In the previous article, we explored the key characteristics of major stablecoins like USDT, USDC, and DAI, analyzed failed stablecoin projects and the reasons behind their collapse, and reviewed the rapidly evolving regulatory landscape for stablecoins across different countries.
As of September 11, 2024, the total market capitalization of stablecoins exceeded $170 billion, marking its highest point since November 2022. As mentioned earlier, regulatory frameworks for stablecoins are advancing in many countries, leading to the rise of more stablecoin projects.
In this article, we will delve into the features and concerns of newly emerged stablecoins, highlighting their points of differentiation from existing ones. We will also discuss the potential growth of the stablecoin market in comparison to the traditional foreign exchange market.
The number of stablecoin projects in the cryptocurrency market has been increasing at an impressive rate. According to data from DeFiLlama, the number of stablecoin projects surged from 27 in April 2021 to 182 by July 2024, representing a 574% growth in just three years.
As mentioned in the previous article, Tether’s Q4 2023 report revealed a net profit of approximately $2.9 billion and a net operating income of around $1 billion. Circle, too, reported revenues of about $779 million for the first half of 2023. Notably, Tether’s total revenue for 2023 reached $6.2 billion, surpassing BlackRock’s annual revenue of $5.5 billion for the same period.
Despite generating significant profits from their collateral assets, stablecoin issuers have yet to distribute these earnings to their stablecoin holders. Recognizing this, new stablecoin projects are emerging with strategies aimed at sharing the profits from collateralized assets with holders of their stablecoins.
Additionally, stablecoins built on decentralized finance (DeFi) protocols are adopting various innovative strategies. One key feature of these new stablecoins is the use of Liquid Staking Tokens (LSTs) as collateral to boost profitability.
In the past, MakerDAO’s DAI was collateralized with ETH, but users who staked ETH as collateral couldn’t receive staking rewards. In contrast, recent stablecoin projects are utilizing LSTs as collateral, allowing users to earn staking rewards while enhancing capital efficiency. This approach is driving innovation in the stablecoin market, offering more value to users.
2.1.1. USDY (Ondo Finance)
Ondo Finance, launched in August 2022, raised $20 million in a Series A funding round led by Pantera Capital and Founders Fund, with notable participation from Coinbase Ventures, Wintermute, and Tiger Global. One of Ondo Finance’s flagship products is USDY.
USDY is a “tokenized note” backed by short-term U.S. Treasury bonds and bank deposits. Ondo Finance offers two types of tokens: USDY and rUSDY, both of which can be easily swapped on their platform. rUSDY is a *rebase token that maintains its $1 value while distributing interest. In contrast, USDY retains a fixed token supply, with its value increasing over time, while rUSDY preserves its $1 value by adjusting the token quantity held by users.
🔎 Rebasing is a mechanism that adjusts the total token supply to maintain a stable price, typically $1, by altering the number of tokens held by users without changing their ownership percentage.
The key features of USDY are:
Monthly report of Ondo Finance in August, source: Ondo Finance
USDY’s TVL, source: Ondo Finance
USDY operates across seven blockchain networks: Ethereum, Arbitrum, Aptos, Sui, Cosmos (Noble), Solana, and Mantle, with ongoing plans to expand its reach. According to RWA.xyz, as of September 18, 2024, USDY has a market capitalization of $396.69 million, ranking it as the third-largest tokenized bond-backed stablecoin, following BlackRock’s BUIDL and Franklin Templeton’s FOBXX.
2.1.2. USDM (Mountain Protocol)
In June 2024, Mountain Protocol raised $8 million in a Series A funding round led by Multicoin Capital, with participation from Coinbase Ventures, Castle Island Ventures, Bankless Ventures, and Wormhole. The protocol’s flagship product is USDM, an ERC-20 rebasing token backed by short-term U.S. Treasury bonds.
The key features of USDM are:
Monthly report of Mountain Protocol in August, source: Mountain Protocol
Mountain Protocol’s USDM follows a stable expansion strategy and currently supports several EVM-compatible blockchains, including Ethereum, Arbitrum, Optimism, Polygon, and Base. A key differentiator between USDM and Ondo’s USDY is its use of tokenized funds like BUIDL and USTB in its reserves. Currently, USDC is the only currency that can be used to issue USDM. However, there are plans to introduce a bank wire transfer option in the future.
2.1.3. USDe (Ethena Labs)
Etena Labs successfully completed a strategic funding round of $14 million, led by Dragonfly Capital and Maelstrom, with additional support from Binance Labs. The company further accelerated its market entry through a launchpool on the Binance exchange. Etena Labs’ flagship product, USDe, is designed to be a crypto-native stablecoin solution that does not rely on traditional banking systems.
USDe supply, source: Ethena
USDe, described as a “crypto-native synthetic dollar,” uses stETH as its primary collateral. As of September 19, 2024, USDe has a market capitalization of $2.6 billion, making it the largest among new stablecoin projects.
The key features of USDe are:
USDe structure, source: Ethena Labs Gitbook
However, despite its innovative approach, USDe carries certain risks, which are outlined in Etena Labs’ official documentation:
USDe represents an innovative approach in the stablecoin market by utilizing crypto assets like LST as collateral and implementing a delta-neutral strategy to ensure price stability. This method sets USDe apart from traditional fiat-backed stablecoins, offering a decentralized and efficient alternative. However, it also introduces unique risks, balancing innovation with risk in the evolving cryptocurrency ecosystem. USDe’s approach is a significant experiment in the stablecoin market, potentially shaping the future of stablecoin market.
2.1.4. LISUSD (Lista DAO)
Lista DAO recently completed a successful undisclosed funding round of $10 million, led by Binance Labs. The project operates as an open-source liquidity protocol that generates yield from crypto assets and offers decentralized stablecoin loans through its flagship product, LISUSD.
The key features of LISUSD are:
The risk factors of LISUSD are:
LISUSD offers a distinct approach to stablecoins with its “De-Stablecoin” model, focusing on decentralization, capital efficiency, and flexible price stability. By using LST and LRT tokens as collateral, it presents opportunities for higher returns and scalability. However, this also brings risks related to asset volatility and smart contract reliability.
As the stablecoin market continues to evolve, innovations like LISUSD provide users with more options and yield potential. Yet, they also introduce new risks, particularly regarding regulatory uncertainty and the stability of crypto-based collateral. The response from regulators and the market’s adoption of these innovations will be critical in determining the success of projects like Lista DAO’s LISUSD.
The rise of new digital assets such as USDY, USDM, USDe, and LISUSD introduces challenges due to their differing characteristics from traditional stablecoins, potentially causing confusion among investors.
This lack of clear definitions presents regulatory risks. How these assets are classified will significantly affect their operations and future growth. If regulators define them as securities or algorithmic stablecoins, these projects may face operational restrictions or compliance hurdles that could limit their expansion.
New stablecoin projects also face the challenge of limited utility and an increasingly competitive landscape. If these projects fail to gain recognition as traditional stablecoins under regulatory frameworks, they may struggle to perform key functions like international remittances, payments, and exchange support. This limitation could confine their utility primarily to DeFi ecosystems, restricting broader adoption and long-term growth potential.
Moreover, the continuous emergence of projects with similar strategies is intensifying competition in the stablecoin market. For example, Elixir’s deUSD, which employs a delta-neutral strategy like Etena Labs’ USDe, is just one of many new entrants. This increased competition can put significant pressure on the profitability and growth of individual projects, further emphasizing the need for each project to develop a unique value proposition and sustainable business model.
There is ongoing controversy surrounding the overvaluation of governance tokens issued by new stablecoin projects, highlighting a disconnect between market expectations and the actual business scale.
According to Coindesk on July 30, 2024, while USDC had a market capitalization of $33.5 billion, its issuer, Circle, was valued at only $5 billion. This places Circle’s value at approximately 15% of USDC’s market cap, which is seen as a standard ratio for major stablecoin issuers.
However, new projects are showing a notably different trend:
This trend reflects the market’s heightened expectations for new stablecoin and Real World Assets (RWA) projects. Investors are placing high value on their innovative potential, but this also carries significant risk. The current valuations of ONDO and ENA may be considered excessively high relative to their actual business scale and potential, suggesting the possibility of future market corrections.
Most new stablecoin projects, except for Mountain Protocol, issue governance tokens. This represents a significant departure from traditional stablecoins like USDT and USDC.
While governance tokens can effectively drive early-stage growth and foster community engagement, they also introduce regulatory and operational complexities.
The innovative approaches adopted by new stablecoin projects present opportunities, but they also come with inherent structural risks that could affect the stability and long-term sustainability of these projects.
3.5.1. USDY and USDM: Collateral Asset Management Risks
USDY and USDM both use U.S. Treasury bonds and bank deposits as collateral. While this structure provides a layer of stability, it exposes the projects to risks similar to those faced by USDC during the failures of Silvergate Bank and Silicon Valley Bank.
3.5.2. USDe and LISUSD: Risks of Cryptocurrency Collateral
USDe and LISUSD employ a collateral structure based on cryptocurrency assets, which exposes them to unique risks.
Despite these risks, new stablecoin projects continue to draw attention with their innovative approaches. They have the potential to serve as a bridge between traditional finance and the DeFi ecosystem. However, regulatory uncertainties, limited utility, and the complexities of governance models will be key factors in determining their long-term success.
Share of USD and EUR stablecoins traded, source: Kaiko
Currently, the stablecoin market is predominantly dominated by USD-backed tokens. According to Kaiko, approximately 90% of all cryptocurrency transactions are conducted using USD-backed stablecoins. In 2024, the average weekly trading volume of these stablecoins reached $270 billion—70 times the volume of Euro-based stablecoins.
While stablecoins pegged to other fiat currencies hold a smaller market share, they are showing steady growth.
As regulatory frameworks solidify, the growth of stablecoins backed by a wider range of fiat currencies is expected. Several factors contribute to this potential expansion:
A range of factors is converging to fuel the potential expansion of the stablecoin market. The high adoption rate in emerging markets, combined with active participation from major financial institutions, suggests that stablecoins may evolve beyond their current role within the cryptocurrency ecosystem to become an integral part of the global financial system.
The clarification and strengthening of stablecoin regulatory frameworks are expected to significantly improve market stability and reliability. This will likely lead to increased arbitrage opportunities between fiat currencies and stablecoins, while also facilitating the entry of large-scale institutional investments.
4.3.1. Key Impacts of Regulatory Enhancements
4.3.2. Expansion of arbitrage opportunities
As regulation improves price stability, various arbitrage opportunities are expected to emerge:
These arbitrage activities are expected to enhance market efficiency and improve the price discovery mechanism.
4.3.3. Development of the Derivatives Market
As the stablecoin market matures, various derivatives commonly seen in traditional finance are expected to be introduced, offering investors more diverse options and risk management tools.
The introduction of these derivatives will add sophistication and efficiency to the stablecoin market. Investors will gain access to a wider range of strategies, and businesses will be better equipped to manage risks.
The stablecoin market is rapidly evolving, increasingly serving as a bridge between traditional finance and digital finance. The emergence of new projects, the establishment of regulatory frameworks in various countries, and the proactive engagement of market participants all underscore the dynamic nature of the stablecoin ecosystem.
Innovative stablecoin projects like USDY, USDM, USDe, and LISUSD offer new opportunities but also bring unique risks. Their success will largely depend on effective risk management and their ability to adapt to regulatory changes.
Major regions such as Hong Kong, the EU, and the UAE are actively introducing regulations that are expected to formalize and stabilize the stablecoin market. This regulatory clarity is likely to encourage institutional investment and enhance the credibility of the market.
Stablecoins are poised to go beyond their traditional role as a store of value, potentially driving the digital transformation of the foreign exchange market. The introduction of diverse derivatives is expected to make the market more sophisticated and efficient. However, several challenges must be addressed, including regulatory compliance, technological stability, and the establishment of user trust. Additionally, external factors such as the introduction of central bank digital currencies (CBDCs) will play a crucial role in shaping the future of stablecoins.
In conclusion, stablecoins have the potential to become a key infrastructure of the digital economy. Monitoring developments in this space and analyzing their implications from multiple perspectives will be essential. Understanding how stablecoins will evolve and reshape the global financial system will be critical to anticipating the future of the financial industry.
In the previous article, we explored the key characteristics of major stablecoins like USDT, USDC, and DAI, analyzed failed stablecoin projects and the reasons behind their collapse, and reviewed the rapidly evolving regulatory landscape for stablecoins across different countries.
As of September 11, 2024, the total market capitalization of stablecoins exceeded $170 billion, marking its highest point since November 2022. As mentioned earlier, regulatory frameworks for stablecoins are advancing in many countries, leading to the rise of more stablecoin projects.
In this article, we will delve into the features and concerns of newly emerged stablecoins, highlighting their points of differentiation from existing ones. We will also discuss the potential growth of the stablecoin market in comparison to the traditional foreign exchange market.
The number of stablecoin projects in the cryptocurrency market has been increasing at an impressive rate. According to data from DeFiLlama, the number of stablecoin projects surged from 27 in April 2021 to 182 by July 2024, representing a 574% growth in just three years.
As mentioned in the previous article, Tether’s Q4 2023 report revealed a net profit of approximately $2.9 billion and a net operating income of around $1 billion. Circle, too, reported revenues of about $779 million for the first half of 2023. Notably, Tether’s total revenue for 2023 reached $6.2 billion, surpassing BlackRock’s annual revenue of $5.5 billion for the same period.
Despite generating significant profits from their collateral assets, stablecoin issuers have yet to distribute these earnings to their stablecoin holders. Recognizing this, new stablecoin projects are emerging with strategies aimed at sharing the profits from collateralized assets with holders of their stablecoins.
Additionally, stablecoins built on decentralized finance (DeFi) protocols are adopting various innovative strategies. One key feature of these new stablecoins is the use of Liquid Staking Tokens (LSTs) as collateral to boost profitability.
In the past, MakerDAO’s DAI was collateralized with ETH, but users who staked ETH as collateral couldn’t receive staking rewards. In contrast, recent stablecoin projects are utilizing LSTs as collateral, allowing users to earn staking rewards while enhancing capital efficiency. This approach is driving innovation in the stablecoin market, offering more value to users.
2.1.1. USDY (Ondo Finance)
Ondo Finance, launched in August 2022, raised $20 million in a Series A funding round led by Pantera Capital and Founders Fund, with notable participation from Coinbase Ventures, Wintermute, and Tiger Global. One of Ondo Finance’s flagship products is USDY.
USDY is a “tokenized note” backed by short-term U.S. Treasury bonds and bank deposits. Ondo Finance offers two types of tokens: USDY and rUSDY, both of which can be easily swapped on their platform. rUSDY is a *rebase token that maintains its $1 value while distributing interest. In contrast, USDY retains a fixed token supply, with its value increasing over time, while rUSDY preserves its $1 value by adjusting the token quantity held by users.
🔎 Rebasing is a mechanism that adjusts the total token supply to maintain a stable price, typically $1, by altering the number of tokens held by users without changing their ownership percentage.
The key features of USDY are:
Monthly report of Ondo Finance in August, source: Ondo Finance
USDY’s TVL, source: Ondo Finance
USDY operates across seven blockchain networks: Ethereum, Arbitrum, Aptos, Sui, Cosmos (Noble), Solana, and Mantle, with ongoing plans to expand its reach. According to RWA.xyz, as of September 18, 2024, USDY has a market capitalization of $396.69 million, ranking it as the third-largest tokenized bond-backed stablecoin, following BlackRock’s BUIDL and Franklin Templeton’s FOBXX.
2.1.2. USDM (Mountain Protocol)
In June 2024, Mountain Protocol raised $8 million in a Series A funding round led by Multicoin Capital, with participation from Coinbase Ventures, Castle Island Ventures, Bankless Ventures, and Wormhole. The protocol’s flagship product is USDM, an ERC-20 rebasing token backed by short-term U.S. Treasury bonds.
The key features of USDM are:
Monthly report of Mountain Protocol in August, source: Mountain Protocol
Mountain Protocol’s USDM follows a stable expansion strategy and currently supports several EVM-compatible blockchains, including Ethereum, Arbitrum, Optimism, Polygon, and Base. A key differentiator between USDM and Ondo’s USDY is its use of tokenized funds like BUIDL and USTB in its reserves. Currently, USDC is the only currency that can be used to issue USDM. However, there are plans to introduce a bank wire transfer option in the future.
2.1.3. USDe (Ethena Labs)
Etena Labs successfully completed a strategic funding round of $14 million, led by Dragonfly Capital and Maelstrom, with additional support from Binance Labs. The company further accelerated its market entry through a launchpool on the Binance exchange. Etena Labs’ flagship product, USDe, is designed to be a crypto-native stablecoin solution that does not rely on traditional banking systems.
USDe supply, source: Ethena
USDe, described as a “crypto-native synthetic dollar,” uses stETH as its primary collateral. As of September 19, 2024, USDe has a market capitalization of $2.6 billion, making it the largest among new stablecoin projects.
The key features of USDe are:
USDe structure, source: Ethena Labs Gitbook
However, despite its innovative approach, USDe carries certain risks, which are outlined in Etena Labs’ official documentation:
USDe represents an innovative approach in the stablecoin market by utilizing crypto assets like LST as collateral and implementing a delta-neutral strategy to ensure price stability. This method sets USDe apart from traditional fiat-backed stablecoins, offering a decentralized and efficient alternative. However, it also introduces unique risks, balancing innovation with risk in the evolving cryptocurrency ecosystem. USDe’s approach is a significant experiment in the stablecoin market, potentially shaping the future of stablecoin market.
2.1.4. LISUSD (Lista DAO)
Lista DAO recently completed a successful undisclosed funding round of $10 million, led by Binance Labs. The project operates as an open-source liquidity protocol that generates yield from crypto assets and offers decentralized stablecoin loans through its flagship product, LISUSD.
The key features of LISUSD are:
The risk factors of LISUSD are:
LISUSD offers a distinct approach to stablecoins with its “De-Stablecoin” model, focusing on decentralization, capital efficiency, and flexible price stability. By using LST and LRT tokens as collateral, it presents opportunities for higher returns and scalability. However, this also brings risks related to asset volatility and smart contract reliability.
As the stablecoin market continues to evolve, innovations like LISUSD provide users with more options and yield potential. Yet, they also introduce new risks, particularly regarding regulatory uncertainty and the stability of crypto-based collateral. The response from regulators and the market’s adoption of these innovations will be critical in determining the success of projects like Lista DAO’s LISUSD.
The rise of new digital assets such as USDY, USDM, USDe, and LISUSD introduces challenges due to their differing characteristics from traditional stablecoins, potentially causing confusion among investors.
This lack of clear definitions presents regulatory risks. How these assets are classified will significantly affect their operations and future growth. If regulators define them as securities or algorithmic stablecoins, these projects may face operational restrictions or compliance hurdles that could limit their expansion.
New stablecoin projects also face the challenge of limited utility and an increasingly competitive landscape. If these projects fail to gain recognition as traditional stablecoins under regulatory frameworks, they may struggle to perform key functions like international remittances, payments, and exchange support. This limitation could confine their utility primarily to DeFi ecosystems, restricting broader adoption and long-term growth potential.
Moreover, the continuous emergence of projects with similar strategies is intensifying competition in the stablecoin market. For example, Elixir’s deUSD, which employs a delta-neutral strategy like Etena Labs’ USDe, is just one of many new entrants. This increased competition can put significant pressure on the profitability and growth of individual projects, further emphasizing the need for each project to develop a unique value proposition and sustainable business model.
There is ongoing controversy surrounding the overvaluation of governance tokens issued by new stablecoin projects, highlighting a disconnect between market expectations and the actual business scale.
According to Coindesk on July 30, 2024, while USDC had a market capitalization of $33.5 billion, its issuer, Circle, was valued at only $5 billion. This places Circle’s value at approximately 15% of USDC’s market cap, which is seen as a standard ratio for major stablecoin issuers.
However, new projects are showing a notably different trend:
This trend reflects the market’s heightened expectations for new stablecoin and Real World Assets (RWA) projects. Investors are placing high value on their innovative potential, but this also carries significant risk. The current valuations of ONDO and ENA may be considered excessively high relative to their actual business scale and potential, suggesting the possibility of future market corrections.
Most new stablecoin projects, except for Mountain Protocol, issue governance tokens. This represents a significant departure from traditional stablecoins like USDT and USDC.
While governance tokens can effectively drive early-stage growth and foster community engagement, they also introduce regulatory and operational complexities.
The innovative approaches adopted by new stablecoin projects present opportunities, but they also come with inherent structural risks that could affect the stability and long-term sustainability of these projects.
3.5.1. USDY and USDM: Collateral Asset Management Risks
USDY and USDM both use U.S. Treasury bonds and bank deposits as collateral. While this structure provides a layer of stability, it exposes the projects to risks similar to those faced by USDC during the failures of Silvergate Bank and Silicon Valley Bank.
3.5.2. USDe and LISUSD: Risks of Cryptocurrency Collateral
USDe and LISUSD employ a collateral structure based on cryptocurrency assets, which exposes them to unique risks.
Despite these risks, new stablecoin projects continue to draw attention with their innovative approaches. They have the potential to serve as a bridge between traditional finance and the DeFi ecosystem. However, regulatory uncertainties, limited utility, and the complexities of governance models will be key factors in determining their long-term success.
Share of USD and EUR stablecoins traded, source: Kaiko
Currently, the stablecoin market is predominantly dominated by USD-backed tokens. According to Kaiko, approximately 90% of all cryptocurrency transactions are conducted using USD-backed stablecoins. In 2024, the average weekly trading volume of these stablecoins reached $270 billion—70 times the volume of Euro-based stablecoins.
While stablecoins pegged to other fiat currencies hold a smaller market share, they are showing steady growth.
As regulatory frameworks solidify, the growth of stablecoins backed by a wider range of fiat currencies is expected. Several factors contribute to this potential expansion:
A range of factors is converging to fuel the potential expansion of the stablecoin market. The high adoption rate in emerging markets, combined with active participation from major financial institutions, suggests that stablecoins may evolve beyond their current role within the cryptocurrency ecosystem to become an integral part of the global financial system.
The clarification and strengthening of stablecoin regulatory frameworks are expected to significantly improve market stability and reliability. This will likely lead to increased arbitrage opportunities between fiat currencies and stablecoins, while also facilitating the entry of large-scale institutional investments.
4.3.1. Key Impacts of Regulatory Enhancements
4.3.2. Expansion of arbitrage opportunities
As regulation improves price stability, various arbitrage opportunities are expected to emerge:
These arbitrage activities are expected to enhance market efficiency and improve the price discovery mechanism.
4.3.3. Development of the Derivatives Market
As the stablecoin market matures, various derivatives commonly seen in traditional finance are expected to be introduced, offering investors more diverse options and risk management tools.
The introduction of these derivatives will add sophistication and efficiency to the stablecoin market. Investors will gain access to a wider range of strategies, and businesses will be better equipped to manage risks.
The stablecoin market is rapidly evolving, increasingly serving as a bridge between traditional finance and digital finance. The emergence of new projects, the establishment of regulatory frameworks in various countries, and the proactive engagement of market participants all underscore the dynamic nature of the stablecoin ecosystem.
Innovative stablecoin projects like USDY, USDM, USDe, and LISUSD offer new opportunities but also bring unique risks. Their success will largely depend on effective risk management and their ability to adapt to regulatory changes.
Major regions such as Hong Kong, the EU, and the UAE are actively introducing regulations that are expected to formalize and stabilize the stablecoin market. This regulatory clarity is likely to encourage institutional investment and enhance the credibility of the market.
Stablecoins are poised to go beyond their traditional role as a store of value, potentially driving the digital transformation of the foreign exchange market. The introduction of diverse derivatives is expected to make the market more sophisticated and efficient. However, several challenges must be addressed, including regulatory compliance, technological stability, and the establishment of user trust. Additionally, external factors such as the introduction of central bank digital currencies (CBDCs) will play a crucial role in shaping the future of stablecoins.
In conclusion, stablecoins have the potential to become a key infrastructure of the digital economy. Monitoring developments in this space and analyzing their implications from multiple perspectives will be essential. Understanding how stablecoins will evolve and reshape the global financial system will be critical to anticipating the future of the financial industry.