Analyzing the Comeback of Decentralized Stablecoins: UST and MIM

Written by | Magic Ventures

Original Title: 《The Comeback Journey of Decentralized Stablecoins: UST and MIM

Stablecoins are the most important and profitable infrastructure in the entire market, which is undeniable, as evidenced by their market cap growth over the past few years.

For this reason, many giants have entered this field, leading to fierce competition. For early players, having their own stablecoin seems to have become an industry standard. Thus, we have seen USDT from Bitfinex/Tether, USDC from Coinbase/Circle, BUSD from Binance, and so on.

Although some stablecoins dominate their niches due to first-mover advantages, such as USDT's dominance in TradFi and BUSD's rule in the BSC ecosystem, the continuous advancement of the industry has also provided many opportunities for newcomers. For instance, after riding the wave of DeFi, the minting volume of USDC on the Ethereum network has nearly matched that of USDT, while at the beginning of last year, the former was only one-fifth of the latter.

As a result, we have seen up-and-coming stars like sUSD, alUSD, UST, and MIM embark on their journeys. Some have achieved modest success, while others have found themselves in deep trouble. By reviewing their growth, we can explore the main factors that influence or constrain the success of a stablecoin.

"Why would others want to use your stablecoin?" This is a question that every stablecoin project needs to answer. If you can't force them to use it, then spend money to make them use it well. This is the answer given by Kain, the founder of Synthetix, who is known as the pioneer of liquidity mining.

sUSD serves as the medium for trading other synthetic assets (synths) within the Synthetix system. Initially, it only accepted the platform's native token SNX generated through staking, and the staking ratio was quite high.

As the Synthetix ecosystem continued to expand, the dual-layer incentives (Staking reward + Liquidity Mining) took effect, and after the onset of DeFi Summer, sUSD was chosen as a mining token by multiple protocols, leading to a surge in market demand. This demand also brought strong positive feedback to Synthetix's token price: the greater the demand for sUSD, the more SNX was needed to mint sUSD, leading to less circulating SNX in the market, which in turn drove up the price.

However, this process also exposed a serious flaw in sUSD: a stablecoin needs to maintain its peg after being sold off widely in the market, and it also needs to avoid excessive premiums when being bought in large quantities. Unfortunately, sUSD fails to guarantee the latter, as it often has a premium of 2% or even higher, due to the high staking ratio of up to 8:1, which makes the minting cost of sUSD extremely high.

Another factor is the scarcity of application scenarios. Apart from trading within the Synthetix system for other Synth transactions and some protocol mining, sUSD lacks more application scenarios. Therefore, when the DeFi summer craze passed, the shrinkage of Synthetix's own ecosystem and the decrease in mining demand led to a negative cycle where the demand for sUSD decreased, and the price of SNX fell.

In a sense, Terra's UST is the successor to sUSD. In the Terra ecosystem, UST takes on the role that sUSD plays in Synthetix, but in a more aggressive manner. Compared to the high staking ratio of SNX to sUSD, Luna can synthesize UST at a 1:1 ratio, thus achieving higher capital efficiency.

Additionally, unlike Synthetix, Terra is a public chain, which not only means it can tell a bigger story and has greater valuation potential but also can create more scenarios to accommodate a larger volume of UST.

As long as the ecosystem continues to expand and the number of users increases, the demand for UST will also rise. This will similarly reflect on the price of Luna.

The purpose of projects within the Terra ecosystem is singular and clear: to create more scenarios and demand for UST and provide actual subsidies with their own tokens. This also helps to alleviate some of the inflationary pressure on Luna.

Taking Mirror Protocol, the first major ecological project on Terra, as an example, the CDP asset used to synthesize U.S. stock assets, $mAsset, primarily relies on UST (or other $mAssets). With the launch of early $MIR liquidity mining incentives, the platform's TVL once soared to $2 billion.

Why does a single synthetic asset platform have a peak TVL that rivals the entire Synthetix platform? Clearly, Synthetix also has the same functionality and provides more precise price feedback. This is because, unlike the sophisticated design of Synthetix's debt pool betting mechanism, each Synth is priced directly by oracles, and the secondary market price of mAssets on the Mirror platform is determined by AMM.

In the Synthetix ecosystem, users holding synthetic U.S. stock assets are often those who need exposure to U.S. stocks, and this group is usually the smallest. In contrast, on Mirror, in addition to this group, there are liquidity providers (LPs) supporting liquidity and arbitrageurs keeping prices aligned with the stock market. The MIR token subsidies attract the former group, while the price differentials between mAssets and the stock market attract the latter.

The sequential launch of Mirror and the lending protocol Anchor greatly boosted the demand for UST and triggered the first wave of Luna's price surge. However, afterward, things did not go smoothly. In May of this year, the market experienced a significant correction, and during this pressure test, the performance of the Terra ecosystem was very poor.

Due to network congestion, many positions on Anchor were liquidated because they could not supplement their margin, and panic led more funds to choose to flee. During this period, the stablecoin UST briefly dropped to around $0.90, and the price of Luna plummeted by 75% within a week.

However, after this, UST did not suffer a lasting setback. After a brief period of silence and the launch of more ecological projects, the Terra ecosystem regained its vitality, and since then, UST has continued to grow. Following this event, the team has consciously created scenarios for UST outside the Terra ecosystem, applying it to more ecosystems to generate more demand.

Another rapidly rising stablecoin project is Magic Internet Money (MIM). Compared to UST's 1:1 minting, which is backed by liquidity provided by Luna, MIM follows a similar CDP route as MakerDAO and targets emerging long-tail assets that MakerDAO has not ventured into.

Unlike UST, which was born with a golden key, MIM emerged in a competitive environment in Ethereum. Its ability to stand out among numerous competitors is due to its clever grasp of several key opportunities. The first issue a stablecoin must address is supply and liquidity. The answer to this problem is not difficult: incentives. However, how to incentivize efficiently is another question.

At this moment, the launches of bribe.crv and Votium made the liquidity of the stablecoin exchange Curve rentable. Any project can issue rewards to veCRV holders, directing weekly CRV emissions towards their Gauge. Higher CRV incentives are bound to attract more liquidity to the Gauge, which also means higher demand and minting volume for MIM.

Before the market realized how efficiently liquidity could be rented, the MIM team quickly recognized this and invested heavily in the initial weeks, causing CRV incentives to rapidly tilt towards MIM's gauge, at one point accounting for 30% of weekly releases. This also propelled MIM's minting volume to soar, with TVL quickly surpassing the $1 billion milestone.

Another differentiating competitive strategy of MIM compared to MakerDAO is multi-chain deployment. Unlike MakerDAO, which only deploys on the Ethereum main chain, MIM's contracts are deployed across multiple chains. During this process, MIM also collaborated with cross-chain protocol AnySwap, allowing tokens to be bridged in real-time from L2 to L1, thus eliminating the 7-day waiting time and greatly improving cross-chain capital efficiency.

However, incentives and strategies can only help a project excel in short-term competition; dominating application scenarios is the main factor that keeps 3CRV (USDT + USDC + Dai) in an invincible position in the long run.

(What’s worse is that the subsidies for the MIM-3CRV gauge actually provide half of the subsidies to the 3CRV, and this issue becomes more severe over time, as every $1 of incentives will spend $0.50 on driving demand for competitors.)

Of course, the MIM team is also acutely aware of this, as evidenced by their reduction of daily spell emissions and promotion of the MIM-UST gauge. Moreover, the team places great emphasis on expanding application scenarios, including real-time transfers from L2 to L1 mentioned earlier, as well as collaborating with multiple DEXs to launch trading pairs with MIM as the quote currency.

https://twitter.com/CurveFinance/status/1466733088524881921

Currently, on Curve.fi, although MIM gauge's trading volume often ranks among the top, MIM's growth has somewhat stagnated. I believe the reasons for this are twofold: first, MIM is gradually transitioning from a model that relies on incentives to drive demand to one that relies on scenarios to drive demand, which comes with growing pains; second, although MIM initially positioned itself against MakerDAO and DAI.

In reality, its true competitors are other decentralized stablecoins, and only recently have people begun to compare it to the standards of MakerDAO and DAI --- another example of "fake it till you make it"?

Although UST and MIM are two completely different routes of stablecoins, their journey thus far, aside from the personal charisma of the project founders, is mainly due to their teams effectively addressing supply and some demand issues through incentives and scenario development. Looking ahead, they will face even fiercer competition, and how far they can go remains to be seen.