Stablecoin Brief: November 15th, 2023

Key Insights

The overall stablecoin market capitalization slightly increased over the past thirty days, reaching $125.7 billion.
The divergence between the fiat-backed giants, USDT and USDC, continues, with USDC supply falling 4.39% over the past month.
Liquid staking token (LST)-backed stablecoins, a relatively new form of overcollateralized stablecoin, continue to see growth, with Lybra and Prisma reaching $304 million and $358 million in TVL, respectively.
The incentivization methods found in LST-backed stablecoin protocols will help bootstrap the protocols, but over the longer term, these protocols will fiercely compete with others (e.g., money markets and DEXs) for LST deposits.

Stablecoin Screener

In line with the broader crypto market and general sentiment, the total stablecoin market capitalization saw a slight increase of ~1.68% over the past thirty days, pushing the total stablecoin market capitalization up to ~$125.7 billion.

Fiat-Backed Giants — USDT & USDC

Despite the more positive shift in sentiment, the second largest stablecoin by market capitalization, USDC, continues its downward circulating supply trend (-4.39% over the past thirty days). As noted in our previous stablecoin brief, the decrease in USDC supply (-45% YTD) stands in contrast to the growing supply of USDT (+31% YTD), which now hovers around $86.8 billion.

The continued expansion of USDT supply only helps further its current business model and network effect flywheel. From a chain perspective, Tron continues to dominate USDT deposits, seeing a ~$2.8 billion increase over the past month, compared to Ethereum, which saw ~$0.76 billion over the same time period. In particular, the more USDT is leveraged as a store of value for those seeking access to U.S. dollars and a pure payment currency in developing countries, the less it has to bend towards becoming a yield-generating product in the short term. With U.S. treasuries yielding ~5%, Tether can continue to pocket the entire, sizeable spread without passing through any interest toward holders.

On the other hand, USDC holders can now earn “rewards” via Coinbase by depositing their USDC. USDC depositors can earn up to an APY of 5% but can be changed at any time. Especially for U.S. participants, receiving a yield approximately equivalent to U.S. treasuries is likely a good enough incentive to continue holding USDC. However, if the rewards offered on USDC dip too far below U.S. treasury yields, holding USDC becomes a much more difficult position to maintain.

The business models of USDT and USDC have naturally generated massive profits but have also created a market opportunity for new stablecoin entrants.

Emerging Stablecoin Models – LST CDPs

Lybra and Prisma are examples of newer collateral debt position (CDP) protocols. They enable liquid staking tokens (LSTs), such as Lido’s stETH, to be used as collateral. Users can deposit supported LSTs and mint a stablecoin against them. A key differentiating feature of these LST CDPs relative to the fiat-backed model is the ability for users to receive yield from their staked ETH positions.

Lybra and Prisma saw large, thirty-day TVL increases of 27% and 547%, respectively. These protocols allow users to have the benefits of a long ETH position that earns yield (i.e., by holding and staking ETH) and minting a stablecoin against it.

To help bootstrap the protocol, Prisma also uses the ve-token model popularized by Curve to incentivize certain actions. For example, once a user locks the native protocol token, PRISMA, they can vote to direct PRISMA emissions towards:

Minting new mkUSD, Prisma’s stablecoin, with a particular collateral, or
Maintaining an active mkUSD debt position with a particular collateral.

The support of LST collateral (and the underlying yield generated by them) within these protocols allows users to offset any fees or borrowing costs. Compared with a traditional ETH CDP, this is a healthy improvement. Yet, they are still under the constraints of other CDP protocols, namely:

Collateral Constraints: The LST market sets a natural upper bound on the TVL within these protocols.
Capital Efficiency: To protect themselves against bad debt, these protocols generally require CDPs to be overcollateralized.

We can use the current staked ETH values and assume a 200% collateralization ratio along with a $2000 ETH price to get a rough sense of the constraints' effect on these protocols.

The two largest liquid staking providers, Lido and Coinbase, make up nearly half (44.7%) of the entire staking market. Lido’s stETH has a market cap of ~$18 billion, and Coinbase’s cbETH has a market cap of ~$2.8 billion, totaling $20.8 billion. With a 200% collateralization ratio, these LST-backed stablecoin protocols combined have an upper bound of ~$10.4 billion that can theoretically be minted against the LST collateral.

Of course, these protocols don’t exist in a vacuum — numerous other DeFi protocols are all vying for LST deposits, so competition for this collateral will continue to be fierce, even as the total staked ETH market inevitably continues to grow.

Stablecoin Ecosystem Chartbook

Zooming back out to the network level, Arbitrum once again saw an increase in its stablecoin market capitalization, now reaching over $1.8 billion.

As discussed in our previous stablecoin brief, the Arbitrum Short-Term Incentives Program (STIP) should continue to incentivize stablecoins and liquidity to flow into the network. The STIP grants ARB tokens to protocols on the network, which will then leverage the ARB tokens to incentivize and drive activity within the protocols. DeFi protocols such as GMX and MUX are set to receive large allocations, totaling 12 million ARB and 6 million ARB, respectively.

Solana also saw a modest increase in stablecoin inflow (+4.3% over the past thirty days), bringing its total stablecoin supply to $1.5B. Stablecoins provide leverage opportunities and liquidity within DEXs, so stablecoin inflows and overall TVL will be key indicators to measure the status of Solana DeFi.

Nearly every network is seeing a bump up in stablecoin transfers, with Arbitrum leading the pack with an increase of 57% over the past thirty days.

Given that stablecoin market capitalizations across most chains were relatively flat over the past month, this likely implies existing holders and protocols are seeing heightened activity.

Stablecoin yields within money markets continue their upward march, with nearly every major stablecoin drawing 4.0%+ in APY. The arbitrage opportunity between borrowing stablecoins for lower than yields on real-world assets should continue to push onchain yields up until they converge on real-world interest rates (~5%).

While the LUSD APY is cooling down, the momentary spike was likely primarily due to the strategy well described in this tweet. With the DAI savings rate set at 5% and the fact that LUSD has no ongoing borrow interest rate (only one-time entry and exit fees), high demand was created for LUSD. Users would swap the minted LUSD for DAI, and deposit the DAI to earn the 5% yield. Additionally, the sell pressure on LUSD caused its price to dip below $1, creating the incentive to redeem LUSD and thereby decreasing its overall supply.

With a large increase in Prisma’s TVL (+547% over the past thirty days) also comes a large increase in fees generated by the protocol — $3.2 million over the past month. Prisma charges minting, redemption, and continuous borrowing fees. Currently, mint fees range between 0.5% - 0.63%, and borrowing rates are set at 2% for each collateral type. The continuous borrow rate allows the protocol to scale its fees in tandem with overall mkUSD growth, compared to systems like Liquity that have no continuous borrow rate.