Stablecoin Depth Analysis: Definition, Classification, and Case Study

Stablecoins play an important role in the cryptocurrency space. As of the end of July 2024, the total market capitalization of stablecoins is about $165 billion, accounting for nearly 7% of the entire cryptocurrency market of $2.417 trillion. Among them, Tether (USDT), as the leader in stablecoins, currently ranks third in market capitalization, behind Bitcoin and Ethereum.

This article will delve into the definition, classification, and important role of stablecoins in the cryptocurrency ecosystem. We will also explore its operational mechanisms and potential risks by analyzing the case of Ethena USDe.

Definition of Stablecoin

According to the definitions provided by the Financial Stability Board and the Bank for International Settlements, a stablecoin is a "cryptocurrency designed to maintain a stable value relative to a specific asset or a group of assets." Typically, stablecoins are pegged to fiat currencies such as the US dollar.

The Necessity of Stablecoins

The existence of stablecoins is necessary:

1. Compared to traditional assets, stablecoins offer more convenient trading in the Web3 environment, facilitating daily transactions and enabling fast, low-cost cross-border payments.

2. Compared to other cryptocurrencies, stablecoins reduce the impact of value fluctuations. During turbulent market periods, stablecoins become a safe haven for value preservation.

Stablecoin Classification

Stablecoins are mainly divided into two categories:

collateral stablecoin

Backed by other assets to ensure that the value is supported by collateral. Mainly includes:

1. Fiat-backed stablecoins: such as USDT and USDC.
2. Commodity-backed stablecoin: such as Tether Gold (XAUt).
3. Cryptocurrency collateral stablecoin: such as DAI.

algorithm stablecoin

Ensure collateral security through algorithms or adjust market supply and demand to maintain stability. Main methods include:

1. Settlement mechanism: like DAI.
2. Burn and Mint: like TerraUSD (UST).
3. Adjust the lending interest rate: like Beanstalk (BEAN).

It is worth noting that stablecoins may employ multiple mechanisms to maintain stability.

Security Risks and Solutions

The main risks faced by stablecoins include:

1. Collateral Transparency
2. Fluctuations in collateral value
3. Smart Contract Vulnerabilities
4. Market Volatility

Methods to address these risks include regular audits, publishing proof of reserves, implementing over-collateralization and liquidation mechanisms, and strict security audits.

Mainstream stablecoin analysis

The top 20 stablecoins in the market account for over 99% of the total market value, showing a highly concentrated trend. Among them, the top 5 stablecoins (USDT, USDC, DAI, USDe, and FDUSD) account for 96%. All of the top 20 stablecoins have asset collateral, and some also incorporate algorithmic stability mechanisms.

This phenomenon indicates that, despite algorithmic stablecoins claiming to have excellent designs, users still prefer fully collateralized stablecoins, especially those backed by fiat currency.

USDe Case Study of Ethena Labs

USDe is a stablecoin issued by Ethena Labs, currently ranked fourth in market capitalization. Its design principle is primarily based on the stability of centralized exchanges (CEX), using a "delta hedging" strategy to maintain the stability of the collateral assets.

The sources of income for USDe include staking rewards and delta-hedged derivative position profits. Historical data shows that this income combination remains positive even during market downturns.

However, USDe also faces some potential risks:

1. Centralization Risk: Dependence on CEX may become a vulnerability.
2. Market Risk: There may be a continuous negative funding rate, affecting returns.

Conclusion

Stablecoins play an important role in the cryptocurrency ecosystem by providing stability and facilitating transactions. From fiat-collateralized to algorithmic mechanisms, to asset-backed, different types of stablecoins meet the diverse needs of the crypto community.

As Ethena Labs continues to improve USDe, people are concerned about whether it can remain stable amidst market fluctuations and avoid a collapse similar to Luna. Although USDe's underlying assets and economic model are quite different from Luna, its performance still needs to be closely monitored.

Given the enormous market value and influence of stablecoins, continuous security audits and monitoring are crucial for maintaining market stability and trust.