From Market Demand to Ultimate Design, Stablecoin Issuance Guide

The logic of the interest-earning stablecoin ( YBS ) is to mimic banking operations, but that is only surface-level. The project also needs to address many issues such as the source of user earnings, the distribution method, and how to maintain long-term operation. The collapse of DeFi projects is just a routine occurrence in the financial industry, but events like Silicon Valley Bank could trigger systemic risks that need to be addressed promptly.

Era of Excess Leverage

Finding profit is the core of product thinking, while financialization is manifested as speculation. Significant price differences are the source of arbitrage, and long-term fluctuations require hedging risks.

After the introduction of computer technology, the financial industry has gone through three stages in quantitative speculation:

1. Portfolio Insurance: Diversifying investments to preserve value, quantifying risks and pricing.
2. Leverage: Amplifying small trade profits through borrowing.
3. Credit Default Swaps: Derivative risk control failures, reduced to pure gambling

Currently, the significant price differences in the financial world have disappeared. Normalization, small-scale transactions, and decentralization have become the norm, with on-chain MEV and off-chain exchanges mimicking traditional finance.

In terms of time dimension, long-term value preservation is no longer mainstream; leverage, extremism, and speculation have become the goals. Hedging itself has become the purpose, while long-term risks are ignored.

In this context, the YBS project faces a dilemma: a low APY/APR makes it difficult to attract funds, but promising too high could lead to a Ponzi scheme, ultimately collapsing in financing, trading, and other aspects.

The essence of hedging is arbitrage, and momentum is difficult to avoid.

Products are unremarkable, US Treasuries have become mainstream.

Interest-bearing stablecoins require a strong asset reserve, and the credit leverage model is difficult to cold start. Early projects could issue stablecoins by "claiming" to possess equivalent dollar assets, but now this operation has become more challenging.

Most YBS projects aim to adopt the credit leverage model of banks: reserves to meet regulations, insufficient liquidity to address withdrawals, and the remaining funds to be lent out for interest. This is the fundamental reason why USD/U.S. Treasury bonds have become the mainstream choice for YBS, as they can circulate seamlessly in both Web2 and Web3, maximizing returns.

underlying asset

USD/Treasuries are mainstream choices, but directly purchasing Treasuries seems a bit rough. The market opportunity lies in helping Web3 projects purchase physical assets and assisting traditional financial giants in the compliant issuance of YBS.

There are four main forms of utilizing USD/U.S. Treasuries:

1. U.S. Treasuries / USD cash / USD-related assets
2. Mainstream on-chain assets and their pegging forms
3. USDT/USDC as underlying assets
4. Alternative forms, such as GPU computing power tokenization

The progress of mainstream on-chain assets as reserve funds is slow and requires broader recognition from traditional financial markets. Attention can be focused on three aspects: ETFs, national reserves, and institutional strategies.

Minting Mechanism

The minting of YBS should specifically refer to the "issuance of stablecoins based on underlying assets" as a one-way process. Theoretically, the new era of YBS generally adopts a 1:1 full collateralization, but the actual situation may vary. A few non-fully collateralized products use credit or guarantee mechanisms, making it difficult to become mainstream.

Source of Earnings

The source of income needs to consider two dimensions: the interest mechanism and stability. Taking Ethena as an example, its delta-neutral mechanism consists of ETH spot and short positions for hedging, ensuring that USDe is pegged to the US dollar at a 1:1 ratio. The funding rate arbitrage from short positions is the source of income, used to pay the returns to sUSDe holders.

Other YBS projects mainly improve on interest-earning scenarios and asset value stabilization mechanisms.

Yield Distribution

There are two distribution mechanisms:

1. Value increases, quantity remains unchanged: For example, Avalon, Falcon, etc., sToken prices increase over time.
2. Quantity increases, value remains unchanged: For example, Resolv and sToken increase over time but are pegged to stablecoin at a 1:1 ratio.

The YBS project faces two major challenges: first, establishing sufficient reserves, and second, finding a stable source of income. This makes YBS more suitable for large institutions with strong capital.

Yield Competition, High Volume and Intense

The YBS project faces the challenge of balancing yield and scale after obtaining financing.

Pool Duiduo Strategy

To provide more options for yield, the YBS project needs to establish yield pools on multiple chains and protocols. The main strategies include:

1. Amplify returns using Pendle and Equilibria
2. Improve yields through lending mechanisms such as Aave and Morpho.
3. Shift to emerging DeFi protocols such as Pendle/Morpho/Euler

Pendle has become the infrastructure of the YBS industry, similar to the relationship between USDC and Coinbase.

Rewards System

The reward system needs to balance between preventing witch hunts and real customer acquisition, mainly including:

• Deposit Reward
• Staking Rewards
• Rebate Program
• Specific Behavior Rewards

Market Volume

Market volume is mainly established through three methods:

1. KOL and media reach users
2. Off-chain legitimacy, such as endorsements from large enterprises
3. Endorsement by Notable Individuals

Fuzzy Strategy

Financial indicators such as APR/APY have ambiguous space, as different projects have varying calculation methods and periods. The participation of off-chain assets in yield calculation also adds uncertainty.

Conclusion

YBS appears simple on the surface, but is actually complex. Savings and lending services aimed at the public often involve social and political dimensions. This article describes the basic aspects of a healthy YBS project from the perspective of the project party, but among many projects, the chances of long-term survival are very few.