Interest-bearing stablecoin issuance guide

Continuing from the previous article, the logic of interest-bearing stablecoin (YBS) is to imitate the banking industry. This is just the appearance. It is also necessary to solve many problems such as where the user income comes from, how to issue it, and how to maintain the long-term operation of the project.The collapse of DeFi projects is a daily routine in the financial industry. SBF can go to jail, but Silicon Valley Bank is the embryo of systemic risk, and the Federal Reserve needs to act immediately.

The era of excess leverage

Seeking profits is product thinking, and the expression of financialization is speculation.Large price differences are the source of arbitrage, and long-term fluctuations require hedging risks.

The opposite is the movement of Tao. After the introduction of computer technology, the financial industry has gone through three stages in quantitative speculation:

• Portfolio insurance: diversify investment targets to maintain value, quantify risk levels and price them;

• Leverage (LTCM): a mountain of sand can make a mountain, and small transaction profits can be magnified by borrowing money;

• Credit default swap: CDS is not a demon, derivatives risk control fails and becomes pure gambling;

In the current financial world, the large price difference in space has disappeared. Daily, small-amount and decentralized transactions are the norm. On-chain MEV and off-chain CEX are Web3's imitation of TradFi.

Long-term value preservation in time is no longer the mainstream. Leverage, extremism and speculation are the goals. Hedging itself becomes the purpose, and long-term risks will never be brought to the future.

Under the above background, YBS project parties are basically facing a dilemma of contradiction: if APY/APR is not high enough, it will be difficult to attract funds to increase TVL; but if the promise is too high, it will inevitably go to Ponzi, and eventually explode in any link of TGE, financing, haircut, brushing, VC and exchange.

The essence of hedging is arbitrage, and momentum cannot be avoided.

First put YBS Extracting from the stablecoin market, there are currently three branches of stablecoins:

• The first is for institutional use only, mainly a clearing network, used for cross-border, cross-industry and cross-entity, with the goal of supplementing and replacing existing products such as Visa and SWIFT, such as JD.com or JP Morgan;

• The second is the USDT-like product promoted by TradiFi, which can be divided into stablecoins anchored to the US dollar and non-US dollars, as well as alternative attempts by large financial institutions, such as USD1;

• The third is Ethena's competitors, such as Resolv, etc., which is also the main body of our article.

There is always an "impulse" in the market, which pushes up when it can and continues to fall when it is expected to. This is called momentum, and YBS is an appropriate name for it. Many projects will play the same game with Ethena, pushing APY to the highest, and then clearing the market, leaving the king of this track. Hedging will eventually converge with arbitrage and become difficult to distinguish between the two.

It is still a familiar formula, for more than 100 YBS After analyzing the project frame by frame, the issuance guide of interest-bearing stablecoin projects was extracted and roughly divided into two parts: product mechanism and market expansion. Among them, the product mechanism consists of four parts: underlying assets, minting mechanism, income source and distribution. This is the general formula of the YBS project. The only difference is the ratio and web page packaging.

The second is the market. In the era of formula convergence, the market is essentially a handicraft, which tests the aesthetics of the project party. It can only roughly outline the four aspects of Pool strategy, Rewards design, market volume and fuzzy strategy.

Let's start with the product. After Delta Neutral, it is nothing more than a magic modification of Ethena.

The product has no special features, and the US Treasury bonds have a large share

The interest-bearing stablecoin is different from the "historical stability" of USDT. Year after year of FUD has created tenacity. YBS requires extremely strong asset reserves. The cycle of the credit leverage model is difficult to cold start. Let me explain it briefly.

In the early stablecoin market, the project party could issue a stablecoin of 1 US dollar by "claiming" to have assets equivalent to 1 US dollar, and then pledge it and transfer it to the off-chain, and then cycle it indefinitely.

After the collapse of UST and FTX, the above operation is too difficult. Although there is still a disconnection between the chain and the off-chain, under the background of real-name entrepreneurship and increasingly mature supervision, it can be assumed that most YBS project parties have sufficient reserves.

YBS project parties prefer to use the bank's credit leverage model, that is, the reserve system to deal with supervision, insufficient liquidity to deal with withdrawals, and the rest to lend out interest. This is the fundamental reason why the US dollar/US debt has become the mainstream choice of YBS. Only the US dollar/US debt can flow seamlessly in Web2 and Web3 to maximize the profit of the income portfolio.

The GENIUS Act is not the beginning of supervision, but a summary of past practices.

1. Underlying assets

In terms of the choice of underlying assets, the US dollar/US Treasury bonds are the mainstream choice, but directly adopting MakerDAO/Sky's fundraising to buy US Treasury bonds is still a bit rough. The market space left here is to help Web3's YBS project party buy real assets and help Web2 financial giants issue compliant YBS.

For example, Compound founder's new work SuperState, in addition to helping DeFi old money manage their finances, one of its important businesses is USTB, compliant US Treasury tokenization, and Resolv is its customer.

For example, since Ondo introduced Kaite Wheeler, who used to work at BlackRock and Circle, its relationship with Wall Street has become closer. Wheeler was in charge of the fixed income product business for iShares institutional clients at BlackRock, and was also in charge of institutional cooperation at Title at Ondo.

If we sort out the forms of representation using US dollars/US bonds, they can be divided into the following four types:

• US bonds/US dollar cash/US dollar related assets, case: Sky's USDS

• Mainstream assets on the chain and their hook forms, case: Resolv's USR

• USDT/USDC as the underlying asset, case: Level's lvlUSD

• Alternative forms, such as GPU computing power tokenized GAIB

Among them, Resolv's BTC/ETH reserves are a hypothetical state, and are currently still the same. USDC and US debt are more closely related, just like Ethena was originally conceived to use BTC, but eventually chose ETH, compromise is the norm.

The progress of mainstream assets on the chain, especially BTC/ETH/SOL and other YBS reserve funds is not good.It should be noted that Ethena's ETH hedging is a stability mechanism, which is not completely consistent with the reserve.

Personally, I think that mainstream assets on the chain need to be accepted by a wider range of traditional financial markets before they can be directly used as reserves by YBS. We can observe the three angles of ETF, national reserves and (micro) strategies. The stable currency on the chain needs to have off-chain recognition first, which is simply black humor.

The most interesting are new forms such as GAIB, which do not use a certain asset as a reserve, but a certain "practicality". The essence of currency is a general equivalent. The computing power in the AI ​​era does have this feature. I hope to gain something.

2. Minting mechanism

In the previous article, the minting and interest-bearing processes of YBS were confused, but the minting of YBS should specifically refer to the one-way process of "stable currency issuance based on underlying assets", and should not involve subsequent reverse operations such as interest-bearing mechanisms and redemption.

By referring to the CDP (collateralized debt position) mechanism of lending products, we include all YBS in this scale, but it can be positive or negative to accommodate YBS types with inadequate reserves.

In theory, unlike MakerDAO (DAI), Aave (GHO) and Curve (crvUSD) which generally adopt the over-collateralization model, the YBS of the new era is generally 1:1 fully collateralized, at least in terms of mechanism design, but the reality is that it is not for outsiders to know, which is also what YBSBarker hopes to penetrate.

In addition, a few inadequately collateralized products basically adopt credit or guarantee mechanisms, which are difficult to become the mainstream choice in this cycle, so they are not introduced.

III. Yield Source

Based on the underlying assets and minting mechanism, we consider two dimensions of the source of income: interest-bearing mechanism and stability, which constitute the complete process of minting, interest-bearing and redemption of interest-bearing stablecoins.

Take Ethena as an example. The Delta mechanism is composed of ETH spot and short position hedging. The hedging itself is a mechanism to ensure that USDe is anchored to the US dollar at 1:1, and the funding rate arbitrage of the short position itself is the source of interest, which is used to pay the income of sUSDe holders.

Ethena also chooses stETH and other ETH with their own pledge-based interest-bearing versions to enhance its ability to capture income. The above is the minting process of sUSDe and USDe, and the redemption process also needs to be considered.

1. 1. sUSDe falls back to USDe. After unstaking, a 7-day cooling-off period is required before the withdrawal process can be entered, or it can be directly exchanged in real time on DEX;

2. 2. USDe falls back to ETH, and there is a T+7 restriction. Of course, USDe itself is a stable currency and can be directly exchanged for any asset on CEX or DEX, but this is not an official asset redemption function.

In addition to Ethena, the remaining YBS projects are nothing more than more interest-bearing scenarios and improved asset value stabilization mechanisms. The slightly different thing is Avalon's liquidation mechanism, which is more like traditional lending products and is used to control the price stability of stablecoins.

4. Yield Distribution

There are only two distribution mechanisms, one is that the value remains unchanged but the quantity increases, and the other is that the value increases but the quantity remains unchanged:

•  Value increases but quantity remains unchanged: Avalon, Falcon, Level, Noon, the price of sToken increases period by period and can be exchanged for more stablecoins

• Quantity increases but value remains unchanged: Resolv, the number of sTokens increases period by period, but the price of sToken and its own stablecoin remains 1:1 anchored.

Looking at the entire product mechanism design of YBS,there are two most difficult points. One is the establishment of reserves.For other DeFi projects, such as DEX, under the AMM mechanism, adding liquidity is a user behavior. DEX itself is mainly technology development, product design and marketing. It is difficult to say that you need your own funds to make a successful product.

YBS is naturally a pegged asset or equivalent form of "currency". Too little capital reserve cannot gain user trust. In other words, people like to use YBS issued by rich people. At this point, YBS will naturally exclude ordinary entrepreneurs, but it is particularly suitable for large VCs to make heavy bets to cultivate Ethena No. 2, Circle IPO No. 2, or USDT printing machine No. 2.

The second is the source of yield. Referring to the history of traditional financial quantification, only those who are earlier than their peers can earn alpha returns. After that, they either learn from Simons to keep the secret of the medal, or compete in software and hardware resources, and finally become the "law of large numbers", using capital scale to overwhelm opponents, triggering a systemic crisis, and repeating the cycle until the end of the world.

Competition of yields, high volume

Okay, after the formation, you have established an excellent YBS team. After completing the project naming, front-end, back-end, and smart contract AI outsourcing, you have successfully obtained a huge amount of financing from Big Name VC. Now you have to attract large and retail investors to deposit funds to increase the yield and scale of income.

Then a big problem arises,The yield and the scale of income seem to be unable to coexist.

1. Pool

The most effective way for YBS to acquire customers is to provide high yields, but the larger the scale of funds, the lower the stable high return rate will be. From A16Z's investment income to BlackRock's asset management income, the Aave thousand-fold myth created by the first-class warehouse is only a thing of the past.

YBS must find its own flywheel: provide users with more income options, or more simply, find all chains, protocols and pools that can build income.

There are three perspectives around the income of YBS:

• Currency standard: the issuance data of stablecoins and sTokens themselves;

•  Pool standard: the purpose and interest-bearing data of stablecoins and sTokens;

• Protocol standard: the overall governance structure of the stablecoin and sToken protocol.

The three levels of abstraction and complexity increase in sequence. From the simplest perspective, the issuance, pledge amount, and holding addresses of USDe and sUSDe are based on currency, while their trading pools in Pendle and Curve are based on Pool, and the income, distribution mechanism, and historical data involving USDe, sUSDe, ENA, sENA, and protocols are based on protocol.

The currency standard is very intuitive, and the complexity of the Pool standard is reflected in the accumulation of cross-chain, multi-protocol, and multi-pool.

Among them, Equilibria is Pendle's "bribery platform". Through Equilibria, users can collectively pledge ETH to achieve the effect of Lido, reduce investment costs and increase final benefits.

Following this idea, Chiduoduo presents three characteristics:

• Pendle and amplify Pendle returns: Pendle and Equilibria, similar to Curve and Convex;

• Aave and Morpho lending mechanisms amplify returns, and the specific pools and specific lending pairs of the Morpho model are gradually popular;

• Get rid of the old and keep the new: Pendle/Morpho/Euler is replacing the importance of Curve and Uniswap, the old generation of DeFi protocols to YBS.

Most importantly, Pendle has become the infrastructure of the YBS industry. Only by logging into Pendle can YBS take root on the chain and play the same effect as USDC binding Coinbase.

Flywheel start: The more pools--> The larger the fund capacity, the more stable the income--> The more users

Two. Rewards system

The reward system is simple to summarize, but it is extremely complicated to do. How to evaluate user behavior and try to balance between anti-witch and real customer acquisition, Onekey and Infini have successively abandoned the U card business, which is also due to the uncontrollable profit model of C-end users.

Rewards in the YBS field are actually more like a Points War. Some users want to get financial returns, and some users want to get expected airdrops, and try to make their behavior close to reality.

• Deposit: Hodl time, double points. USDf 6x

• Staking: Points are much less, Falcon USDf 1x

• Rebates: The more people, the higher the rebate

• Specific behaviors: associated protocols, such as Resolv 19

However, the points system is not synonymous with airdrops and tokens. Under the usual "off-chain calculation, front-end display" mode, whether you can get the Farm reward as scheduled can only be left to fate.

III. Market Voice

Ethena’s success is certainly due to its excellent design, but it is inseparable from Arthur Hayes’ personal support. Referring to past successful cases, three models can be roughly summarized:

• User reach: KOL + media, the role is getting smaller and smaller, closer to conventional actions.

• Off-chain legitimacy: USD1 backed by Trump, JD.com, Walmart and other big companies.

• Big Name: Arthur Hayes has a personal endorsement effect on Ethena.

I don't think I understand the market volume very well. If you have any ideas, please feel free to share them in the comment section.

Four. Fuzzy strategy

1. APR VS APY, both simple and compound interest are fuzzy financial indicators, and potential crises can also create credit leverage.

2. Falcon has off-chain assets involved in the profit calculation, and the theoretical optimal and practical are not completely consistent;

3.  Even for the same indicator, there are differences in the calculation period. For example, Falcon adopts 7D, Level uses 1Ys as the period, and Noon has not been announced yet.

Even if the calculation method is the same, the off-chain part of each YBS will also participate in the calculation, such as CEX's order data, or foundations, audits, etc., which are black boxes that cannot be tracked in real time. There is a lot of room for manipulation of the details in the middle.

The YBS market is still a battle of return data, and the use of specific strategies requires users to actively explore, so as to amplify the rate of return and participate in this gold-digging feast.

Conclusion

The less demand, the closer to God.

The surface of YBS is extremely simple, and the 1:1 anchoring to the US dollar brings lasting security, but the stacking behind it is extremely complex.

For the general public, deposit collection and lending have always been social and political events, both in the East and the West. Based on this, we have gone deep into the YBS and explained the basic features of the health project from the perspective of the project party. Starting a business is difficult. How many of the 100 YBS projects can survive?