Recently, the Frax community approved a proposal to make its FEI stablecoin fully backed by USD equivalents, quite than keeping a partially backed and partially algorithmic stablecoin. Thanks to Frax’s decision, the times of experimenting with algorithmic stablecoins may finally be behind us.
The decentralized stablecoin space has only proven successful with stablecoins backed by ETH, USDC and BTC. The failure of algorithmic stablecoins (reminiscent of UST) and the depegging of over-leveraged stablecoins (reminiscent of MIM) have turn out to be certainly one of the principal reasons for the lack of trust in decentralized stablecoins.
The decentralized stablecoin space remains to be small
Decentralized stablecoins account for five.5% of the overall stablecoin supply. DAI MarkerDAO manages the lion’s share of this with 71% dominance. Decentralized stablecoin transfer volumes are largely dominated by DAI and have declined since Q3 2022, suggesting activity across the sector stays subdued.
During the 2021 and 2022 bull markets, platforms like Abracadabra and Luna thrived on higher profits, but when the market turned negative, these stablecoins were among the many first to collapse. Luna’s UST stablecoin crashed in May 2022 after a big stablecoin recall disrupted its algorithmic engine.
Prior to its collapse, UST was the third largest stablecoin with more supply than BUSD and only behind USDT and USDC. However, the rippling fallout of Luna’s fall saw Abracabra MIM’s stablecoin lose its course as a consequence of a widespread fall in asset prices supporting MIM. Liquidations piled up on the platform without buyers, resulting in frequent dips below the $1 mark.
Only just a few officials remain in place
Stablecoin DAI MakerDAO is the longest running decentralized alternative with a big market share. While the DAI project promoted decentralization, the token fell victim to centralization, with over 50% of the assets supporting DAI consisting of USDC Circle.
The MakerDAO community has steadily taken steps to diversify the platform’s support. In October 2022, the community voted to convert USDC 500 million into US Treasuries.
Recently, MarkerDAO and the decentralized stablecoin space took one other blow after a court ruling in England forced the platform to incorporate the choice to take over assets from the user. This creates significant regulatory risk for platforms using and running decentralized stablecoins.
In addition to MakerDAO, Liquity has earned an honest status in DeFi as a stablecoin platform backed solely by ETH. Liquity resists censorship since it only provides Ethereum smart contracts that will not be managed by admins. The total supply of LUSD is 230 million, with LQTY because the platform’s utility token.
The price of the project’s native token, LQTY, doubled after going public on Binance on February 28, 2023. Alleged insider trading is behind the worth spike reported by anonymous on-chain analytics portal An Ape’s Prologue. Still, the token’s low issuance rate and real benefit from protocol fees may give it a whole lot of benefits over management-only tokens like Uniswap’s UNI token.
Stablecoin platforms construct liquidity and trust over time
Frax’s decision to migrate from a semi-algorithmic project to a completely backed stablecoin could lead to increased demand for FEIs. Moreover, Frax is a big holder of Curve’s CRV token and Convex Finance’s CVX token, which enables the DAO to incentivize the supply of liquidity on Curve. This is notable because adequate liquidity is certainly one of the primary conditions for a stablecoin’s success.
Related: Stablecoin adoption may lead to DeFi growth, says Aave founder
Currently, the volatility of the cryptocurrency market discourages many users from minting cryptocurrency-backed cryptocurrencies. The lack of trust in decentralized stablecoins and the long-term permeability of centralized stablecoins on many exchanges makes it difficult for decentralized alternatives to realize market share.
Still, the long-term market opportunity for decentralized stablecoins is critical. Over time, the reduced volatility and transparency of cryptocurrency regulations will likely increase the demand for crypto-backed stablecoins.
The views, thoughts and opinions expressed herein are solely those of the authors and don’t necessarily reflect or represent the views and opinions of Cointelegraph.
This article doesn’t contain investment advice or recommendations. Every investment and trading move involves risk and readers should do their very own research when making decisions.
