leverage the fact that they're forms of pooling systems that need to act as DeFi facilitators.

Beyond leveraging on the primitives on which stablecoins are used today, this implies looking for new verticals on which to reduce frictions in DeFi.

Typically, reserve-backed stablecoins are yield facilitators but they can also be trade facilitators. In a price stability module, you don't have to settle at all times between the various assets in the reserves. This can be used as an advantage to provide better routes between these assets in DeFi.

Going further, a protocol behind several independent decentralized stablecoins could build on this and find a way to propose statistically better trade routes between all the assets in the backing of its different stablecoins. With this, decentralized stablecoins could end up in the middle of most trade routes across different assets, making them become de facto DeFi Swiss knives.

And Angle in all this?

We have built for agEUR the most complete and advanced stablecoin infrastructure. agEUR is now the most used Euro stablecoin, and it has become a hub for all Euro stablecoin trades, making up for 60% of all the onchain Euro DEX trades.

Although agEUR has seen some significant growth, it remains a Euro denominated asset in a market that is centered around the dollar.

The name Angle comes from the goal of the protocol to become the angular stone for DeFi through which everything has to get routed at some point. Now that the protocol has done its proofs on the Euro, it's time to fulfill our initial vision, supercharge our stablecoin experience and address a far larger market.

We will reveal more on our recent work for this very soon!