CoinEx Institute | Market Analysis of Decentralized Stablecoins (I)

5 min readMar 22, 2022

This article illustrates the decentralized stablecoins and their models in today’s crypto market, offering a way to evaluate decentralized stablecoins by comparing their pros and cons. We hope you can benefit from the learning framework of decentralized stablecoins demonstrated below.

Statistics that appear in this article are recorded from July 2021 to February 7, 2022. We focused on decentralized stablecoins with a total supply of over $100 million, covering their market performance from the May 19 crash to recent falls. In particular, normal market observation covers the six months from July 1 to December 31, 2021, while market statistics registered from January 19 to February 2 are reserved for stress tests (during this period, the BTC price once plummeted by around 23%, and DeFi protocols witnessed massive liquidation, which makes it a great time for stress tests).

What is a decentralized stablecoin?

Prices are determined by supply and demand. Essentially, currencies are also a type of commodity, which means that their prices also conform to the most fundamental economic principle. When it comes to legal currencies in the real world, countries rely on central banks and financial policies to maintain the dynamic balance of monetary supply and demand and to stabilize its price. By doing so, the purchasing power of legal currencies is kept within a comparatively predictable range of fluctuation.

In the blockchain space, decentralized stablecoin protocols play the role of central regulators and control the issuance and stability of their stablecoins through smart contracts, which adjust the supply and demand of a stablecoin by finetuning the major protocol parameters (e.g. the collateralization rate, the proportion of coins required for minting, seigniorage) to ensure that the stablecoin is stably pegged to the target currency.

Factors to consider when observing decentralized stablecoin protocols

When analyzing decentralized stablecoin protocols, one should account for three factors:

  1. Stability: Whether a stablecoin is pegged to the target legal currency, and whether the deviation is within an acceptable range;
  2. Utilization rate of assets: The essential mechanism of most decentralized stablecoins is to print more money using money, and the capital efficiency of this process is also a major asset for protocols;
  3. Earning power of protocols: How a protocol profits from the issuance of stablecoins, and the source & stability of revenue.

Market Landscape

Let’s begin with a quick overview of the current stablecoin market. Most stablecoins issued in the market are USDC and USDT, which account for 74% of the total supply of all stablecoins, while 16% is taken up by decentralized stablecoins. Meanwhile, USDT contributed 84% of the total trading volume registered by the market. Overall, the proportion of decentralized stablecoins in the total market cap of all stablecoins is not that high, and they are also traded less frequently. Despite this, from the perspective of growth, the market share of decentralized stablecoins is rising.

Source: Coingecko, CoinEx Institute

In today’s market, there are four types of decentralized stablecoin protocols: the over-collateralized, the partially collateralized, the ecosystem type, and the derivative type. Moreover, many extensively adopted protocols (by the total supply and trading volume) are over-collateralized, while the derivative type is a new category of decentralized stablecoin protocol, and most of such protocols are under testing or just launched. The picture below shows the market share of the four types of protocols by total supply.

Source: Coingecko, CoinEx Institute

Over-collateralized stablecoin protocols

Over-collateralized stablecoins are deployed on protocols that allow users to mint crypto assets by depositing crypto collaterals that are worth less than the cryptos to be minted. These highly stable protocols use such over-collateralized assets to cushion assets on the protocol, and users’ positions will be liquidated when their collateralization rate reaches the liquidation level. The disadvantage of such protocols is equally clear — low utilization rate of assets.

Currently, over-collateralized protocols that are well-established (over $100 million in total supply) include MakerDAO (DAI), Liquity (LUSD), Mai Finance (MAI), Alchemix (ALUSD), Kava Lend (USDX), and Spell (MIM). It is also clear that DAI and MIM are the absolute leaders in this category in terms of total supply and trading volume (>90% when put together).

Source: Coingecko, CoinEx Institute

In terms of stability, through the statistical comparison between the normal observation period and the stress test period, we can tell that significant market swings had virtually no impacts on the DAI price, which even became more stable during the stress test period. Although MIM significantly fluctuated after the slump (the MIM price dropped to around $0.99, a decrease of 1%), the price soon rebounded. Based on the overall performance recorded by the protocols during the stress test period, MIM stood out in terms of stability. Protocols with poor stability include Kava Lend (USDX) and Mai Finance (governance token: QI). The prices had been below $1 for a long time. Moreover, the prices slumped and became more volatile during the stress test period.

MIM and LUSD are the worst performers in terms of the total supply. The supply of both stablecoins has dropped by approximately 40%, while that of other protocols in the same category has stayed relatively stable, which may indicate a lack of confidence in MIM and LUSD (the drop in the MIM supply can be largely blamed on MakerDAO’s co-founder, who tweeted that MIM and UST are Ponzi schemes).

Generally speaking, over-collateralized stablecoins did not show significant volatility under the stress test.

Source: Coingecko, CoinEx Institute

In terms of the utilization rate of assets, protocols including DAI, LUSD, and USDX focus on prudent mainstream coins, while ALUSD, MAI, and MIM introduced interest-earning assets as collateral to further release liquidity. The revenue sources of the protocols are basically the same, covering lending & borrowing, liquidation, and mint fees.

Source: CoinEx Institute

To be continued.