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Price Recap: Polkadot; Stablecoin’s Future, What Will Stablecoins Look Like?

Weekly Market Recap with @coraldefi

1) Native USDT launches on @Polkadot

2) canFRAX holders still stranded on non-Ethereum L1s

3) What will stablecoins look like in the future?

1) Native USDT launches on @Polkadot

Despite Polkadot being one of the most funded blockchains with a massive developer base, the ecosystem has struggled to attract other retail and institutional capital.

Project Strength: Which Blockchain Has The Highest Developer Count, And Why It MattersProject Strength: Which Blockchain Has The Highest Developer Count, And Why It Matters

Whether it's the obstacles of navigating Polkadot.js or the hassle of obtaining the parachain token to pay gas fees, users do not bridge to Polkadot related projects.

Even @MoonbeamNetwork and @AstarNetwork which are EVM parachains on Polkadot have boasted little success in growing its capital bases. Polkadot lacks many of the high yield incentives that convince users to learn how to migrate to to a non-EVM chain.

@acalanetwork the DeFi hub of Polkadot has just now recovered from its overcollateralized stablecoin depegging after a smart contract erroneously minted 3B aUSD.

After a month of tracking down the addresses holding the newly minted stablecoin, aUSD is now fully collateralized.

Acala’s Path to Resuming OperationsAcala’s Path to Resuming Operations

The Acala Foundation made a donation to ensure the overcollateralization which included 3,794,703 USDC and 42.7M ACA. The 5,837,712 aUSD that was minted from the donation was then burned to cover the shortfall of funds that was not previously recovered from the error mint.

Tether announced native integration on Polkadot. Through XCM, native USDT is available on all parachains. Native issuance of USDT allows users to hold stablecoins without the central points of failures inherent in bridging protocols such as the 190M Nomad exploit back in August.

As a result, those who bridged tokens to other chains were left with a token that was undercollateralized. Fast forward to today and less than 20% of funds have been recovered.

Nomad: Official Nomad Funds Recovery Address | Address 0x94a84433101a10aeda762968f6995c574d1bf154 | EtherscanNomad: Official Nomad Funds Recovery Address | Address 0x94a84433101a10aeda762968f6995c574d1bf154 | Etherscan

2) canFRAX holders still stranded on non-Ethereum L1s

Canonical FRAX (canFRAX) represents FRAX not held on Ethereum Mainnet. The 60M canFRAX amounts to just 4.5% of FRAX in circulation.

Since multiple bridges may be compatible with the same chain, three users could use three different bridges to move FRAX from Eth to Avax. Three different FRAX contracts on Avax complicates the process of building up a strong capital base in money markets and liquidity pairs.

As a result, FRAX Finance introduced canFRAX to address liquidity fragmentation across protocols on the same chain.

In FIP-100 governance post, the team expands on why canFRAX was initially implemented. "All AMMs, lending protocols, and AMOs use canFRAX of their respective chain so liquidity is not fragmented and 1 single address for FRAX becomes canonical per chain.

This has very powerful network effects to make 1 FRAX token the default stablecoin rather than multiple kinds of bridged FRAX each with low liquidity and use cases."

[FIP -100] Remove all canFRAX/canFXS swaps between bridges & remove bridge FRAX/FXS POL[FIP -100] Remove all canFRAX/canFXS swaps between bridges & remove bridge FRAX/FXS POL

Protocols and bridges could swap their version of FRAX for a universal canFRAX for that Layer 1 blockchain. While this was capital efficient, it introduced security issues that became concerning and apparent with every new bridge exploit.

Some bridges rely on honest validators to ensure funds stay secure whereas other bridges rely on optimistic rollups. Ultimately, if just one of the bridges included in composing canFRAX for that blockchain is exploited, all canFRAX holders risk undercollateralized FRAX holdings.

On Aug 13, FXS holders passed FIP-100. Bridges are now no longer able to swap canFRAX and canFXS. The FRAX team also removed any POL on these bridge protocols which makes it almost impossible for larger canFRAX holders to swap back into FRAX on Eth Mainnet.

This is a frustrating reality for canFRAX holders who primarily hold FRAX to earn enhanced yield. The FRAX team will eventually roll out FraxFerry which will guarantee canFRAX holders a 1:1 redemption into FRAX on Ethereum Mainnet.

While this is reassuring to know that the redemption is guaranteed, there is no timeline of when FraxFerry will be live. Until then, canFRAX holders need to do their best to extract the little yield left for FRAX on non-Ethereum chains.

3) What will stablecoins look like in the future?

Stablecoin regulation is looming. Algorithmic stablecoins may be a thing of the past. Last week, the U.S. House Financial Services Committee announced that it was considering a two year ban on algorithmic stablecoins...

like Terra's UST that are "marketed as convertible for a fixed value of monetary value and are solely reliant on the value of another digital asset from the same issuer to maintain their price."

U.S. Legislation Would Ban Algo Stablecoins for Two Years: Report - The DefiantU.S. Legislation Would Ban Algo Stablecoins for Two Years: Report - The Defiant

Of existing stablecoins that exist, USDN is the only one that fits these parameters as it is structured very similarly to UST. Other algo stablecoins such as USN USDD are fully backed by dollars. Both USN and USDD offer the highest stablecoins yields in DeFi.

U.S. legislation also stresses the importance of a liquid backing so that holders of the stablecoin can redeem to the underlying on demand.

@UXDProtocol is a Solana stablecoin that initially was backed by a delta neutral position in SOL. For example, a user would deposit 1M SOL and the protocol would take 500K of that to open a short SOL perp position.

The issue was that the protocol would occasionally have to pay funding when the market was skewed short and funding rates were negative.

Recently, UXD rebranded to a stablecoin that is not only backed by the SOL delta neutral trade, but also other non-directional trades. The protocol will back UXD with stablecoin lending, overcollateralized loans, and real world asset investing.

This is a unique format that does not necessarily make UXD fully liquid, but potentially a strong stable asset that is backed by positions accruing yield.

Asset Liability Management Module: The Endgame of StablecoinsAsset Liability Management Module: The Endgame of Stablecoins

A less risky but realistic expectation is that T-bills will be tokenized on-chain and will pass the yield to stablecoin holders. Or there may be some combination that consists of T-bills and other DN positions that allows the stablecoin holder to accrue yield and obtain leverage.

Despite all the concerns around stablecoin regulation, the market is still in its early fazes. The 152B market cap of stablecoins has a long way to go, but the composition of stablecoins will look very different from now.

This post is based on this twitter thread.

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