Stablecoin projects need to take a more collaborative approach to increasing liquidity for each and the ecosystem as a whole, says Sam Kazemian, the founder of Frax Finance.
Speaking to Cointelegraph, Kazemian explained that as long as “the liquidity of stablecoins increases in proportion to each other” through shared liquidity pools and collateral systems, there will never be real competition between coins. stable.
Kazemian’s FRAX stablecoin is a fractional algorithmic stablecoin with parts of its supply backed by collateral and other parts algorithmically backed.
Kazemian explained that the growth of the stablecoin ecosystem is not a “zero-sum game” as each token is increasingly intertwined and dependent on the performance of the other.
FRAX uses Circle’s USD coin (USDC) as part of its warranty. AIDa decentralized stablecoin maintained by the Maker Protocol, also uses USDC as collateral for more than half of the tokens in circulation. As FRAX and DAI continue to increase their market capitalization, they will likely need more USDC collateral.
However, Kazemian pointed out that if one project decides to dump another, it could have negative effects on the ecosystem.
“It’s not a popular thing to say, but if Maker were to drop their USDC, it would be bad for Circle because of the return they get from it.”
USDC is the key
The stream three best stablecoins by marketcap in order from the top are Tether (USDT), USDC and Binance USD (BUSD). DAI and FRAX are both decentralized stablecoins that take the fourth and fifth best places.
USDC has seen the strongest growth in the past year of the three, with market capitalization more than doubling last July to $55 billion, putting it almost within reach of USDT. according CoinGecko.
Kazemian believes that the proliferation of USDC in the industry and arguably greater transparency on its reserves should make it the most valuable stablecoin for ecosystem collaboration.
He called the USDC a “low risk, low innovation project” and acknowledged that it served as a base layer for further innovation from other stablecoins. He said:
“We and DAI are the layer of innovation on top of USDC, like decentralized banking on top of a conventional bank.”
Algo stablecoins not working
Although the FRAX stablecoin is partially algorithmically stabilized, Kazemian says pure algorithmic stablecoins “just don’t work.”
Algorithmic stablecoins like Terra USD (UST), which slumped dramatically in May, maintains its peg through complicated algorithms that adjust supply based on market conditions rather than traditional collateral.
“To have a decentralized on-chain stablecoin, it must have collateral. Doesn’t need to be over-collateralized like Maker, but it does need exogenous guarantees.
The death spiral in Terra’s ecosystem became evident when the UST, which is now known as the USTC, lost its anchorage.
The protocol started minting new LUNA tokens to ensure there were enough tokens supporting the stablecoin. The quick strike drove down the price of LUNA, now known as LUNC, which triggered a full retail token sell-off, dooming any hope of re-pecking.
Related: The liquidity protocol uses stablecoins to ensure zero impermanent losses
In the weeks leading up to the UST depeg, Terraform Labs founder Do Kwon said his project needed to be split return the stablecoin with different forms of collateral, especially BTC.
“In the end, even Terra realized that their model wouldn’t work,” Kazemian added, “so they started buying more tokens.”
At the end of May, Terra had sold almost all of its $3.5 billion value of BTC.
Terra has landed other projects in its wake, including colleague algo stablecoin DEI of Deus Finance, which has also failed to revert to the dollar peg at the time of writing.