How Crypto Disrupts 💥 Traditional Finance
While the media is calling for a crypto funeral, crypto continues to disrupt traditional finance.
✨ Crypto Made Simple ✨: Types of Stablecoins
Before 2020, stablecoins were a very obscure part of crypto. But like we pointed out on Wednesday, they’ve already grown into a $140 billion market — over $170 billion at its peak.
There are three main types of stablecoins in today’s market: centralized, overcollateralized, and algorithmic.
The most popular type of stablecoins today are “centralized” stablecoins, which are created by centralized companies and backed with traditional assets like commercial paper, Treasury bonds, and cash.
A few examples would be Tether USD (USDT), USD Coin (USDC), and Binance USD (BUSD). Centralized stablecoins are also the largest type by far.
Those three coins have a combined market cap of about $131 billion, which is nearly 15% of the entire crypto market.
The Not-So-Easy Feat
While those coins are minted by centralized companies, other stablecoins have attempted to be fully backed by other cryptocurrencies.
This is hard to do, and the market cap of crypto-backed stablecoins is limited by the market cap of the rest of crypto … but it would be necessary if crypto wants to be a fully self-reliant ecosystem.
Right now, crypto-backed stablecoins are all overcollateralized, which means the amount of money backing them is larger than the total market cap of the stablecoin.
The first major attempt at this was MakerDAO’s DAI stablecoin, which used to be backed solely by ETH.
However, they’ve since changed their strategy, and the largest backer of DAI’s value is USDC.
A Necessary Controversy 🗣
As you can imagine, the decision to back a “crypto-native” stablecoin with a centralized stablecoin has been pretty controversial in the crypto world.
Now, the largest overcollateralized crypto-native stablecoin is Liquity USD (LUSD), which is fully backed by ETH. Here’s how it works...
Anyone can go onto Liquity’s app and deposit ETH. Depending on how much ETH you deposit, you can mint a certain amount of new LUSD, which is backed by your ETH.
The only rule is that the value of your ETH has to be at least 110% of the value of the LUSD that you mint.
Overcollateralized stablecoins have been a hot topic during this bear market, with other big-name DeFi apps like Aave and Curve announcing they’re creating their own versions to be released over the coming months.
Algorithmic Stablecoins? 🤖
The third major type of stablecoin is algorithmic. Algorithmic stablecoins don’t have any backing other than a mechanism that automatically increases or reduces the supply depending on certain conditions.
If you followed the LUNA/UST fiasco in May, you already know the potential danger that these can cause.
I won’t go into the details here, but TerraUSD (UST) was one of the largest stablecoins in the market at a value of $19 billion when it was depegged and triggered a total collapse of itself and the LUNA token, which had a market cap exceeding $30 billion at its peak.
The only other relevant algorithmic stablecoin was USDD, which currently has a market cap of about $710 million. However, because of the questionable safety of algorithmic stablecoins, there’s recently been an effort to back them with other cryptos like USDT, USDC, and BTC.
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Liquid Staking
Today, I’m going to focus on a trend that I believe could be a catalyst in bringing the next bull market: “liquid staking.” For a quick update, watch the video below:
Staking has become a mainstream topic in crypto this year due to the Ethereum merge, which allows people to delegate their ETH tokens to the entities that validate the Ethereum network, and in turn, earn a reward paid in ETH.
However, the main drawback of this is that you have to keep your ETH “locked up” in order to continue being paid the rewards.
A solution to this problem was introduced back in December 2020 — right after it became possible to stake ETH tokens. The solution is called “liquid staking,” and it allows you to deposit your ETH to be staked, and essentially get a voucher to redeem it later.
That “voucher” is in the form of another crypto token, so you can trade it, borrow against it, lend it out, or anything else that you can do with ERC20 tokens. There are many such tokens on the market today; a few popular ones are Lido’s stETH, Rocket Pool’s RETH, and Coinbase’s cbETH.
These have exploded in popularity in 2022, and stETH now has the 12th-largest market cap in the entire market.
Liquid staking plays on a very important trend that’s emerged in crypto over the past 12 to 18 months: composability. In the case of liquid staking, composability allows capital efficiency.
This means you can commit your resources (ETH) to help secure the Ethereum network without locking up the dollar value of that ETH, giving you the ability to earn interest or cash out if you need to.
That extra freedom is great, but it should also be mentioned that if you ever want to pull your original ETH out of staking, you’ll need to exchange your stETH, RETH, cbETH, etc. for it.
So, if you stake 10 ETH on Rocket Pool and receive 10 RETH, and then proceed to sell those RETH, you’ll need to buy 10 RETH on the open market to get your original ETH back.
In the meantime, if ETH’s price goes up by more than the interest that you earn from staking, you’d lose money overall.
The Future of Staking
As I mentioned before, right now, you can earn ETH from verifying transactions on the network, which improves its overall security.
But the future of ETH staking is already being developed, and it’ll be possible to earn more yield by delegating your ETH to perform many more tasks in the network.
The leader in extra staking rewards right now is EigenLayer.
While it’s still in very early stages, it plans on launching a product where ETH stakers can “re-stake” their ETH by using it to perform additional tasks aside from validating Ethereum network transactions.
I could see this being done in a lot of different ways.
I’ll try not to get too technical, but one of the major upcoming issues for Ethereum is the rapidly growing amount of data stored on the blockchain.
The invention of smart contracts has made it possible to do all sorts of things on Ethereum, as well as many other blockchains.
This gives it some advantages over a blockchain like Bitcoin, but one of the major disadvantages is that it requires the storage of exponentially more data, making the blockchain “heavy.”
The heavier the blockchain, the harder it is for individuals to contribute to it.
While anyone can run a Bitcoin node on their home PC, that’s becoming much harder to do for something like Ethereum … and it’s impossible for most of the other popular L1 blockchains out there.
As a result, solutions are being developed to reduce the amount of data that has to be stored, making the network more efficient.
The most likely solution in the short term is to store data on a different network (called a “data availability layer”) that’s connected to Ethereum. Then, you’d be able to run a program to quickly find any specific data when you need to.
That way, data needed to make a transaction is available at any time — without clogging up the Ethereum network and driving up transaction fees.
Back to the main point, in the not-too-distant future, there’ll most likely be a way to use your ETH to earn yield by verifying that the data called from the data availability layer is correct.
Users will have the opportunity to pick and choose what functions they’d like their ETH to perform, and each duty will have a designated additional yield that the users can earn.
Everything I mentioned above has to do with furthering the composability and capital efficiency in the crypto ecosystem.
In order to survive, a digital economy will have to have far fewer barriers and inconveniences than the current financial system.
Being able to move money more easily and getting paid seamlessly to perform certain functions with your money are just two of the very early stages of crypto’s composability … and I believe it’ll only get even more incredible as it expands.
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