- How does a stablecoin achieve greater adoption without utilizing unsustainable growth mechanisms?
- What do sustainable stablecoin yields have to do with crypto derivatives?
- What framework can you use to assess the resiliency of stablecoins?
All stablecoins are stable.
You might have assumed this about stablecoins at one point, given the taxonomy of the asset class.
Instead, what the latest TerraUSD (UST) fallout has revealed is that not all stablecoins are created equal.
In theory, a stablecoin is pegged 1:1 to a reserve asset such as the US Dollar and therefore backed by one US Dollar’s worth of stable and liquid collateral assets. But in the spirit of crypto, many centralized issuers and decentralized stablecoin protocols have tested the boundaries of said theory, in the process of experimenting with different forms of so-called stablecoins.
Stablecoins were born from utility – the need for a reliable and low-cost instrument used as a medium of exchange for global, peer-to-peer trade. First-generation stablecoins such as USDT (Tether) and USDC have largely filled this role. But along the way, we have seen several creative spins on stablecoin utility – extending beyond payments to trading and earning yield.
Unfortunately, some of the recent issues surrounding the adoption of stablecoins such as UST have led to distrust around the future viability of stablecoins.
But UST’s downfall does not mean that stablecoins should not exist for the purpose of earning yield. In fact, second-generation stablecoins are expected to maintain stability while providing additional value, such as earning interest. In light of this reality, the question remains: how does a stablecoin achieve greater adoption without utilizing unsustainable growth mechanisms? CoinFLEX has designed the flexUSD stablecoin with this in mind, by capitalizing on the growth of crypto derivatives.
What do sustainable stablecoin yields have to do with crypto derivatives?
CoinFLEX is the first crypto exchange to create a peer-to-peer repo (borrowing and lending) market, connecting dollar lenders (repo buyers) with crypto-collateralized borrowers (repo sellers). Repo sellers receive USDC in exchange for their coins, and retain their crypto exposure via the deliverable long perpetual futures leg. Repo market participants include basis traders (arbitraging or speculating on the price difference between a perpetual future and spot), lenders, borrowers, and cross-exchange arbitrageurs.
Understanding that many of these crypto activities are challenging to manage manually, CoinFLEX created flexUSD to tokenize these market opportunities. flexUSD takes advantage of the large demand for institutional levels of leverage and scarcity of dollars in the crypto markets, by earning funding rates from traders on the CoinFLEX exchange. flexUSD pays this interest to holders on-chain every 8 hours. It’s important to note that because flexUSD sources this yield directly from the CoinFLEX futures markets rather than third-party intermediaries, the stablecoin earns transparent and sustainable yields for holders.
With this in mind, let’s take a step back and understand how flexUSD maintains its promise of stability.
The Stablecoin Trifecta
It’s helpful to have a framework for assessing the resiliency of stablecoins, namely focusing on the following properties:
Stability – What is the stablecoin’s depegging risk?
flexUSD is backed by USDC and coin assets in CoinFLEX’s repo markets. As a repo trade involves a coin position and an opposing futures position, flexUSD’s balance sheet is always fully hedged and indifferent to the underlying crypto market price movements.
Transparency – How are you able to verify the collateral reserves backing the stablecoin?
flexUSD’s collateral reserves are hoping to be verified and publicly attested to by a leading US auditing firm daily, every 8 hours. Holders have full transparency on how flexUSD is generating yield: on CoinFLEX, an orderbook-based publicly viewable marketplace that any qualified customer can view and trade. With other yield products, you typically have to take the borrower’s word for what the funds are being used for and have zero visibility as to what is actually being bought and invested in with your funds.
Redeemability – What is the liquidity risk of the stablecoin, especially during market stress?
In flexUSD’s history, CoinFLEX has been able to successfully process $1 worth of the underlying asset (USDC) for every flexUSD redemption.
With flexUSD, CoinFLEX is pioneering the gold standard for stablecoins.
What is a promising utility for stablecoins?
flexUSD serves to benefit a range of holders - from average investors to institutional funds and corporate treasurers. Corporate treasurers are tasked with a number of responsibilities, one of which is cash and liquidity management. In this regard, they face a number of challenges:
- FinTech companies and other startups in the US raised $35bn or more in 2021 and many need credible use cases on how to generate yield on these funds
- Their runways can be extended significantly by more effective management of these cash balances
- Yields earned from bank balances are sub-1% APR
- These companies require cash-like liquidity on a daily basis, so they don’t want to get locked into very long-term investments.
With flexUSD, corporates can:
- Use a trusted asset such as USDC as collateral
- Increase their bottom line through access to competitive yields
- Be fully liquid versus locking up funds through staking mechanisms
- Benefit from full transparency with daily attestations
- Know exactly where and how yield is being generated
Indeed, not all stablecoins are created equal.
This post is commissioned by CoinFLEX and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.
© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.