Stablecoin Market Outlook: LUSD Leads the Way

As stablecoins are a core component of on-chain financial infrastructure, it is crucial to evaluate the advantages and disadvantages of numerous stablecoins and select the most suitable one. This article, produced collaboratively by Frogs Anon researcher rxndy and Liquity Protocol, classifies stablecoins based on design elements and constructs a framework based on collateralization and centralization levels to compare DAI, FRAX, and LUSD, and predict market trends for stablecoins.

Looking at the top 10 stablecoins by trading volume, centralized stablecoins (essentially just on-chain USD) are the most widely used, but they cannot provide censorship resistance or protection from traditional bank crises. The ultimate goal of stablecoins is to solve the trilemma of decentralization, capital efficiency, and price anchoring, which USDC and USDT clearly fail to achieve. Among the top 10 stablecoins, only DAI, FRAX, and LUSD can be considered somewhat decentralized.

1) Frax is a partially collateralized stablecoin that uses the AMO system to adjust its collateralization ratio and maintain price anchoring. Given the regulatory crackdown on algorithmic stablecoins after the UST collapse, a recently passed proposal indicates that the community is in favor of transitioning to a fully collateralized model; 2) DAI and its CDP model are the most successful stablecoins apart from on-chain USD like USDC. However, DAI borrowing often relies on centralized stablecoins as collateral, also facing centralization risks; 3) LUSD is the most prominent stablecoin in the field that is fully collateralized by crypto assets to date, based on its immutable smart contract, economically sound anchoring mechanism, and capital efficiency that provides room for growth without compromising collateral ratios. Although Liquity’s smart contracts remain on Ethereum, LUSD has been bridged to L2, with liquidity on Optimism and Arbitrum totaling over $11 million.

Each bank bankruptcy reaffirms the value of decentralized stablecoins, and LUSD has long been viewed by the market as a stablecoin that can be held during times of crisis. Adding bridges and liquidity venues on L2 allows LUSD to be opened up to a wider range of market participants while retaining the immutability that makes the protocol resilient. LUSD’s sustained growth during a deep bear market demonstrates its ability to withstand the test of time and adverse market conditions. And now, with pledging ETH becoming the dominant asset in crypto, the new protocol forking Liquity with LUSD as collateral further demonstrates its design advantages.


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