CoinEx Institute | Market Analysis of Decentralized Stablecoins (II)

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.

Read Part I here.

Partially collateralized stablecoins

Partially collateralized stablecoins are normally minted using mainstream stablecoins and their governance tokens at a certain ratio. Since the governance tokens of infant projects are backed by little value, most of such stablecoins will eventually become victims of the death spiral, and very few could survive.

When it comes to partially collateralized protocols, a unique concept called PCV (Protocol Control Value) should be noted. We can think of PCV as a protocol’s treasury, which constitutes an asset entirely owned by the protocol and cannot be redeemed by users. PCV grows in value through the interest-earning operations and fees of the protocol. A stablecoin is considered over-collateralized when the PCV exceeds its market cap. The size of PCV determines the scale of the supply of stablecoins and the level of risks.

Right now, partially collateralized protocols that are comparatively mature include Fei Protocol (FEI) and Frax (FRAX), which together account for about 91% (Frax: 60%; FEI: 31%) of the market share.

Source: Coingecko, CoinEx Institute

To assess their stability, such stablecoins were also stress-tested. We found that FEI and FRAX had been just as stable as most over-collateralized stablecoins, which are thought to be more stable, during the stress period or normal period. In terms of stability, they have even outperformed most over-collateralized stablecoins. Such a strong performance is largely the result of successful PCV. The collateralization ratio (PCV/market cap) of FEI has reached 132%, while that of FRAX has stabilized at 85% through its mechanisms.

The stability performance of AMPL is rather poor because its unique Rebase mechanism led to drastic price swings.

Source: Coingecko, CoinEx Institute

In terms of the utilization rate of assets, FRAX features the mixed minting of governance tokens (FXS+USDC), which means more stablecoins can be minted. As such, the minting of FRAX can be considered to be 100%-collateralized, and there is no risk of liquidation because the governance tokens are directly minted and collateralized. In the case of FEI, which can be directly minted using ETH and DAI, the liquidation risk is zero, and the stablecoin is also 100%-collateralized. Stablecoins in this category are roughly the same in terms of earning power, which is backed by protocol revenue and interests generated by PCV asset management.

Source: CoinEx Institute

Ecosystem type stablecoin protocols

Ecosystem type stablecoins can be minted and redeemed using their public chain coins (USDT-margined) at a 1:1 ratio. The value of such stablecoins is backed by the value of the entire public chain ecosystem.

At the moment, only Terra’s UST and Waves’ NUSD have increased their circulating supply. In particular, UST accounts for 96% of the market share.

Source: Coingecko, CoinEx Institute

UST is now almost as stable as DAI thanks to its fast-growing ecosystem. Though it had been hit by tweets from MakerDAO’s founder, the price just slightly fluctuated, and neither the average price nor the circulation value was much affected. Waves performed badly with respect to stability, which might be related to the fact that the protocol’s ecosystem is not fully-fledged and that there are not enough application scenarios.

Overall, the depth of ecosystem-based stablecoins is closely bound up with their ecosystem. A sound ecosystem facilitates strong stability performance and improves the number of coins in circulation.

Source: Coingecko, CoinEx Institute

Of the four categories, the ecosystem type stablecoins showed the highest utilization rate of assets because the collateralization of these coins is backed by the growth of the entire ecosystem, which means that the maximum number of coins that can be minted is subject to the ecosystem’s market cap. In addition, the earning power of such stablecoins is also correlated with the adoption of their ecosystem — Each transaction and contract execution performed on the public chain brings in revenue for the ecosystem.

Derivative type stablecoin protocols

Most derivative type stablecoins remain in their infancy in terms of the circulating supply or the period since issuance. As such, few valid statistics are available. The circulating supply of agEUR, a EUR-pegged stablecoin issued by Angle Protocol, is comparatively large in this stablecoin category. In addition, UXD Protocol issued approximately 10 million USD-pegged UXD; Hubble Protocol issued around 30 million USD-pegged USDH. These protocols use on-chain derivatives to hedge the collaterals used to mint their stablecoins and to have their USDT-margined value locked at a certain level, which mitigates the liquidation risk and stabilizes the anchoring.

For instance, both agEUR and UXD come with an asset utilization rate of 100%, which means that these stablecoins can be minted using their risky assets at a 1:1 ratio. Moreover, as the hedging of minting collaterals requires the shorting of on-chain futures, considerable liquidity is injected into the derivatives market, which can be regarded as another source of value of derivative type protocols.

The preferred valuation of different models

According to our observation, the circulating supply of stablecoins and the Fully Diluted Valuation (FDV) of the governance token are not significantly correlated, and there is median regression during certain periods (see the picture below). Therefore, we believe that (FDV of the governance token)/(the circulating supply) could be an effective way to evaluate decentralized stablecoin protocols. It should be noted that the derivative type stablecoins were not included due to the unavailability of samples.

Source: Coingecko, CoinEx Institute

After averaging the FDV/supply ratios of all intervals, we arrived at several interesting findings. Firstly, among over-collateralized stablecoins, protocols that use interest-earning assets as collateral (i.e. the utilization rate of assets is higher) come with higher market caps. Our second finding is that the market of stablecoins differed according to their categories: regular over-collateralized protocols < over-collateralized protocols that generate interests ≈ partially collateralized protocols < ecosystem type protocols. Considering our discussions of stability, the utilization rate of assets, and earning power, it seems appropriate to conclude that the market is most concerned with the utilization of assets when evaluating decentralized stablecoin protocols.

Source: Coingecko, CoinEx Institute

This article does not constitute any investment advice.

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