With MakerDAO allocating 5% annualized returns to DAI holders, stablecoin holders have an increased demand for earning returns. Many stablecoins have been affected, such as USDC, FRAX, LUSD, and eUSD. Let’s take a look at their performance and response measures.
Author: Jiang Haibo
With the emergence of Liquidity Staked Derivative Finance (LSDFi) and MakerDAO’s Enhanced DAI Savings Rate (ESDR), stablecoin holders have a demand for earning returns. Due to MakerDAO’s EDSR allocating 5% annualized returns to DAI holders, other stablecoins may be exchanged for DAI to earn returns. As a result, they are being “drained,” leading to a decrease in circulation or a shift from premium to discount. In order to cope with this situation, some stablecoin issuers have actively updated their strategies.
USDC: Holding in Coinbase earns a 5% annualized return
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Maker’s Peg Stability Module (PSM) allows the minting of DAI with centralized stablecoins like USDC at a 1:1 ratio, or the redemption of DAI for centralized stablecoins. After the introduction of this feature, the proportion of USDC in DAI collateral gradually increased to over 50%. This has led to criticism that DAI has lost its decentralized characteristics. Although the issuance of DAI has increased, this portion of DAI does not have a stability fee and does not generate value for Maker. Instead, it bears the counterparty risk of USDC, which was also reflected in the USDC depegging incident this year.
The situation began to change as Maker gradually invested the funds in PSM into RWA. In this process, the USDC in PSM will be redeemed for USD and used to purchase US Treasury ETFs. At this point, the pressure is shifted to the issuer of USDC, Circle. Since there are no fees for the minting and redemption of USDC, Circle has transitioned from benefiting from DAI to becoming a compliant channel for helping Maker attract funds to purchase US Treasury bonds.
According to data from glassnode, the circulation of USDC has decreased from 55.9 billion in June 2022 to 26.08 billion currently (September 12, 2023). Maker’s redemption of USDC to purchase US Treasury bonds played a certain role in this decline.
In September 2022, Coinbase proposed on the Maker forum to deposit a portion of USDC from PSM into Coinbase Prime to participate in Coinbase’s institutional reward program, where these funds could earn a 1.5% annualized return.
However, Maker did not stop the pace of redeeming USDC to purchase government bonds. In July of this year, when there was only slightly over 300 million USDC left in PSM to guarantee necessary liquidity, Maker co-founder Rune proposed the implementation of EDSR to raise the DSR to 8% to attract incremental funds. Later, EDSR was lowered to 5%.
In this situation, Coinbase continues to follow suit, offering users a 5% annualized return for holding USDC on the Coinbase exchange.
Recently, the circulation of USDC seems to have avoided a downward trend, but the profits obtained by USDC issuers will decrease due to Coinbase’s concession. At the same time, new competitors such as PYUSD and FDUSD have also emerged in the centralized stablecoin track.
Frax: Significant decrease in circulation
From the beginning, the majority of the reserves of the stablecoin issued by Frax Finance were USDC. As shown in the figure below, most of the reserves held by Frax Finance are FRAX-USD, which is the liquidity of FRAX, USDC, and USDP on Curve. This means that a portion of the circulating Frax is held by the protocol, and USDC accounts for a considerable proportion of the remaining reserves. In the case of higher yield and relative safety of DAI, the circulation of FRAX stablecoin is easily affected.
According to data from glassnode, the circulation of Frax has dropped from 2.9 billion in March 2022 to the current 670 million, a decrease of 17.3% compared to the 810 million when Maker’s EDSR took effect.
When Maker’s EDSR took effect, Frax founder Sam Kazemian proposed a partnership with the US company FinresPBC to redeem USDC and USDP for USD through the FRAX v3 RWA asset strategy to earn interest. After deducting costs, the remaining income generated by Frax will be directly returned to the protocol by FinresPBC.
Liquity: LUSD premium turns negative
In the case of Maker gradually shifting towards RWA, Liquity’s LUSD has become a representative project in the fully decentralized stablecoin track, which only supports the minting of LUSD with ETH as collateral.
Because Liquity currently only supports ETH as collateral, it has to consider adding new features in the face of competition from forked product versions Gravita and Lybra.
During the Stable Summit held in July, Liquity founder Robert Lauko announced the plan for Liquidity V2, which will take into account decentralization, stability, and scalability. Liquidity V2 is expected to be publicly released in 2024 and will introduce leverage and lending products, as well as support for ETH pledged as collateral.
According to official data, the circulation of LUSD has decreased from 1.56 billion in May 2021 to the current 287 million. Compared to the 297 million when Maker’s EDSR took effect, the decrease is relatively small.
However, the impact on the price of LUSD seems to be greater. According to CoinMarketCap data, LUSD has been in a continuous negative premium phase for over a month, which is the first time this has happened in the past year.
Lybra Finance: Most of the Funds Withdrawn After Lybra V2 Upgrade
As for who is the better solution in the stablecoin field between USDT and LSDFi, currently, the USDT-like projects are temporarily leading.
Lybra is the leading project of LSDFi and supports the minting of eUSD by pledging derivatives of ETH. eUSD holders can earn higher returns than Maker EDSR, but due to a significant decline in recent data, it is also mentioned here. According to DeFiLlama data, the total value locked (TVL) of Lybra V1 and V2 has dropped from $343 million on September 5th to the current $129 million. Lybra V2 was recently launched, which is the full-chain version of Lybra, supporting more collateral and expanding stablecoin to other chains without sacrificing interest.
Similarly, according to CoinGecko data, the price of eUSD (OLD) on September 5th was $1.04 with a market cap of $184 million. However, as of September 13th, according to Etherscan data, the circulating supply of eUSD (OLD) and eUSD was only 29.3 million and 36.02 million respectively, which is less than half of the previous amount.
This indicates that most of the previous funds chose to leave directly during the migration from Lybra V1 to V2. Although it is not certain whether this is due to Maker EDSR, the main income for users in Lybra still comes from the liquidity mining subsidy provided by the project, and the attractiveness may decrease as the price of the governance token falls.
Summary
With the development of LSDFi and the launch of Maker EDSR, stablecoin holders may prefer to share the profits from holding stablecoins. Other stablecoins that do not generate income may be drained during this process, leading to a decrease in circulation or a negative premium in price.
Among the stablecoins observed by LianGuaiNews, FRAX has a significant decrease in circulation, LUSD’s premium has turned from positive to negative, USDC has followed by distributing 5% annualized returns to holders in Coinbase, and the issuance of Lybra’s eUSD has decreased by more than half during the migration from V1 to V2.
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