Curious to learn what the new StablePlaza pool is? Read our introduction to the upcoming StablePlaza pool.
Because of the turbulence in the stable token market in the past few months, we had to think twice, even thrice about which tokens to include in our multi-token pool. The initial community proposal included UST and we are for sure happy we didn’t launch with that.
The depegging of UST opened everyone’s eyes about the potential dangers of unstable stable tokens. That is the main reason we chose to only go with fully collateralized stables and not to include any form of algorithmic stable tokens for now.
However, things might evolve over time, so we included a similar mechanism as we already have on the DefiPlaza pool to swap out tokens and swap in alternatives.
For the upcoming StablePlaza pool, we selected USDC, USDT, DAI, and BUSD.
The first three were a given, and BUSD was selected by our community after a governance proposal was created to choose between FRAX, MIM, and BUSD.
But first, we’d like to explain why having stable stablecoins are so important and what happens when a stable token depegs.
What happens at a depeg?
Even in stable tokens, there is a certain price activity. The price is almost never perfectly in sync with 1 USD. There is a certain margin in which the price of each stable token fluctuates. The mechanism of arbitrage will synchronize the price between markets and the StablePlaza pool ends up with a bit less or a bit more of one token than the others.
Arbitrage is an investment strategy in which an investor simultaneously buys and sells an asset in different markets to take advantage of a price difference and generate a profit.HBS
These arbitrage transactions generate fees for the liquidity providers, while at the same time the arbitrageurs keep the pool perfectly balanced and earn a profit.
When the price difference becomes bigger, the difference in the number of tokens in the pool will also enlarge. Especially when a stable token depegs, we could end up with only the depegged stable token in our pool, since arbitrageurs made a profit by buying all other stablecoins in the pool.
Pegging is the practice of fixing the exchange rate of a currency to the value of another currency.
A depeg is losing that peg to the value of the other currency.
When the stable token restores its peg, arbitrageurs will see a new opportunity and will start buying the recovered token, supplying the depleted tokens in the process, to make a profit again.
As long as stable tokens restore their peg we end up with a balanced StablePlaza pool again and an increase in the generated fees.
That is why we selected the stablest stable tokens. A short-term depeg is fine, as long as the token recovers.
USD Coin ($USDC) is a fiat-collateralized stablecoin, which means it is backed by real assets. USDC is backed by cash and short-term U.S. government bonds. USDC is considered one of the safer stable tokens due to its transparency. Center, a consortium created by Circle and Coinbase to launch USDC, publishes monthly attestation reports, providing third-party assurance as to the size and composition of the USDC reserves. Circle is also a licensed money transmitter under U.S. state law.
Tether, as $USDT is officially called, is the world’s largest stablecoin. It is backed by cash, short-term corporate debt, and even some foreign government debt. Tether presents some more risks than USDC, because of its lack of transparency. There is no public auditing to check whether the reserves can fully back the USDT in circulation. Tether does however publishes an overview of its reserves daily on its own website. Tether also said it will undertake a full audit with a top 12 accounting firm to improve the transparency of its USDT reserves.
Unlike USDC and USDT, $Dai is not backed by traditional financial instruments like cash and bonds. DAI, created by The Maker Protocol, is backed by any Ethereum-based asset that has been approved by MKR holders. This makes DAI a true decentralized stable token since the collateral is not kept by a centralized entity. The Maker Protocol makes it possible to lock ETH and other crypto assets in order to generate new DAI tokens in the form of loans., with the ETH and other crypto-assets as the collateral for these loans.
To counter the volatility of ETH and other crypto assets, DAI is over-collateralized. At the time of writing, the minimum collateralization ratio for ETH is set at 150%. DAI is not hard-pegged to the USD dollar due to its backing by crypto assets but is kept in sync by the ecosystem including internal economic incentives, policy tools controlled by MKR token holders, and arbitrageurs.
DAI has proven itself to be robust across multiple boom and bust cycles in crypto token valuations, so we felt comfortable including it in the StablePlaza pool.
Binance USD ($BUSD) is launched in collaboration between Binance and Paxos, a New York-regulated financial institution, and is a fiat-collateralized stable coin just like USDC. It is fully backed by cash held in Paxos-owned US bank accounts. BUSD is also approved by Wall Street regulators. Just like with USDC, monthly attestation reports are available, providing third-party assurance as to the size and composition of the BUSD reserves.