| Why DeFi Giants Aave, Curve May Want Their Own Stablecoins There’s an old media saying that you need three examples to make a trend. Well, at least two prominent Ethereum-based platforms are designing new stablecoins – a situation that speaks to the importance of those assets and the innovation that competition drives within crypto. At the very least, it’s more than a fad. On Sunday, Aave community members voted overwhelmingly in support of the development of a native stablecoin, called GHO, for the decentralized lending platform. That came about a week after Michael Egorov, founder of the open access Curve protocol, more or less confirmed his team was working on its own fiat-pegged asset. Stablecoins are a type of blockchain-based token that deploy various means to maintain parity with fiat currencies like the U.S. dollar or euro. Typically, in decentralized finance (DeFi), the realm that Aave and Curve play in, these tokens are balanced with overcollateralized amounts of crypto (i.e., there’s more crypto put into the protocol than the stablecoin is worth). Stablecoins are also unmistakably one of crypto’s most important innovations and historically one of its fastest growing sub-economies. Today, there’s over $150 billion worth of stablecoins in circulation, according to data provider CoinGecko. Two dollar-pegged assets from competing centralized companies/consortia, tether and USDC, account for over two-thirds of that market. DeFi already has a host of stablecoins, which serve as an essential part of this permissionless economy. They are used in trading pairs, as a way to protect capital from price fluctuations and to earn yield through lending. MakerDAO’s DAI token is the largest and oldest “DeFi native” stablecoin. While all blockchain-based stablecoins allow peers to transact without intermediaries, truly decentralized stablecoins that are run by algorithms rather than by formal businesses align more with the crypto ethos of programmable financial inclusion. Tether and Circle sometimes block transactions or blacklist addresses, for instance. Making business sense But it seems like pure business sense for Aave or Curve to get into the stablecoin game. Neither of the protocols’ tokens are built, but both will likely drive revenues for and attract users to the platform. Aave plans to charge interest on loans taken out in GHO, with that yield going toward that platform’s decentralized autonomous organization (DAO). Borrowers will also be able to earn interest on the collateral they post to mint the token. Proposed by Aave Cos. as a protocol improvement, 99.9% of voters supported the idea and pledged half a million AAVE tokens. Meanwhile, Curve’s users largely back a native stablecoin for the protocol known as the site of the so-called “stablecoin wars,” though it hasn’t yet been put to a formal vote. As the DeFi trade publication The Defiant put it: “It stands to reason that the basic mechanism for a Curve stablecoin would be to mint it against liquidity provider (LP) positions. At a high level, this would be similar to MakerDAO’s collateralized debt position model. Using LP positions as collateral should theoretically make liquidity more sticky on Curve, as an outstanding loan against an LP position would require users to pay down that loan before retrieving their collateral. After all, people use Maker partially so they don’t have to sell their ETH. In this case, people could borrow against their Curve LP positions so they can access liquidity without giving up that fee-generating collateral.” Aave’s community, which had the earlier stablecoin proposal, was seemingly spurred to put GHO to a vote after Curve’s developer team began speaking publicly about its plans. Being first can have its advantages. The whole stablecoin wars are essentially a fight within DeFi about which token can attract the most users and maintain the most liquidity to ensure its price stability. That said, Aave has been criticized in the past for expanding into a wide array of unrelated markets – like social media. While a stablecoin could drive profits and provide users with discounts, it also waters down its brand. “What does Aave do again?” crypto commentator Cobie rhetorically asked. The situation, while not yet a trend, is a little reminiscent of DeFi Summer in 2020, when every other protocol launched a governance token. It would be interesting to see what happens to the market for undercollateralized stablecoins (or these assets’ security guarantees) if more protocols get into the game, especially at a time when capital and users are exiting. It’s also worth remembering how ugly that summer was at times, with protocols launching specifically to suck users away from others through “vampire attacks” and attractive token subsidies. It’s not my place to say whether users or DeFi as a whole would be better served if Maker was less prominent – or if every decentralized exchange had a native stablecoin a la Binance Coin. But the entire promise of DeFi is that open markets drive innovation, even if there are increased risks. And it’s probably too early to call the market oversaturated until Sushi decides to mint its own stablecoin. – D.K. | 