The total market value of stablecoins exceeds 205 billion USD, with USDT's market share continuing to decline. This article explains the diversification of stablecoins

Traditional Stablecoins

USDT (Tether) and USDC (USD Coin) are currently the two most mainstream traditional stablecoins on the market.

USDT (Tether)

Issuer: Tether Limited

Launch Date: 2014

Value Peg: USDT is pegged to the US dollar at a 1:1 ratio, backed by Tether's reserve assets (such as cash, government bonds, etc.).

Market Position: The first stablecoin ever launched globally, and one of the largest in terms of trading volume and liquidity. Widely used in cryptocurrency trading, cross-border payments, and liquidity provision in the DeFi ecosystem.

Controversy: Transparency has always been a focal point of external scrutiny, and Tether's reserve audits have sparked widespread discussion.

USDC (USD Coin)

Issuer: Co-founded by Circle and Coinbase, regulated by the Centre Consortium.

Launch Date: 2018

Strong Compliance: Strictly adheres to US regulatory requirements, with high transparency of reserve assets, audited monthly with public reports.

Value Peg: Pegged to the US dollar at a 1:1 ratio, with reserves consisting of cash and short-term government bonds. Widely used in DeFi, payment solutions, and corporate transactions.

Market Position: Highly favored by institutional users for its compliance and transparency, making it the second-largest stablecoin after USDT.

FDUSD (First Digital USD)

Issuer: First Digital Labs

Launch Date: 2023

Pegging Mechanism: Backed by 100% US dollars or equivalent cash equivalents (such as short-term government bonds), maintaining a 1:1 value peg with the US dollar.

Blockchain Support: Compatible with Ethereum and Binance Smart Chain (BNB Chain), primarily supported by Binance for trading, lending, mining, etc., leading to high market acceptance.

DAI

DAI is a decentralized, over-collateralized stablecoin launched by the MakerDAO smart contract platform on the Ethereum blockchain. Unlike traditional fiat-backed stablecoins, DAI is generated by collateralizing crypto assets (such as ETH), maintaining a 1:1 peg with the US dollar (USD).

Issuer: MakerDAO

Launch Date: 2017

Value Peg: Maintains a stable value of 1:1 with the US dollar through smart contracts and collateral mechanisms.

Operating Network: Ethereum and other EVM-compatible blockchains (such as Polygon, Optimism, etc.). Currently, it is the highest market cap algorithmic stablecoin.

New Stablecoins

Unlike traditional stablecoins, new stablecoins not only maintain relative price stability but also provide additional investment returns to holders through innovative yield models.

Key Features of New Stablecoins:

1. Provide returns to users by investing in low-risk assets (such as government bonds), staking native tokens, or using structured financial strategies.

2. Maintain relative price stability and high liquidity using assets like government bonds as collateral, which can be traded or redeemed at any time.

3. Combine on-chain assets with off-chain funds, bonds, etc.

1. USDe

USDe is a new synthetic dollar stablecoin developed by Ethena Labs, aimed at providing a decentralized, scalable, and censorship-resistant stablecoin solution. It currently ranks third in the stablecoin market by market cap and first among algorithmic stablecoins.

Operational Mechanism

The core mechanism of USDe is to maintain a 1:1 peg with the US dollar through a Delta-neutral strategy. Whitelisted users (typically institutions, exchanges, and large holders) can use crypto assets like ETH, BTC, USDT, and stETH as collateral to mint USDe. Ethena Labs uses these collaterals to open corresponding short perpetual contracts or futures positions to hedge against price fluctuations, ensuring the stability of USDe's value. This strategy allows USDe to achieve stability and scalability without over-collateralization.

Currently, regular users cannot directly deposit ETH or BTC to mint USDe; they can purchase USDe using stablecoin assets (such as USDT, USDC, DAI, crvUSD, etc.), avoiding liquidation risks.

USDe's Yield Mainly Comes From Two Aspects

Staking Yield: When users use liquid staking tokens (like stETH) as collateral, these tokens generate staking rewards, including inflation rewards from the consensus layer, transaction fees from the execution layer, and maximum extractable value (MEV). These rewards accumulate over time, enhancing the value of USDe.

Funding Rate and Basis Yield: In the perpetual and futures markets, traders holding long positions typically need to pay funding rates to those holding short positions. Additionally, the basis of futures contracts (the difference between futures and spot prices) can also generate returns. Ethena Labs utilizes these mechanisms to provide additional yield sources for USDe holders.

Staking USDe can yield sUSDe to enjoy staking rewards, and the yield of USDe fluctuates based on market volatility and changes in funding rates for hedged positions. It once reached an annualized yield (APY) of 80%, and the current yield for sUSDe is approximately 8.64%.

https://app.ethena.fi/dashboards/apy

Recently, Ethena partnered with BlackRock to launch the USDtb stablecoin, which provides yield from RWA, avoiding the risk of funding rates turning negative, ensuring stable income during both bull and bear markets, and completing the overall product line, making Ethena a focal point in the market.

Among them, ENA is Ethena's governance and mining token, similar to the usual token in the Usual protocol, having no substantial value, primarily mined and sold by large holders. This can also be seen through the K-line, which was nearly zero but recently rose due to hype around the RWA concept.

2. USD0

USD0 is the stablecoin of the Usual Protocol, issued 1:1 against RWA assets as reserves.

When users deposit assets, they receive a Liquid Deposit Token (LDT) as a synthetic asset, representing their initial deposit value in the Usual protocol. LDT can be freely traded without permission and is backed 1:1 by the original assets deposited in the protocol. LDT provides holders with permanent withdrawal rights, allowing them to redeem the underlying assets at any time under normal circumstances. To enhance the platform's liquidity and security, Usual Protocol introduces various RWA assets represented by government bonds as collateral for the stablecoin.

Due to the stability of Usual's price, the market cap of USD0 and Usual Protocol has remained relatively stable. However, Usual, as the mining and governance token of Usual Protocol, does not have much substantial function. When the market begins to shift attention, this token is destined to be discarded like many other mining tokens.

3. Sky Dollar (USDS)

https://sky.money/

MakerDAO has officially rebranded to Sky, launching a new stablecoin USDS and governance token SKY on September 18. The existing DAI stablecoin and MKR governance token will continue to exist, and users can voluntarily upgrade their tokens.

According to the rules, DAI can be exchanged for USDS at a 1:1 ratio, while each MKR token can be exchanged for 24,000 SKY tokens; every year, the governance token SKY will be distributed to USDS holders at a rate of 600 million SKY.

4. USDD (USDD)

USDD (Decentralized USD) is a decentralized over-collateralized stablecoin initiated by the TRON DAO Reserve and mainstream blockchain institutions, currently circulating on 11 major public chains including TRON, Ethereum, BNB Chain, and BTTC. USDD is over-collateralized by various mainstream digital assets, including TRX, BTC, USDT, etc., and provides real-time public queries of the collateralization rate on the USDD official website (usdd.io) and the TRON DAO Reserve official website (tdr.org), ensuring high transparency.

5. BlackRock USD (BUIDL)

https://www.blackrock.com/hk

BUIDL is the first tokenized fund launched by global asset management giant BlackRock on the Ethereum network in March 2024, officially named BlackRock USD Institutional Digital Liquidity Fund. The fund aims to provide a digital asset investment tool pegged to the US dollar for institutions and qualified investors, combining the stability of traditional finance with the efficiency of blockchain technology.

Operational Mechanism

The BUIDL fund issues tokenized shares via Ethereum, allowing investors to hold and trade fund shares digitally. The fund's assets primarily invest in high liquidity, low-risk financial instruments such as cash, US Treasury bonds, and repurchase agreements, ensuring that each BUIDL token is backed by real assets, maintaining a stable value of $1 per token.

In addition to Ethereum, BUIDL has expanded to multiple blockchain networks, including Polygon, Optimism (OP Mainnet), Avalanche, Arbitrum, and Aptos.

Source of Returns

Investors holding BUIDL tokens can enjoy accrued returns daily, distributed monthly to their wallets in the form of new tokens. The current yield is comparable to the yield of short-term US Treasury bonds, approximately 4.5%. BUIDL tokens can be transferred to pre-approved investors at any time, providing high liquidity. It will also collaborate with other DeFi stablecoins as reserve funds for algorithmic stablecoins, thereby generating additional returns.

6. Ondo US Dollar Yield (USDY)

https://ondo.finance/

Operational Mechanism

USDY (Ondo U.S. Dollar Yield) is a yield-bearing dollar token launched by Ondo Finance, designed to provide investors with a digital asset pegged to the US dollar that generates yield.

The value of USDY is supported by high liquidity, low-risk financial instruments such as short-term US Treasury bonds and bank demand deposits. Investors can purchase USDY using stablecoins like USDC, and holding USDY is equivalent to indirectly holding these underlying assets. The yield of USDY is realized through interest income from the underlying assets, compounded daily and distributed monthly to holders. It is important to note that USDY is only available to non-US individual and institutional investors, and there is a 40-day lock-up period after purchase during which it cannot be transferred.

Source of Returns

Underlying Asset Income: The short-term US Treasury bonds and bank deposits represented by USDY generate interest income, which is directly distributed to investors after deducting management fees.

Compound Income: The yield of USDY is compounded daily and distributed monthly, increasing the value of investors' holdings over time.

The annualized yield (APY) offered by USDY is adjusted monthly by Ondo based on actual conditions. As of January 23, 2024, the APY for USDY is 4.65%.

In addition to collecting fees from the aforementioned interest rate spread, Ondo also charges a 0.2% fee on redemption actions. USDY, as a priority debt secured by bank demand deposits and short-term US Treasury bonds, has been over-collateralized by Ondo, providing a 3% first-loss position. For every $100 worth of USDY issued, there is at least $103 worth of bank deposits and US Treasury bonds as collateral. Additionally, Ankura Trust, as the collateral agent, provides daily transparency reports detailing asset holdings.

Ondo aims to maintain a collateral composition of 65% bank deposits and 35% short-term Treasury bonds for USDY's collateral, without investing in any other assets.

Ondo Token is the native token of the Ondo Finance platform, supporting the platform's operation, governance, and incentive mechanisms.

7. USDX Money (USDX)

https://app.usdx.money

usdx.money is a stablecoin issuance protocol launched by Stables Labs (a project created by a group of DeFi OGs). Recently, the protocol announced the completion of $45 million in financing, with investors including Dragonfly Capital, Jeneration Capital, NGC, BAI Capital, Generative Ventures, and UOB Venture Management, with a valuation of up to $275 million.

Similar to Ethena, usdx.money generates income through a Delta-neutral investment portfolio strategy, primarily through "multi-currency arbitrage" and "perpetual contract hedging mechanisms," establishing hedged positions between the spot and derivatives markets to ensure that the overall value of the asset portfolio remains neutral to price fluctuations, thereby reducing market volatility risk. Compared to Ethena, usdx.money offers a wider range of currency options, not limited to BTC and ETH. This flexibility brings the direct advantage of higher yields but also implies higher risks.

8. Frax (FRAX)

Frax Finance was launched in May 2019, initially as an algorithmic stable protocol, later evolving into a comprehensive DeFi tech stack. It operates multiple business sectors, including stablecoins, DEX, money markets, liquid staking, and RWA.

The FRAX stablecoin protocol, part of the Frax Finance protocol, maintains a 1:1 peg with the US dollar through a combination of partial collateralization and algorithmic mechanisms.

Operational Mechanism: FRAX employs a fractional reserve and algorithmic stability hybrid mechanism. Specifically, minting each FRAX stablecoin requires a certain proportion of collateral (such as USDC) and governance tokens (FXS). For example, when the collateral ratio (CR) is 90%, minting one FRAX requires 0.9 USDC and 0.1 FXS. When market demand increases, the system mints more FRAX to meet demand; conversely, when demand decreases, the system reduces the supply of FRAX. This dynamic adjustment mechanism helps maintain FRAX's peg to the US dollar.

Frax Finance introduces Algorithmic Market Operations Controllers (AMO), allowing FRAX's monetary policy to be managed through open market operations rather than solely relying on collateral. This flexibility enables FRAX to respond more effectively to market fluctuations.

Source of Returns:

Interest Income: Users can earn interest by staking USDC or FXS. The staked assets are used to support FRAX's liquidity and stability, while users also receive corresponding returns.

Liquidity Mining: Users can earn additional rewards by providing liquidity (such as providing liquidity for FRAX in decentralized exchanges). These rewards are typically distributed in the form of FXS or other tokens.

Governance Token FXS: Users holding FXS can participate in protocol governance and earn returns through minting taxes, minting/redeeming fees, etc. Additionally, the value of FXS may increase with the success of the protocol, providing capital appreciation opportunities for holders.

The current annualized yield (APY) for USDY is approximately 10%. Recently, the Frax Finance community initiated a vote on adopting BlackRock's USD Institutional Digital Liquidity Fund (BUIDL) as reserve assets for the stablecoin Frax USD (frxUSD). As a positive signal, FXS experienced a price surge, although it may not be considered a significant positive development.

9. Resolv USD (USR)

https://resolv.xyz/

Resolv USD (USR) is similar to Ethena, using ETH and derivatives as collateral and employing hedging operations to protect assets from market volatility, thereby achieving stable value support. USR can also be purchased using USDT and USDC.

Source of Returns:

Yield from ETH collateral

Profits from hedging operations

These returns are distributed daily to users holding stUSR.

10. M By M⁰ (M)

https://www.m0.org/

M⁰ is a decentralized stablecoin protocol that allows permitted participants to mint M tokens based on approved collateral by the protocol. Users of M⁰ can earn returns from their collateral while using dollar stablecoins. The core team of M⁰ comes from projects like MakerDAO and Circle, and the protocol was initially launched on Ethereum, with plans to expand to other L1 and L2 networks.

Operational Mechanism:

1. Collateral and Minting:

Minting participants need to deposit off-chain collateral approved by the protocol (such as treasury bonds) and obtain approval through validators to generate M stablecoins. The collateral ratio is set by the protocol to ensure that each M is pegged to $1. The protocol maintains the stability of M through arbitrage mechanisms. If M's market price deviates from the peg, arbitrageurs will buy or sell M to bring its price back.

2. Custody and On-chain Verification:

Custodians operate independently, storing collateral and periodically verifying asset values on-chain. Validators supervise the behavior of minting participants and take measures to restrict activities in case of violations.

3. Avoiding Misconduct by Minting Participants through Delayed Minting and Penalty Mechanisms.

Source of Returns:

1. Passive income generated from the collateral deposited by minting participants, such as treasury bonds or other low-volatility assets.

2. Minting fees paid by minting participants to generate M.

3. One-time penalties charged to minting participants who fail to update collateral values on time or maintain compliance, used for the stability of the protocol.

11. yala

https://yala.org/

yala is a stablecoin protocol based on the Bitcoin ecosystem. It is currently in the testnet phase, and users can participate in tasks for a chance to receive an airdrop!

Yala has completed $8 million in seed round financing, co-led by Polychain Capital and Ethereal Ventures, with participation from Galaxy, Anagram, ABCDE, Amber Group, HashKey Capital, Satoshi Lab, and UTXO Management.

Operational Mechanism

Users connect their BTC wallets, deposit BTC or UTXO assets into Yala Finance, and borrow stablecoins $YU.

They can choose DeFi protocol products that cooperate with Yala, such as staking, re-staking, or liquidity mining protocols, to appreciate their assets.

Users can withdraw their initially deposited BTC while converting additional earnings into BTC and returning them to their BTC wallets.

Source of Returns

Users earn additional returns by deploying the borrowed $YU into cooperative DeFi protocols (such as staking and liquidity mining), and these returns are ultimately returned in BTC.

Summary of Stablecoins

The stablecoin market is vast, serving as the cornerstone of DeFi and the foundation for future PayFi. For a long time, stablecoins backed by fiat reserves like USDT/USDC should remain a priority. Some algorithmic stablecoins may experience short-term popularity due to their algorithms or platform tokens, but in the long run, it will depend on the platform's business development capabilities, whether exchanges recognize them, and whether more DeFi protocols accept them. The new types of stablecoins are mainly divided into two categories: one backed by traditional financial assets like government bonds, which offer returns but not much, such as Usual, where high yields are incentivized by platform tokens with daily emissions. If the market can continuously absorb these, stability can be maintained; otherwise, they will ultimately go to zero. The other type maintains the balance of stablecoins through arbitrage, but this is inherently opaque, unregulated, and not sufficiently secure, destined to develop only around on-chain DeFi.

However, the market cap bubble of stablecoins can be inflated significantly, such as BUILD, which maps off-chain assets to on-chain and can be used as reserves to generate FRAX stablecoins, while FRAX stablecoins can also serve as reserves for other new stablecoins, but in reality, there is only one reserve backing it. In the face of stablecoins, what we can do is seek out new stablecoin protocols, lay out in advance, aim for airdrops, and stake for rewards, while avoiding platform tokens!