In-depth analysis of four new types of decentralized stablecoins: Dai, GHO, crvUSD, and sUSD.

Original author: Chole

Original source: Chain Tea House

Traditional finance's view on DeFi cannot be separated from the idea that "the wanderer will eventually return home". They believe that the endgame for crypto is to be acquired by traditional finance, because as long as the bottleneck between on-chain development and application implementation cannot be solved, there will always be the possibility of acquisition or regulation.

If classified by the risk of centralization, stablecoins can be divided into centralized stablecoins and decentralized stablecoins. This is also an important attribute of stablecoins in the era of increasing threats from centralized regulation. Furthermore, decentralization solves the concept of "stability" in stablecoins. To truly achieve the ultimate goal of stablecoins, it is necessary to create their own demand scenarios, not only for general equivalent currencies, but even to create unique economic activities to truly reflect the value of decentralized stablecoins.

One, MakerDAO Endgame Plan

(一) USDC and RWA bring potential risks to MakerDAO

MakerDAO founder Rune Christensen specifically mentioned in 2021 that USDC is one of the biggest potential risks for DAI stablecoin. DAI is fundamentally different from USDT/USDC, as the former is decentralized and mainly collateralized by Ether, while the latter stablecoins have significant regulatory friction, which poses a significant risk to DAI.

And besides stablecoin risks, Maker has been increasing its collateral of real-world assets in the past few years, such as national or corporate bonds, which makes Maker increasingly dependent on other real-world assets, cross-chain bridge assets, and assets that may be subject to regulatory and law enforcement pressure. This has led to criticism from users that Maker has put itself in an unsustainable position, as these assets fundamentally undermine Maker's goal of becoming an "uncensorable stablecoin".

Rune hopes that when he announces the "Clean Money" plan, Maker will be able to transfer assets from USDC to other bonds, thereby increasing its returns and preventing regulatory or law enforcement agencies from blocking DAI.

(二) Final Plan Launch

Rune proposed "The Endgame Plan" in August last year, aiming to repair and improve MakerDAO and its governance and ecosystem, so that the overall system can achieve a self-sustaining balance, also known as the "endgame state". (For more details on "The Endgame Plan", readers can refer to this article.) In short, Rune believes that if the overall system can reach the "endgame state", DAI can become an "unbiased world currency", completely unaffected by external factors, and become the infrastructure for both the crypto ecosystem and the world economy. In other words, Rune wants DAI to become the next Bitcoin.

According to the original proposal, several key parts were selected for screening:

First of all, Rune wants to restructure the existing decentralized work ecosystem into a self-operating decentralized autonomous organization "MetaDAO", which includes its complex matters, and everything else is "Maker Core", allowing MKR token holders to govern in a decentralized manner.

"Maker Core" will support collaborative "MetaDAO", and "MetaDAO" will also have its own profit model, governance token, and parallel governance process. Rune explained that MetaDAO is like a fast and flexible application layer Layer 2, while Maker Core is a slow and expensive but secure foundation Layer 1. Therefore, MetaDAO is responsible for trying innovation and taking on more risks, while security is provided by L1.

Furthermore, since Maker has already heavily integrated with Ethereum and relies on it as collateral, Endgame should move on to the next step. As Ethereum's dependence and dominant position fundamentally align with Maker Core, Endgame needs to fully leverage this symbiotic relationship and launch EtherDai (ETHD).

EtherDai (ETHD) can be seen as a new synthetic asset controlled by the Maker governance community, integrating top-tier liquidity collateralized lending currencies, similar to stETH of Lido Finance. Rune stated that the key to the long-term survival and success of DeFi protocols is to accumulate as much collateralized ETH as possible, while Maker also needs to construct collateralized ETH products to maintain the status of top DeFi protocols and decentralized stablecoin protocols.

In short, EtherDai (ETHD) is a new asset generated through "staked ETH" that helps Maker acquire more "staked ETH". The future mechanism details of ETHD will also be completed through MetaDAO, and Maker believes that this product may be as important as DAI in the long run.

(Three) How to increase the DAI supply in the yield farm?

MetaDAO will also have a token called MDAO, with a total of 2 billion MDAO tokens distributed through staking mining. Staking mining is divided into three categories:

20%: DAI Farm is aimed at promoting DAI demand and wide token distribution effects.

40%: ETHD, which is the ETHD Vault Farming, not only provides MDAO farming rewards, but also offers staking rewards.

40%: MKR, the delegated governance farm, rewards users who delegate their voting power to their preferred representatives.

These three asset allocations ensure the widespread and heterogeneous distribution of MetaDAO governance tokens, while remaining consistent with Maker and MKR holders, maximizing the creation of a broader Maker ecosystem.

Simply put, through yield farming, MetaDAO token MDAO will be distributed, which will help increase the supply of DAI collateralized by decentralized assets, rather than the demand for DAI. More user activity will shift towards the ETHD farm. In the endgame described by Rune, Maker will have more RWA as collateral, meaning the final collateral asset type will be a combination of on-chain and off-chain assets.

（四）MetaDAO Definition? What is the operating core?

As mentioned earlier, "Maker Core" will support collaborative "MetaDAO", which will also have its own profit model, governance token, and parallel governance process.

Further explanation, MetaDAO can be divided into three categories: Governors, Creators, and Protectors.

Governors: Responsible for organizing the decentralized manpower of Maker Core and increasing governance participation.

Creators: Responsible for the growth and innovation of the Maker ecosystem.

Protectors ( 保护者 )：Responsible for mediating between Maker Core and the real world, configuring RWA assets, and protecting RWA from physical and regulatory threats.

Finally, Rune has set up three stages for Maker:

Pigeon Stance: Basically Maker's state when the endgame plan was first introduced. During this phase, the plan will last for two and a half years, and Maker will focus on earning revenue and storing ETH for the next phase. After two and a half years, unless delayed or started earlier, the Eagle Stance phase will begin.

Eagle Stance: Reduce the amount of collateralizable assets to below 25% of total assets. If necessary, they plan to break the peg between DAI and the US dollar at this time.

Finally, there is the Phoenix Stance, which is only activated during periods of global instability or when collateral is at risk of attack. This situation can arise at any time and without warning. During this phase, all remaining seizable assets are sold to acquire more ETH. Finally, if the fund is not sufficient to pay off the debt and the protocol surplus is not enough, MKR will be sold on the market to maintain the protocol's solvency.

Rune Christensen outlined three main reform proposals in the Endgame proposal, including clear and specific rules (to be implemented immediately after the Maker governance MIP proposal is passed), governance participation incentives to be implemented by the end of 2023, and the transfer of operational complexity from MakerDAO to SubDAO (to be implemented in 2024).

Here is a special note about SubDAO. SubDAO will serve as a semi-independent professional department within MakerDAO. Its main tasks include maintaining decentralized front-end, allocating DAI collateral, managing operational efficiency risks, making marginal decisions, experimenting with innovative products and operating plans, etc. SubDAO will utilize MakerDAO's key governance processes and tools to simplify its operations.

Under the implementation of the Endgame framework, Maker will gradually stop maintaining the native treasury and instead allow SubDAO to generate DAI in bulk from the Maker Protocol at a low benchmark interest rate. SubDAO will also bear all costs, including employees, oracles, maintenance, upgrades, and other expenses, and will bear the first loss in all collateral exposure.

Next, the five stages can be divided into:

Phase 1 Beta Release: Continuously improve MakerDAO's core product DAI stablecoin, increase its usage and availability. Plan to launch more types of DAI to meet the needs of different users.

Phase 2 of SubDAO Launch: In this phase, MakerDAO will release six new SubDAO products to expand the MakerDAO ecosystem. Additionally, MakerDAO will integrate with external projects and partners, including introducing new synthetic assets, expanding lending and deposit options, and more financial derivatives, to increase its influence and availability in the decentralized finance ecosystem.

The third stage of AI governance tools release: After the launch of SubDAO, MakerDAO will be committed to fundamentally changing the governance within MakerDAO by introducing production-level artificial intelligence tools. These tools are supported by Alignment Artifacts and will improve decision-making and create a fair competitive environment between internal staff and community members.

Phase 4 Governance Participation Incentive Plan: As the governance ecosystem manages the DAO proficiently through governance AI tools, MakerDAO will launch a governance participation incentive plan to provide economic rewards to participants, promoting community participation and consensus building.

Final Endgame state of Stage 5: The last stage will deploy a new blockchain, currently known as NewChain. The new chain will have the ability to use hard forks as a governance mechanism, as well as optimization features to make it an "AI-assisted DAO governance process and AI tool user backend", including features such as smart contract generation, state rent, and protocol-level MEV capture.

Rune also mentioned that the launch of the new chain will be the final step in the Endgame release process. Once it is deployed, MakerDAO will permanently enter the endgame plan state, and further significant changes will become impossible. Its core processes and power balance will remain decentralized, self-sufficient, and permanent.

(Five) Latest Progress

On May 8th, MakerDAO announced the Spark protocol, which aims to enhance the liquidity and yield of the DAI stablecoin. The protocol is deployed on Ethereum and provides supply and borrowing functions for ETH, stETH, DAI, and sDAI, making it accessible to all DeFi users centered around DAI. Additionally, all DeFi users can use the Spark protocol.

Spark protocol is also an essential part of MakerDAO's Endgame expansion plan, with a focus on reshaping DAI as a freely floating asset collateralized by real-world assets.

二、AaVE GHO

(Note: As per the instructions given, I have not translated the content and have retained the original text as it is.)

Aave, the non-custodial liquidity market protocol known as the Defi lending king, allows depositors to provide liquidity and earn passive income by depositing assets into Aave's public fund pool. On the other end, borrowers can freely borrow assets from the fund pool using various methods such as over-collateralization or unsecured loans. All credit activities on the platform can be conducted without any credit checks, and not only is the liquidation efficiency high, but the probability of bad debts is also much lower than traditional lending models. Additionally, Aave has no repayment deadlines.

Aave was founded on Ethereum in 2017 and has now expanded into a large protocol that can cross 7 chains. On January 27th of this year, Aave V3 was officially launched on the Ethereum mainnet, completing the upgrade of the 7 major chains. As an established DeFi protocol, its token has risen nearly 60% this year.

And back in July 2022, the Aave community released an ARC proposal to introduce GHO, a decentralized stablecoin generated through over-collateralization and pegged to the US dollar. This coin will not only be the first to be launched on the Aave protocol, but will also allow users to mint GHO based on the collateral they provide. As a leading player in the DeFi space, the news of AAVE's stablecoin launch is sure to attract a lot of attention.

(一) GHO Development Stage

Phase One: On July 28th of last year, the Aave community proposed the issuance of the stablecoin GHO. Users can earn interest income by collateralizing assets through the AAVE protocol, while also generating the decentralized stablecoin GHO. When users want to redeem their collateralized assets, they need to destroy the minted GHO to do so.

For AaveDAO, GHO profits belong to the DAO and the borrowing interest rate is determined by it. Holders of stkAAVE who participate in the AAVE security module pledge can enjoy discounted interest rates to generate GHO.

Unlike DAI, GHO's collateral can provide continuous income, and AAVE introduces the concept of a "facilitator", which is designated by the AAVE community through governance, usually a protocol or institution. Facilitators can generate or destroy GHO without any collateral based on different strategies to regulate the market. For each facilitator, Aave Governance must also approve the so-called "bucket".

The storage bucket represents a specific GHO upper limit that a particular promoter can generate, and the AAVE protocol itself will serve as the first promoter.

Phase 2: On July 31st of last year, the GHO proposal was approved with a 99.99% approval rate (501,000 AAVE). Aave implemented the creation of the GHO stablecoin through a new Aave Improvement Proposal (AIP), and Aave DAO was responsible for managing it during its creation. Users were allowed to use their provided collateral to mint GHO, and the borrowing revenue from GHO would belong to Aave DAO. Aave and GHO were completely separated into two products.

Aave has also iteratively upgraded to Aave 3 in terms of capital efficiency, protocol security, decentralization, and user experience through continuous research, market data analysis, and community feedback.

Here is a brief explanation of Aave 3 upgrade. The launch of Aave V3 will further improve capital efficiency, security, and cross-chain functionality, promoting the development and decentralization of the entire protocol ecosystem. This includes: firstly, asset cross-chain flow (Portal), promoting "cross-chain" transactions, allowing assets to seamlessly transfer on Aave V3 markets on seven chains, solving the current liquidity demand differences among chains; secondly, efficient mode (eMode), users can significantly increase their borrowing limit by using "similar" assets as collateral; thirdly, isolation mode (Isolation Mode), newly listed assets labeled as "isolated" will have borrowing limit restrictions and can only lend out specific assets, and cannot be used as collateral with other assets at the same time.

Therefore, through Isolation Mode, users can generate GHO using various assets currently supported by the Aave protocol, while reducing risk through collateral. Supply and borrowing limits also help to reduce risk. For example, in a market downturn, as the price of collateral contracts rises, demand for GHO increases, and users will borrow more GHO using other non-volatile collateral assets to repay their positions. This will increase the amount of GHO entering the market and reduce demand.

At the same time, the efficient mode (eMode) can also allow stablecoin holders to exchange GHO at a ratio close to 1:1 with zero slippage. Asset cross-chain flow (Portal) enables GHO to be distributed across networks without trust and created on Ethereum with higher security. The entire process only requires simple message passing without the use of bridges, reducing overall risk.

Phase Three: On February 9th of this year, GHO officially launched on the Ethereum Goerli testnet for developers and community users to access its interface and detect potential issues in its workflow. The testnet supports four assets: DAI, USDC, AAVE, and LINK, and has added new facilitators to support FlashMinting mode, which can have the same effect as flash loans, improving overall transaction efficiency.

Just a brief explanation, FlashMinting and flashloan are the main reasons why Aave is most well-known. It is the protocol that pioneered the "flashloan" service, allowing users to complete borrowing and lending within the "same block". This enables users to conduct quick arbitrage operations. However, flashloan can only complete all operations within one block. If the funds are not returned, all operations will be reversed.

Simply put, when a user uses Lightning Loan to lend funds but does not make a repayment, the funds will automatically roll back to their original location and return to the starting point. This is because this operation is a failed task in a block and cannot evolve into a "real fact". Lightning loans are commonly used for arbitrage and only require a one-time payment of GAS fees and the cost of the Lightning Loan protocol. If there are good arbitrage opportunities, users can use Lightning Loans to obtain unlimited high profits. However, because Lightning Loans need to complete all operations within one block, code must be used to complete Lightning Loan operations, making it relatively difficult to use.

Finally, it is worth mentioning the completeness of the audit. GHO has undergone four complete audits to ensure its security. Taking the latest ABDK review as an example, all the code was subjected to functional testing and security audit. In 85 categories, a total of 6 modification suggestions were made. According to GHO's progress, there will be one more security audit before it goes live.

(II) Conclusion

Simply put, GHO is the asset that users deposit into the AAVE protocol for over-collateralization minting. Therefore, the increasing demand for GHO will encourage more users to deposit assets into AAVE. In addition, stkAAVE holders who participate in the security module staking can receive discounted rates to mint GHO, which further incentivizes more users to participate in staking. At the same time, the rising demand for AAVE makes AAVE's price more favorable, and the interest generated by GHO becomes a new source of income for the AAVE protocol. Therefore, for AAVE, launching GHO directly enhances the overall competitiveness of AAVE to a great extent.

However, not all orientations point to advantages. The facilitator in AAVE has the right to mint GHO without any collateral, which is too centralized. Once someone with malicious intent intervenes, it may trigger the risk of GHO becoming unanchored. Although AAVE has set up a bucket mechanism to limit the upper limit of GHO generated by facilitators, both are selected through AAVE voting. If there is a conflict of interest, it will lead to a major shift in governance and increasing centralization.

Finally, speaking of acquiring a large number of AAVE holders at a very low cost, GHO and the like are equivalent to perpetual motion machines of interest, and there is a high risk that in the future, a large amount of AAVE will be cashed out through GHO, causing a market crash.

Three, CRV crvUSD

The decentralized exchange Curve Finance was launched in 2020. CurveDAO token (CRV) is the native token of the platform. All liquidity providers who have provided liquidity to Curve have the opportunity to receive rewards in the form of CRV governance tokens.

Curve is different from other DEXs in the market in that it mainly focuses on providing low-slippage trading services between different stablecoins, such as Usdt, Usdc, and Dai. This allows users to reduce the exchange loss of tokens during the exchange process. Therefore, Curve platform does not charge users high transaction fees. The profit source of Curve lies in the issuance of stablecoins and lending platforms or financial derivative platforms.

Curve's lock-up volume as of today (5/24) is $4.02 billion. Previously, on 5/4, it was announced that the crvUSD smart contract had been deployed on the Ethereum mainnet, but the front-end UI interface has not yet been completed and is expected to be released soon. According to Etherscan data, the crvUSD smart contract was successfully deployed on the Ethereum mainnet at around 3am on 5/4 and 20 million crvUSD were minted through 5 transactions in a short period of time.

Following that, Curve's CEO Michael Egorov borrowed 1 million crvUSD by pledging 957.5 sfrxETH as collateral. It's worth noting that after the news of the stablecoin crvUSD being deployed on the Ethereum mainnet, Curve Finance's governance token CRV skyrocketed to $0.975 in a short period of time, with a direct increase of 6% in 24 hours. 

(I) Mining the Operating Mechanism of crvUSD from the Whitepaper

Curve released a white paper last year exploring its overall operation mechanism. Its core principles include "Lending - Liquidation Automated Market Maker Algorithm (LLAMMA)", "PegKeeper", and "Monetary Policy". The first LLAMMA can be seen as a dynamic lending and liquidation algorithm, which introduces an automated market maker into lending and liquidation. Therefore, it is different from ordinary collateralized stablecoins. Normal collateralized stablecoins, such as MakerDAO, belong to over-collateralization. Users need to have sufficient collateral to mortgage to the vault in order to borrow stablecoins in proportion to the collateral ratio. If the value of the collateral falls to a certain extent, there will be a liquidation line. Once the liquidation line is exceeded, the collateral will be automatically sold by the system to repay the debt.

The LLAMMA proposed by Curve is still issued through over-collateralization, but it uses a special purpose AMM instead of traditional lending and clearing processes. When the liquidation threshold is reached, the liquidation will not occur all at once, but will be converted into a continuous liquidation/clearing process.

For example, using ETH as collateral to borrow crvUSD. When the value of ETH is high enough, the collateral will not change, just like traditional collateralized borrowing. When the price of ETH falls and enters the liquidation range, ETH will gradually be sold off. After falling below the range, it will all be stablecoins, and further declines will not change, just like other lending protocols.

However, in the middle of the clearing interval, if ETH rises, Curve will use stablecoins to help users buy ETH again. If there is fluctuation within the clearing interval, the process of clearing and going to clear will be repeated continuously, selling and buying ETH repeatedly.

Compared to MakerDAO's one-time liquidation lending protocol, if there is a market rebound after liquidation, in MakerDAO, users will only have a small residual value left after liquidation, while in Curve, they will buy back ETH during the upward process.

Above is how LLAMMA solves the mechanism of clearing collateral, while PegKeeper and Monetary Policy are the mechanisms used by Curve Finance to anchor crvUSD at 1 USD.

Simply put, LLAMMA is a Curve algorithm for collateral liquidation, which reduces losses during liquidation by diversifying collateral across different price ranges. It dynamically liquidates collateral by generating arbitrage opportunities with greater changes in price than external prices. When the price falls, the collateral becomes crvUSD, and when the price rises, it returns to collateral.

 After the official launch of the crvUSD lending interface, the complete data of the crvUSD liquidity pool can now be seen on Curve's frontend page, with the TVL of each liquidity pool currently ranging between 2 and 3 million US dollars.

Four, SNX V3 sUSD

Synthetix, as an important partner of Optimism, was deployed on Optimism as early as July 2021. Subsequently, Synthetix encouraged users to transfer their staked SNX to Optimism, and trading and revenue gradually shifted from the Ethereum mainnet to Optimism. According to defilama 5/26 data, Synthetix occupies the second place on Optimism with a TVL of 149 million US dollars.

Synthetix's revenue mainly comes from Synths spot trading and perpetual contract trading. At the beginning, it was launched in the market with the positioning of a synthetic asset platform, and a very special "debt pool" operation mechanism was also set up: users can borrow sUSD by pledging SNX. This is different from MakerDAO's collateralized asset minting of DAI. Although Synthetix will also liquidate when the SNX collateralization rate is insufficient (the current liquidation line is 160% collateralization rate), the logic is fundamentally different.

In Synthetix, all users who stake SNX to mint sUSD share a common "debt pool". When a user mints sUSD, the amount of sUSD minted becomes the user's proportion of the entire debt pool. All minted sUSD represents the total debt of the system. Because all users share the same debt pool, if other users increase the value of their assets through their actions, it will cause an increase in the debt of the remaining users. For example, if a user's asset appreciation rate is not higher than the system average, they will incur losses.

It can be seen that the Synth in Synthetix relies on the oracle Chainlink to provide prices. However, the price updates of the oracle on the chain will lag behind the prices in the spot market, indirectly leading to the risk of front-running trades.

Synthetix recognizes the risk and in 2021 directly utilized oracle price feeds for slippage-free atomic swaps, initiating a new narrative for the industry.

Atomic swaps allow users to exchange assets in a atomic manner by combining Chainlink and DEX oracle Uniswap V3 (representing the latest spot price) for Synth pricing. Simply put, in the case of Synthetix composability, it also protects stakers from front-running attacks.

In June 2022, Synthetix announced that 1inch has integrated Synthetix's atomic exchange, allowing trading users to enjoy better liquidity and SNX stakers to receive additional fees.

Synthetix Perps V2 was launched in December of the same year, which can reduce costs, improve scalability and capital efficiency.

From Synthetix to Synthetix V2 to the current Synthetix V3, the team has demonstrated a highly efficient ability to update, not only meeting various customized needs, but also reflecting the ambition to make Synthetix the center of liquidity.

Currently, the functionality of Synthetix V3 is gradually being launched, which is a comprehensive reform of the protocol that the team has started from scratch.

(一) Differences before and after V3 upgrade

Improvement 1: The stablecoin snxUSD pegged to the hook.

Synthetix V3 will launch a new stablecoin called snxUSD to address the scalability issues and potential de-pegging of sUSD in the past.

Pre-upgrade snxUSD: Despite the fact that most sUSD is minted by pledging SNX, Synthetix has also enabled the excess collateralization of WETH to mint snxUSD. However, due to the lack of arbitrage opportunities to bring the price back to $1 when sUSD is slightly higher or lower than $1, there are few users who use it.

Upgraded snxUSD: In the new version of Synthetix V3, snxUSD and some collateral can be exchanged at a 1:1 ratio, allowing users to limit the price of sUSD within a small range through arbitrage activities alone. At the same time, this convenience-oriented minting method may also increase the issuance of snxUSD.

Improvement 2: Reward Distribution and Settlement

Upgraded snxUSD: Allows pool owners to use the reward manager to distribute rewards to users based on their staking ratio or staking time, providing a more flexible value allocation plan.

Synthetix V3 also proposes a liquidation mechanism, which distributes the collateral and debt of the liquidated position among other participants in the treasury. If the entire treasury is liquidated, all collateral will be seized by the system and sold to repay the debt.

Improvement 3: Isolation of Debt Pool

(II) Conclusion

The launch of Synthetix V3 represents an important milestone for the protocol, and whether this thorough reform can become the new narrative of the next generation of permissionless derivative liquidity platforms in the blockchain finance industry remains to be seen.

Five, Conclusion

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