Learning Objectives:
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Understand stablecoin types and mechanics
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Master algorithmic stablecoin economics
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Learn about stablecoin risks and failures
5.4.1: What are Stablecoins?
Definition and Purpose:
Stablecoins are cryptocurrencies designed to maintain a stable value relative to a reference asset (usually USD).
Stablecoin Use Cases: 1. Trading: - Trading pairs - Settlement - Price stability 2. Payments: - Remittances - E-commerce - Peer-to-peer 3. DeFi: - Lending/Borrowing - Yield farming - Collateral 4. Store of Value: - Hedging volatility - Savings - Income generation
5.4.2: Stablecoin Types
Type 1: Fiat-Backed Centralized
Fiat-Backed Stablecoins: USDC (Circle): ┌─────────────────────────────────────────────────────────────────────┐ │ Asset: USD (held in banks) │ │ Issuer: Circle │ │ Regulation: US regulated │ │ Transparency: Monthly attestations │ │ │ │ Example: 1 USDC = 1 USD (backed by USD reserves) │ └─────────────────────────────────────────────────────────────────────┘ USDT (Tether): ┌─────────────────────────────────────────────────────────────────────┐ │ Asset: USD + cash equivalents │ │ Issuer: Tether Limited │ │ Regulation: Limited │ │ Transparency: Disputed │ │ │ │ Example: 1 USDT ≈ 1 USD (partially backed) │ └─────────────────────────────────────────────────────────────────────┘
Type 2: Crypto-Backed Overcollateralized
Crypto-Backed Stablecoins: DAI (MakerDAO): ┌─────────────────────────────────────────────────────────────────────┐ │ Collateral: ETH, WBTC, USDC │ │ Mechanism: Overcollateralized Vaults │ │ Stability: Collateralization ratio >150% │ │ │ │ Example: 1 DAI ≈ 1 USD (backed by $1.50 worth of ETH) │ └─────────────────────────────────────────────────────────────────────┘
Type 3: Algorithmic (No Collateral)
Algorithmic Stablecoins: TerraUSD (UST) - Failed: ┌─────────────────────────────────────────────────────────────────────┐ │ Mechanism: Algorithmic expansion/contraction │ │ Collateral: No underlying collateral │ │ Stability: Secondary token (LUNA) │ │ │ │ Problem: Death spiral when confidence breaks │ └─────────────────────────────────────────────────────────────────────┘
5.4.3: DAI – The Decentralized Stablecoin
MakerDAO Architecture:
MakerDAO System: ┌─────────────────────────────────────────────────────────────────────┐ │ MakerDAO Architecture │ │ │ │ Vaults: │ │ ┌─────────────────────────────────────────────────────────────┐ │ │ │ Collateral: ETH, WBTC, USDC │ │ │ │ Min Collateral Ratio: 150-170% │ │ │ │ Mint: DAI against collateral │ │ │ └─────────────────────────────────────────────────────────────┘ │ │ │ │ │ Stability Fee: │ │ ┌─────────────────────────────────────────────────────────────┐ │ │ │ Interest rate on DAI loans │ │ │ │ Adjusted by governance │ │ │ │ Currently: 5-10% │ │ │ └─────────────────────────────────────────────────────────────┘ │ │ │ │ │ DAI Savings Rate: │ │ ┌─────────────────────────────────────────────────────────────┐ │ │ │ Interest on DAI holdings │ │ │ │ Paid from stability fees │ │ │ │ Current: 3-8% │ │ │ └─────────────────────────────────────────────────────────────┘ │ └─────────────────────────────────────────────────────────────────────┘
5.4.4: Algorithmic Stablecoin Economics
The Death Spiral:
Algorithmic Death Spiral:
1. Confidence Weakens:
┌─────────────────────────────────────────────────────────────┐
│ Stablecoin de-pegs below $1 │ │
└─────────────────────────────────────────────────────────────┘
│
▼
┌─────────────────────────────────────────────────────────────┐
│ 2. Sell Pressure: │ │
│ • Users sell stablecoins │ │
│ • Price drops further │ │
└─────────────────────────────────────────────────────────────┘
│
▼
┌─────────────────────────────────────────────────────────────┐
│ 3. Algorithm Responds: │ │
│ • Mints more governance tokens │ │
│ • Sells for stablecoins │ │
└─────────────────────────────────────────────────────────────┘
│
▼
┌─────────────────────────────────────────────────────────────┐
│ 4. Death Spiral: │ │
│ • Governance token crashes │ │
│ • Algorithm cannot recover │ │
│ • Stablecoin becomes worthless │ │
└─────────────────────────────────────────────────────────────┘
5.4.5: Stablecoin Risks
| Risk | Description | Example |
|---|---|---|
| Collateral Risk | Collateral value drops | DAI 2020 crash |
| Algorithmic Failure | Death spiral | TerraUSD |
| Regulatory Risk | Legal issues | USDC blacklisting |
| Banking Risk | Bank failures | Silicon Valley Bank |
| De-Peg Risk | Price deviation | USDC de-peg 2023 |
5.4.6: Stablecoin Market Overview
Stablecoin Market (2024): Top Stablecoins: 1. USDT: ~$100B (Tether) 2. USDC: ~$30B (Circle) 3. DAI: ~$5B (MakerDAO) 4. USDe: ~$2B (Ethena) Total Stablecoin Market: ~$150B Growth: - 2020: $20B - 2021: $150B - 2022: $200B - 2023: $140B - 2024: $150B+