2020 is proving to be the year of stablecoins. From $5.3 billion in January, the overall market capitalization of the stablecoin market skyrocketed beyond $13 billion as investors rushed to protect their capital from the effects of the global economic crisis. But why are some stablecoins growing much faster than the overall market?
1) DAI – the fuel for yield farming
Market cap: +239% since July 1 (currently $432m)
Best investment vehicles: complex yield farming with COMP and BAL (up to 20% APR)
The key reason for the surge in the supply of DAI is yield farming – the latest craze to take over the DeFi industry. Yield farming (or liquidity mining) means earning rewards for adding liquidity to a DeFi protocol. Farmers come up with ever more convoluted schemes, locking up one asset to get a loan in another, lock that up on a different platform to obtain a third type of asset etc.
For instance, one can add ETH to Compound to get DAI and mine Maker’s COMP tokens, then deposit the DAI in a liquidity pool on Balancer to also farm BAL. Or you could even trade your DAI for USDC, deposit that as collateral on Compound to generate more DAI and farm even more COMP.
In the past couple of months, two major DeFi projects released their farmable tokens: COMP (Compound) and BAL (Balancer). Their prices quickly surged, and users rushed to exploit new yield farming opportunities before the inevitable slump. This ‘farmer invasion’ propelled the market capitalization of DAI past $400m.
If yield farming looks remarkably like banks creating more credit out of thin air – it is. In fact, Vitalik Buterin himself recently called the yield farming mode ‘unsustainable’. He also warned against following hot DeFi trends without evaluating the risks:
2) TUSD (TrueUSD) – looking to be more transparent than USDT
Market cap: +85% since July 21 (currently $319m)
Best investment vehicles: lending on CoinList, 2.4% APR as of August 2020
The quick rise of TrueUSD’s market cap is a bit of a surprise, given that this token hardly ever figures in crypto news headlines. TUSD isn’t featured on many crypto lending platforms, either, with only CoinList, Nuo and Aave listed on DeFi Rate. The 2.4% APR is also considerably lower than the average yield in the stablecoin market.
Still, TUSD is preferred over USDT by some investors because it is more transparent (as far as centralized stablecoins go, of course). Unlike Tether, which is backed by both fiat USD and unspecified ‘credit instruments’ and never audited, TUSD is backed by fiat USD only. In 2019, TrustToken even announced a collaboration with a US accounting firm to provide real-time monitoring of the bank account where the collateral is stored.
Apart from its relative transparency, TUSD, like other stablecoins, is helped by the Covid-19 pandemic and the economic recession. As investors expect fiat money to depreciate as a result of the relaxed monetary policy, they are buying stable crypto assets to protect their capital.
3) USDN (Neutrino USD) – the highest-yielding stablecoin
Market cap: +36% since July 21 (currently $21.7m)
Best investment vehicles: staking on Waves.Exchange, 23.5% APR as of August 2020
USDN is the only coin on our list that isn’t built on Ethereum – and the only one that directly supports delegated staking. Its current 23.5% annual yield is also the highest among stablecoins.
USDN is based on the Waves blockchain, which uses a consensus model called LPoS, or Leased Proof of Stake. Staking means locking up your coins in a smart contract to get something in return – usually rewards for confirming transactions. Delegated staking consists of delegating your right to confirm transactions to another node in exchange for rewards, instead of launching your own node.
Crypto staking is extremely popular among investors, with billions of dollars staked on the contracts of coins like Tezos (XTZ) and Cosmos (ATOM). However, Ethereum doesn’t support staking yet, so you can’t get stake stablecoins like USDT or USDC, which are all built on Ethereum.
It’s not surprising, then, that USDN – the first stakable stablecoin – is attracting so much attention. Its market cap skyrocketed in July and August, when the estimated APR (annual yield) grew from 10% to 23.5% in just 6 weeks. This was due to a price rally of WAVES – the asset by which USDN is backed. Since USDN is a decentralized stablecoin, like DAI, it’s collateralized with another crypto asset, not with fiat US dollars.
4) USDC (USD Coin) – buoyed by the popularity of Curve
Market cap: +18% since July 21 (currently $1.3bn)
Best investment vehicles: lending on Nuo (11.23% APR as of August 21)
USDC’s market cap may be 10 times less than that of Tether, but it plays a more important role in the Ethereum-based DeFi market. Most decentralized lending platforms support USDC, and the rising interest in DeFi lending is fuelling the demand for USDC. A lot of the demand for USDC loans comes from institutional traders who need stablecoins to buy BTC in the spot market and earn arbitrage gains in the derivatives market.
Another price driver is the fast growth of Curve Finance – DeFi platform for swapping stablecoins. Curve was designed as an alternative to the decentralized trading protocol Uniswap. Whereas Uniswap features thousands of tokens, many of them scams, Curve has only stablecoins, such as USDC, DAI, USDT, and wBTC. With $1bn locked in the contracts, Curve is currently the 3rd-largest DeFi protocol on Ethereum.
5) USDT (Tether) – ruled by the whales
Market cap: +9% since July 21 (currently $10bn)
Best investment vehicles: lending on Poloniex (6.5% APR as of August 21)
Tether’s market cap growth rate is much slower than that of other stablecoins on our list – but it’s mostly because the capitalization is already so high.
In spite of its clear market dominance, there are still serious doubts about Tether’s long-term stability. Among the centralized stablecoins, it’s the least-transparent. The coin is supposedly backed by fiat USD in its bank accounts, but there are no audit reports to prove that the money is really there.
In 2019, Tether was involved in a serious scandal: it came out that the company transferred over $700m in collateral funds to its partner, Bitfinex exchange. As a result, Tether admitted that the supply is partly backed by debt liabilities, not just fiat money. If something similar happens in the future and investors discover that the collateral doesn’t match the supply, the price of USDT could drop.
Another concern is the centralization of USDT ownership. According to reports, less than 400 addresses hold over 80% of all Tether. These whales could easily manipulate the market and the price of USDT itself. A good illustration is what happened on July 30 and 31, 2020, when whales sent more than $300 million in USDT to Binance.
This doesn’t mean that investors should stay away from USDT. Still, it’s wise to diversify one’s stablecoin holdings by adding decentralized coins, such as DAI and USDN.
Why you need more stablecoins in your portfolio right now
We’ve seen that each of the 5 leaders on our list has been growing for its own reasons. This leads to an important insight: just because several stablecoin’s market caps are increasing at the same time doesn’t mean that they all correlate.
Thus, you can build an interesting stablecoin portfolio to profit from several sources: DAI yield farming, USDN staking, USDC lending and so forth. Focusing on stable crypto assets is a good investment strategy, given that the Covid-19 pandemic is far from over. As the world slides deeper into recession and yields in traditional money markets descend below zero, stablecoins will become ever more relevant.