Stablecoins are becoming a market consensus.

Stripe's acquisition of Bridge is just the beginning. Huma uses stablecoins to replace the intermediary status of banks, and Circle has become the new upstart in the cryptocurrency circle after Coinbase with USDC. All of the above are poor imitations of USDT.

Ethena is a latecomer but an early winner, MakerDAO changed its name to Sky and switched to interest-bearing stablecoins, Pendle, Aave, etc. are all rapidly transforming from USDC to PT/YT to USDe. The above is a summary of the recent story of on-chain stablecoins.

At least for now, YBS (Yield-Bearing Stablecoin) still belongs to the concept of stablecoin. It is difficult for everyone to understand the fundamental difference between USDe and USDT. In my opinion, YBS projects such as USDe attract users by generating interest, distribute part of the asset income to users, and continue to earn asset income after completing the deposit absorption.

Previously, USDT issuance was a process of creating new assets. It should be noted that the reserves of USDT are the responsibility of regulators or project owners and have nothing to do with users. Users can only passively accept that USDT represents $1 and expect others to recognize its value.

 Image description: Stablecoin classification

 Image source: @zuoyeweb3

YBS follows the logic of deposit absorption and lending of on-chain banks and deconstructs the power of asset issuance. Circle's creation of USDC requires government-business cooperation and exchange support, but YBS has already shown a blowout trend.

To reiterate, the history of the crypto industry is the history of innovation in asset issuance models, but this time it is a little milder in the name of stability, not as intense as the PVP on the ERC-20, NFT (ERC-721) and Meme Coin chains.

For example, f(x) Protocol has at least 5 stablecoins. V1 and V2 have rUSD and fxUSD respectively. In addition, there are $btcUSD, $cvxUSD, and even fETH is also called a stablecoin because it maintains a price anchor by capturing part of ETH's volatility, and the remaining volatility is absorbed by xToken.

 Image description: f(x) Protocol Stablecoin Duoduo

 Image credit: @YBSBarker

Stability comes from volatility, and volatility creates stablecoins.

From the Old World to the New World

Whether it is interest-bearing stablecoins or StableFi, they are both new ways of expressing stablecoins. It is worthwhile to sort out the origins of stablecoins.

Stablecoins originated from Bitcoin, a peer-to-peer electronic cash payment system, but Bitcoin is not stable. This is not a problem with Bitcoin’s design. Bitcoin is essentially an unanchored currency system, and its fair price still fluctuates around its value and cannot be stabilized in the short term.

The earliest attempt of USDT was in the Bitcoin ecosystem, and then it moved to the exchange pricing field. The golden combination of Bitfinix and Tether allowed the stablecoin to find its earliest home, just like Coinbase and Circle today.

Fiat stablecoin was born. Its mechanism is not complicated. You only need to trust Tether, and everyone recognizes the market transaction stability of USDT. The first-mover advantage allows Tether to create a higher profit margin than BlackRock.

Following closely behind is DAI issued by MakerDAO. The over-collateralization mechanism (CDP) has long been the only option for issuing on-chain stablecoins. The 1.5 times collateral assets suppress capital efficiency, but give market players higher credibility.

The subsequent history of cryptocurrency, from an on-chain perspective, is a story of how to reduce the pledge rate. Financial alchemy works in both directions. Hyperliquid can amplify asset trading leverage, but there is no good way to leverage asset creation.

 Image caption: Mainstream is stable in 2022

 Image source: stablecoins.wtf

Regarding asset creation, UST is a sad chapter. The classic algorithmic stablecoin has since failed. Frax can be regarded as semi-algorithmic at best, or it is more appropriate to call it a hybrid mechanism (Hybrid). It is already a shell of USDC.

From a mechanism perspective, interest-bearing stablecoins require interest-bearing mechanisms and stablecoin mechanisms. Based on the other three, the CDP mechanism of DeFi giants is also acceptable, and Ethena's Delta neutral mechanism is also fine, as long as stability can be guaranteed. Of course, USDD is promised by Sun Ge to remain stable as long as everyone agrees.

The real difference lies in the interest-bearing and profit-sharing mechanism, which depends on the source of the interest-bearing assets. There are two simplest ways: using pledged assets such as stETH on the chain and using self-yielding assets such as US Treasury bonds off the chain, and both can be mixed.

Ethena's USDe is rather special. While using stETH to generate interest, it uses CEX hedging to keep the currency price stable. It also needs to comply with off-chain entities and uses USDC as part of the reserve. Again, everything can be mixed, regardless of mechanism and asset.

If Ethena only uses ETH assets, hedges in Hyperliquid, and distributes profits entirely on the chain, then it will be the most ideal on-chain native interest-bearing stablecoin.

Unfortunately, such a project does not strictly exist.

 Image description: List of interest-bearing stablecoin projects

 Image credit: @YBSBarker

The above are the 91 projects we have compiled. If we add USDT, USDT0, USDC, PYUSD and USDD, it is not difficult to get a hundred.

In fact, according to RootData, there are currently 181 projects involving stablecoins, while DefiLlama has included 259. However, after excluding non-interest-bearing stablecoin projects, the mainstream options active in the market are basically covered here.

Sorting by the first letters of the protocols, focusing more on the protocols rather than the stablecoins. Strictly speaking, USDe is not an interest-bearing stablecoin, only sUSDe meets the definition. The token economics of a complete interest-bearing stablecoin protocol should look like this:

1. Stablecoins and their collateralized versions, such as USDS and sUSDS

2. The main protocol token and its staking version, such as ENA and sENA

In addition, paying attention to the protocol will better reflect the distinction between "the protocol is distributing profits, and the stablecoin is the certificate of profit distribution". Referring to the history of asset issuance innovation, there will be no more than 5 high-potential projects in any track, including public chains, DeFi, L2, wallets, inscriptions, runes, and Meme Coins.

It just so happens that interest-bearing stablecoins are a very complex intersection, with DeFi, RWA and stablecoins pulling at each other. Similar to Aave's GHO (ERC-20) and sGHO (ERC-4626), Curve's crvUSD and scrvUSD only serve to strengthen their own protocols and will not do their utmost to block the market share of USDe or USDS.

So the real question is how much market space the market can leave for emerging interest-bearing stablecoin protocols beyond USDS and USDe.

The 91 protocols in the list were roughly selected based on the following subjective criteria:

1. Old DeFi protocols that do not focus on YBS business, such as Aave, still focus on lending business;

2. Inactivity, the most subjective criterion:

• Not on the mainnet yet, will be updated later

• Follow the trend of fast-pass projects, do stablecoins with DeFi giants in 2022, do Delta hedging with Ethena in 2023, and the current trend

• and have been acquired or ceased operations

3. No financing and no backup. Maybe they are struggling to persevere, but stablecoin projects need reserves. No financing means that they cannot be recognized by the primary market, and it is difficult to win with technology or contribute a large amount of TVL to the community.

It must be pointed out here that USD1 issued by WLFI, which is similar to the Trump family, is more like USDT and has little to do with interest-bearing stablecoins, so it is not included in the discussion.

 Image description: Project after rough selection

 Image credit: @YBSBarker

The above 52 projects are the competitors competing for the remaining positions in the interest-bearing stablecoin track. For example, we directly exclude Polkadot's Hydration. No one will expect Polkadot to be resurrected.

For another example, YLDS issued by Figure Markets is the opposite of the on-chain interest-bearing stablecoin, but it has obtained legal registration qualifications and is suitable for traditional financial clients with special compliance needs. For detailed reasons for exclusion, you can view it in the Feishu document.

After the rough selection, set the three dimensions of fundamentals, interest-bearing method and APY to examine its details

• Fundamentals: official website, Twitter, CA

• Interest-earning methods: strategies and actions, sources of income, income distribution methods, rewards

• APY calculation method

A small note: Strategy and Action refer to the financial management strategy corresponding to YBS. Action is the concrete operation steps. The source of income is where the protocol income comes from. The income distribution method is generally issued through staking stablecoins, but specific cases are analyzed in detail and will not be repeated here.

Taking Avalon as an example, its stablecoin is USDa and its interest-bearing stablecoin is sUSDa. The details of each dimension are as follows:

• Income source: USDa loan interest income + USDa Lend business income

• Strategy: Berachain ecosystem KodiakFi pledges USDa/sUSDa to form LP

And Avalon is particularly typical and requires the involvement of Pendle. In the current YBS ecosystem, the combination of Pendle and Aave is the biggest beneficiary, surpassing Curve at its peak. A pit needs to be dug here and left to be filled in the future.

Of course, this naturally involves the assessment and classification of the security and stability of emerging protocols. Sui’s Cetus is a lesson learned, and it’s the second new pitfall (Cetus can receive compensation today 😭).

DeFi Lego to YBS Building Blocks

Successfully reaching the New World does not mean victory, the survival crisis will become more urgent.

There are still too many. We try to start from the end and select to reduce the amount. Referring to the data of YBSBarker and the on-chain data of each protocol, we select the following 12 protocols according to the underlying assets, core mechanisms, and quantitative data such as TVL of the project.

 Image Description: 2 items to choose

 Image credit: @YBSBarker

It is important to note that this is only an analysis of the current market situation, and it does not mean that these projects will win easily. In addition to DeFi giants and institutional adoption, these 12 projects mainly compete in the interest calculation, pricing and payment scenarios of the retail market, which is also the most difficult and profitable track.

Perhaps what Ethena envies most is Sky, which, backed by the yield of government bonds and the existing market of DAI, combined with interest-bearing and stablecoins, has transformed itself into Ethena's strongest competitor.

 Image description: 2 Select project parameters

 Image credit: @YBSBarker

Looking at the remaining 12 finalists, we can only say that interest-earning is indeed a means of acquiring customers.

Similar to the early DeFi Lego blocks, the YBS protocol is constantly combining other protocols. Multi-chain, multi-protocol and multi-pool are standard. Every YBS organization method and every wool party focused on YBS are all applicable, and ultimately contribute TVL and revenue to Pendle.

Remember the leverage of asset creation mentioned earlier? In the YBS field, it can be roughly equal to Pendle, rather than Ethena or other YBS, which work hard to prepare wedding dresses for Pendle.

These projects still have big problems. Considering that YBS is in its early stages, there is nothing unacceptable. The only thing is that the sustainability of the earnings of each protocol is still questionable. In order to share profits with users, Sky allocated $5 million in earnings to USDS holders, resulting in almost no profit for the protocol, which is a loss-making business.

In addition, most YBS protocols will issue the main token of the protocol, such as ENA, or Resolv which has just been listed on TGE. Their own prices are supported by the protocol income and profit-sharing ability. Once the currency price goes down, it will in turn drag down the interest-bearing stablecoin issued by the protocol.

In other words, as the scale of interest-bearing stablecoins expands, the main token of the protocol may not necessarily rise, because the net profit of the protocol may not be high. On the contrary, if the price of the main token of the protocol falls, risk aversion will lead to the withdrawal of liquidity of interest-bearing stablecoins, entering a death spiral similar to UST.

The revelation to us is that we must pay attention to the sustainable profitability of the protocol. Since the YBS project is a crypto bank that absorbs deposits and lends money, the security of the principal is of vital importance. YBSBarker's Protocol Revenue will continue to monitor the security of each protocol, and YBSBarker's Yield Sharing Ratio will continue to monitor the protocol profit sharing ratio.

The following is a moment of outrageous comments. There is no such thing as objectivity, this is purely a subjective opinion.

In addition to Sky and Ethena, pick a few more YBS new protocols, which one will become the new big opportunity?

There is no scientific reason why I chose Resolv, Avalon, Falcon, Level and Noon Capital. It’s probably just a sense of the projects, similar to the market sense.

 Image Description: Potential leader

 Image credit: @YBSBarker

There is a misunderstanding here that the YBS project is a bad project because it is in a hurry to issue coins. This is not necessarily the case. There are many people who take advantage of the situation. However, for YBS, the protocol needs secondary market liquidity for the main token, similar to Ethena introducing VCs affiliated with all mainstream exchanges to form a de facto alliance of interests. In essence, it has transferred the right to mint USDe.

However, the minting right of USDe is represented by ENA. If major institutions want to make money, they don’t need to dump USDe, which will make their investment go down the drain. Stablecoins only have two states, 0 and 1, but ENA can be slowly dumped or pledged to earn income. This is the top conspiracy for Ethena’s success.

Circle violently gave money to Binance and Coinbase, while Ethena adopted a "bribery mechanism" that is more characteristic of the cryptocurrency circle, just like Curve War, a wonderful reuse of game theory.

Conclusion

Today is just an appetizer. After an overall review of the project, I hope everyone will have an overall perception of the current YBS market. At least you will not think that making a YBS is as far-fetched as making a USDT, but don’t think that YBS is the new Meme Coin.

The credibility and financial reserves required by YBS are not within the reach of Meme. Always remember that YBS is also a currency, especially real YBS that does not rely on government bonds or US dollars, which is not much different from the recognition of creating BTC/ETH.

Next, I will explain the issuance guidelines of interest-bearing stablecoins from a more detailed perspective. The mechanisms and details that are not expanded in this article will be fully explained.