Stablecoins, designed to maintain a peg with a fiat currency, have become a key pillar of the crypto economy. From being used for remittances to providing safe havens during periods of high volatility, the total stablecoin supply on Ethereum has reached over $70 billion.

Market Cap dominance by stablecoin type as of August 30, 2023.

Daily token holder dispersion (between October 2020 and August 30)

There are three main types of stablecoins:

• Fiat-backed stablecoins (or “fiat-collateralized” stablecoins): backed by fiat currencies, often a reserve or liquid collateral.
• Over-collateralized stablecoins (or “anchored” stablecoins): often backed by a basket of currencies, which may or may not include other stablecoins or cryptocurrencies.
• Algorithmic stablecoins (or “reflexive” stablecoins): governed by algorithm(s) that adjust the token’s supply based on demand. They may or may not be supported by collateral.

This primer focuses on over-collateralized stablecoins. We will provide an overview of the biggest over-collateralized stablecoins, compare their differing methods and collateral, and discuss their defining moments. 

Market Cap dominance by stablecoin type (as of August 30, 2023).

In addition to how stablecoins are categorized, there are some other important characteristics to consider when evaluating these digital assets.

• Centralization and governance: Governance structures of stablecoins range from being a fully decentralized and unmanaged token to a single signer administrator. The governance structure can be a source of risk for many who prefer not to be involved with anonymous developers or overzealous compliance and legal teams.
  
  
• Audits and transparency: Transparency regarding backed assets (primarily for tokens with fiat backing and over-collateralized tokens) helps ensure that stablecoins are backed as claimed. A common form of transparency comes in the form of “attestations,” in which a declaration of evidence is provided. These attestations are sometimes validated by a third-party “opinion,” but attestations are often unsupported by any third party and should not always be taken at face value. An “audit” is much more valid, and proof of reserves (depending on the methodology) can be useful for risk mitigation. This is important to note: Attestations are not audits, and opinions do not qualify as independent audits, nor can they be considered completely independent.
  
  
• Regulatory considerations: Stablecoins, especially those backed by fiat currencies, can fall under regulatory scrutiny by various regulatory bodies underlying the fiat currency (or currencies) underlying the peg. Understanding the regulatory situation and the significance of any scrutiny helps users navigate available options and their levels of associated risk.
  
  
• Supported networks: As stablecoins grow in popularity and different use cases, launching on new chains has been another angle stablecoin issuers have used to grow their user base and market capture. However, this comes with its trade-offs, as each network has its nuances and some are more prone to unwanted exploits such as oracle exploits or network bugs. If building strategies that cross networks, users should know which networks a stablecoin is on.
  
  
• Supported exchanges: Not every exchange will support each stablecoin. There are competitive advantages to not supporting certain stablecoins, especially for those that compete with existing products. There was some shock and awe last year when Binance announced that they would remove support for three different stablecoins (USDC, USDP, and TUSD) by converting all stablecoins held on the exchange to their own BUSD. This plan did not fully form, as the exchange continued to support USDC and even recently integrated USDC deposits and withdrawals for the Arbitrum network (not to mention BUSD’s ongoing SEC case and recently announced termination of BUSD). In any case, exchanges have differing levels of liquidity for supported stablecoins, so users should keep in mind their preferred entry (on-ramp) and exit (off-ramp) points and plan accordingly. Transaction fees and slippage to convert funds between a liquid and illiquid pair can quickly turn a profitable strategy into a breaking one.
  
  
• Blacklist functionality: Blacklists give contract administrators the ability to freeze funds or prevent an address from transacting with a given token. Token blacklists are becoming popular as a way to prevent the movement of exploited funds by malicious actors. However, this function can be used in ways that do not always support the users’ philosophies, such as when Circle (issuer of USDC) blacklisted 45 Ethereum addresses after OFAC regulatory actions against Tornado Cash. Users should keep in mind the levers possessed by stablecoin issuers that may support or inconvenience their use case.
  
  
• Gasless transactions: Gasless transactions can be a convenient feature for users offering gas-free transactions, where on-chain gas fees are paid by a third party such as a payment provider or an exchange. However, these gasless transactions are not without risks: bad actors have accumulated over $68 million from this exploit on Ethereum alone. It is critical to never sign a transaction, even commonplace “Connect to” signatures, without understanding the implications. Many digital assets and popular stablecoins have this feature built into their smart contracts, so signing a malicious signature request can lead to a bad actor draining the entirety of a user’s wallet without them even realizing it happened.
  
  
• Peg stabilizing methods: Stablecoins can and often do experience price fluctuations away from their peg. For example, USDT, a US dollar stablecoin, has been lower than its $1 peg for the last month after a Curve pool imbalance (the token has otherwise continued to operate normally). Mechanisms available to stablecoins for depeg mitigation vary widely from adjusting the supply to stablecoins, altering collateral, or implementing governance decisions. If mechanisms in place fail to perform or do not exist, the stablecoin may never return to its peg or the market.

Over-Collateralized Stablecoins

Overview

Market Cap dominance for over-collateralized stablecoins as of August 30, 2023.

Market Cap for over-collateralized stablecoins as of August 30, 2023.

The over-collateralized stablecoin marketplace is heavily weighted towards DAI, which boasts over 79% of the market capitalization. With 13% of the market share between them, eUSD and LUSD also hold significant shares of the space, while crvUSD rounds out the significant tokens with a 2.5% market share.

Over-collateralized stablecoin prices for select tokens from October 2020 to August 30, 2023.

Given the massive amount of backing for fiat-backed tokens, overcollateralized stablecoins only hold around 4% of the global stablecoin market. In addition, the underlying token volatility backing these stablecoins can lead to larger price fluctuations. LUSD has had several extremely large depegs over the past few years, while DAI has remained fairly stable, even through the  extreme volatility over the past two years. During these conditions, UST managed to capsize several stablecoins, and troubles in traditional banking including the collapse of Silicon Valley Bank led to multiple arbitrage opportunities for fiat-backed stablecoins such as USDC and USDT.

Spot trading volume market share for over-collateralized stablecoin select tokens from October 2020 to August 30, 2023

DAI is most used within DeFi, but the token has been supported on a number of centralized exchanges for some time. Over-collateralized stablecoins like LUSD and sUSD have either failed to find centralized exchange support due to their volatility and lack of transparency or have not become popular with CEX traders, who trade mostly using USDT and USDC. DAI, however, has had a 95% CEX market share for over-collateralized stablecoins since well before October 2020.

Daily number of holders for over-collateralized stablecoins on select tokens from October 2020 to August 30, 2023

Daily token holders for DAI far outpace any of its stablecoin counterparts. sUSD and mUSD have been adopted by some, but it appears many overcollateralized tokens are still specialized in some ways.

Daily holders dispersion of over-collateralized stablecoins on select tokens from October 2020 to August 30, 2023

Daily token holders have been fairly stable for the last few years for all stablecoins except DAI, which grew quickly in 2021. It appears the challenge for f stablecoins backed by fiat currency to onboard new users also exists for over-collateralized stablecoins. It is important to track user adoption over time as regulatory clarity emerges. This trend could be the catalyst for wider cryptocurrency adoption if users start to onboard through stablecoins rather than more volatile tokens.

DAI (DAI)

DAI market cap since October 2020

DAI mints and burns since January 2020

Dai (DAI) was launched by MakerDAO in December 2017 with a single token for collateral: ETH. In November 2019, this was expanded to include BAT and USDC, the fiat-backed USD stablecoin, but MakerDAO now allows several cryptocurrencies to be used as collateral. New Dai tokens are created (or borrowed) when users deposit collateral assets into Maker vaults. This allows users to mint new Dai tokens and access shared liquidity pools.

Dai tokens can be staked through the Dai Savings Rate (DSR) protocol and earn yield through MakerDAO. MakerDAO is governed by the MKR token, which empowers token holders to create and vote on proposals. In May 2023, the DAO voted to increase the DSR from 1% to 3.33%. The DSR was again raised in July 2023 to as high as 8%. The DSR also introduced the Enhanced Dai Savings Rate (EDSR) which allows the effective DSR to be determined by the DSR utilization rate, which decreases the effective yield on staked Dai as DSR utilization increases.

MakerDAO is an active DAO with a lot of community participation, which shows how incentives can influence adoption. Following the July 2023 proposal, MakerDAO co-founder Rune Christensen noted that “the EDSR helps fix [adoption] by ensuring that Dai holders...get a more fair amount of value from the increased returns generated by the protocol. In turn this might help spur adoption."

Dai’s peg is primarily maintained through incentives. Users mint, or lock up more collateral for DAI when the peg is above $1, and burn (repay DAI) and unlock collateral when the peg is below $1. Over-collateralization is another mechanism for maintaining the stablecoin peg and ensuring the security of the token. As users are required to deposit more collateral than the value of DAI borrowed, this absorbs some of the crypto market volatility without risking the price stability of the stablecoin. 

Over-collateralized tokens’ transparency is managed by smart contracts and can be easily verified on-chain. MakerDAO uses summer.fi (previously Oasis) which allows users to borrow Dai against their vault collateral. This operates much differently than most of the fiat-backed tokens covered in our previous report, which use attestation to verify reserves and require payment processors and jurisdiction-dependent licenses to mint new tokens. Since overcollateralized tokens are often managed on-chain and through decentralized governance schemes such as DAOs, developer preference is an extremely important path to adoption for token issuers.

Curve USD (crvUSD)

crvUSD mints and burns since January 2020

Curve USD (crvUSD) was created by Curve Finance (CurveFi). Curve is one of the largest decentralized exchanges in the world and is managed through Curve DAO and the CRV token. CRV allows the CurveFi community to vote on protocol fees, rewards, and development decisions and can act as a booster on yield farming activity.

Although crvUSD was launched offering only ETH, the stablecoin is now crypto collateralized, being backed by a number of different tokens as collateral. Curve DAO has approved several new tokens such as wBTC and wstETH (wrapped-staked-ETH) and may continue to approve new tokens through DAO votes. Similar to other stablecoins covered in this report, users can mint crvUSD by adding new collateral to the Curve pool. This collateral is maintained by liquidations. Users are liquidated when the collateral threshold is breached and reversed when collateral prices improve.

Notably, CurveFi’s CEO Michael Egorov deposited 957 sfrxETH (staked ETH created by Frax) valued at $1.8 million to mint $1 million crvUSD. crvUSD faced a depeg event in August 2023 when the protocol faced an exploit caused by a severe and unexpected vulnerability. This event led to significant fear in the community and caused a situation similar to a bank run, with many users redeeming crvUSD for collateral. The stablecoin only fell by around 0.35%, but the event signaled that even over-collateralized stablecoins have risks despite often having more value in collateral than issued tokens.

Learn more about becoming an over-collateralized stablecoin maxi as this is just a subset of the report. In the rest of the report, we go through many more stablecoins including Liquity USD (LUSD), Synthetix USD (sUSD), mStable USD (mUSD), Magic Internet Money (MIM), Reserve (RSV), Electronic Dollar (eUSD), Dola Stablecoin (DOLA), BOB Stablecoin (BOB), miMatic (MAI), and many more.

Download the complete research report here: