Stablecoins have become foundational to the crypto ecosystem, but their true stability is determined by more than just market liquidity. This analysis examines ten major stablecoin projects through a holistic framework, considering their assets, liabilities, liquidity mechanisms, and use cases to assess their overall health and sustainability.
Introduction
The stablecoin market faced significant stress tests in 2022 and 2023. The collapse of Terra's UST in May 2022 demonstrated how vulnerabilities in asset backing could lead to catastrophic failure. Subsequently, in March 2023, the de-pegging of USDC following the Silicon Valley Bank (SVB) crisis highlighted the risks even centralized stablecoins face from traditional financial system instability. These events underscore the importance of evaluating stablecoins from a comprehensive perspective that goes beyond superficial liquidity metrics.
This analysis updates our previous assessment of ten stablecoin projects, incorporating recent developments and adding evaluations of newer entrants like crvUSD and GHO. The projects covered are: crvUSD, GHO, LUSD, USDT, USDC, UST, DAI, FRAX, MIM, and FEI.
The Four Analytical Dimensions of Stablecoin Projects
A stablecoin's viability depends on four critical dimensions: its assets, liabilities, liquidity management, and use cases. Focusing solely on one aspect—such as innovative liquidity mechanisms—while neglecting others can lead to systemic risks and potential failure.
Assets
The asset base is crucial for any stablecoin's redemption capabilities. Reserve assets generally fall into four categories:
- Sovereign Credit: Fiat currencies and traditional financial instruments like Treasury bonds, commercial paper, and money market funds (e.g., USDT, USDC reserves).
- Physical Commodities: Precious metals and deliverable commodities like gold or oil.
- Digital Assets: Established, liquid cryptocurrencies like BTC and ETH, along with their wrapped or yield-bearing derivatives.
- Expectational Digital Assets: A project's native tokens or seigniorage shares, whose value is heavily influenced by market sentiment and future expectations (e.g., Luna for UST).
The choice, proportion, and collateralization ratio of these assets define a project's capital structure. Higher volatility assets require higher collateralization ratios. A well-structured asset base ensures solvency and the ability to withstand extreme market conditions.
Liabilities
Liabilities represent the total outstanding supply of the stablecoin in circulation. Analyzing the liability structure involves understanding the scale of issuance and its distribution across protocols, exchanges, and user wallets.
While precise on-chain tracking is possible, a significant portion of stablecoin circulation occurs on centralized exchanges (CEXs) or within opaque centralized protocols. Therefore, the current analytical value lies in identifying abnormal concentrations or extreme imbalances. For instance, if a vast majority of a stablecoin is held within a single protocol offering a high, fixed yield, it signals a concentrated risk point vulnerable to mass redemptions.
Liquidity
Liquidity refers to the ease with which a stablecoin can be redeemed for its underlying value. Liquidity management encompasses the stabilization mechanism and how liquidity is allocated.
Stabilization mechanisms are primarily of two types:
- 1:1 Fiat Settlement: Users mint and burn tokens upon deposit/withdrawal, often managed in batches with buffers (e.g., USDT, USDC).
- Algorithmic Stabilization: Various mechanisms, including seigniorage shares (arbitrageurs stabilize the price), protocol-controlled value (PCV), and over-collateralization with liquidation.
Liquidity can be allocated to arbitrageurs, relying on market efficiency, or managed directly by the protocol through smart contracts. The former is efficient but can fail in extreme volatility, while the latter can be slower and introduce smart contract risks.
Use Cases
Use cases are the fundamental source of demand for a stablecoin. While penetrating traditional payment systems remains a challenge, stablecoins have found niches within the digital economy.
Sovereign currencies have built-in use cases enforced by law. In the decentralized web3 space, no single protocol can mandate usage. Therefore, a stablecoin's growth potential is largely determined by its ability to integrate into specific, high-demand scenarios like decentralized finance (DeFi), trading pairs, cross-border payments, or emerging virtual worlds in gaming and the metaverse.
Project Analysis
crvUSD
Assets
crvUSD's specific reserve assets have not been fully disclosed. Based on its whitepaper and the Curve ecosystem, potential collateral includes BTC, ETH, and CRV.
Liabilities
The total supply of crvUSD will depend primarily on the amount of collateral deposited by users. Its distribution will be determined by post-launch adoption across various DeFi applications.
Liquidity
crvUSD's core innovation is the Lending-Liquidating AMM Algorithm (LLAMMA). Unlike fixed-liquidation-point models, LLAMMA gradually converts collateral into stablecoins as its price decreases, rather than triggering a single liquidation event. This design aims to extract more value from a declining collateral asset, potentially enhancing system stability during market downturns. It remains an over-collateralized model and is still susceptible to de-pegging if collateral value plunges dramatically.
Use Cases
The primary use case for crvUSD is expected to be within the Curve ecosystem itself, which holds significant stablecoin and collateral liquidity. Users can collateralize assets to mint crvUSD, which can then be easily integrated into other stablecoin liquidity pools. 👉 Explore advanced DeFi strategies
GHO
Assets
GHO is an over-collateralized, decentralized stablecoin from Aave. Supported collateral includes ETH, AAVE, LINK, DAI, and USDC. A recent governance proposal set the collateral factor for the native AAVE token at 400%, limiting its share to a maximum of 25% of total reserves. The discount rate and key parameters are controlled by Aave DAO.
Liabilities
GHO is minted and burned by Facilitators. While Facilitators are entities, the rules governing their actions are transparent and on-chain. Their approval and the total GHO minting cap are governed by Aave DAO. GHO cannot be used as collateral within Aave, meaning its minting is driven by user borrowing demand. The initial approved Facilitators are the Aave V3 Ethereum Pool and a Flash Minter module.
Liquidity
GHO is hard-pegged 1:1 to the USD. Arbitrage maintains the peg: if GHO trades above $1, arbitrageurs can mint it by collateralizing assets and selling the GHO for profit, pushing the price down. The reverse is true if it trades below $1.
Use Cases
GHO's main use case is inherent to the Aave protocol. Although it cannot be used as collateral, users can swap it for other stablecoins on the open market, effectively integrating it into Aave's lending and borrowing activities.
LUSD
Assets
LUSD's asset structure is exceptionally simple and transparent, backed solely by ETH. As of March 2023, it had nearly $700 million in ETH reserves backing approximately $260 million in LUSD, resulting in a strong average collateral ratio of ~270%. This high ratio, combined with ETH's robust market, suggests sufficient backing even under significant stress.
Liabilities
A unique feature of Liquity's design is that 64.1% of all minted LUSD is held in its Stability Pool. Users deposit LUSD here to earn liquidation rewards from underwater Troves, which is a key component of its stabilization mechanism. The remaining LUSD is primarily in DEX liquidity pools, with a smaller portion on CEXs. A significant (~25%) and growing portion is held in private wallets, indicating its use as a decentralized safe-haven asset, especially after the USDC de-pegging event.
Liquidity
Liquity employs a unique combination of liquidation and redemption mechanisms.
- Liquidation: Troves (vaults) are liquidated if their collateral ratio falls below 110%. The collateral is transferred to the Stability Pool, and an equivalent amount of LUSD is burned. This incentivizes users to maintain high collateral ratios.
- Redemption: LUSD can always be redeemed for $1 worth of ETH, creating a direct arbitrage loop if the market price deviates. A dynamic redemption fee discourages large, destabilizing redemptions.
A risk-tiering system activates if the global collateral ratio falls below 150%, increasing the minimum collateral ratio for new Troves and expanding the liquidation range.
Use Cases
LUSD's use cases are currently limited. The main utilities are depositing in the Stability Pool to earn liquidation rewards or holding it directly as a decentralized dollar-denominated asset.
USDT (Tether)
Assets
USDT's asset structure has improved significantly since 2022. It now holds over 80% of its reserves in "Cash and Cash Equivalents." Crucially, its composition within this category has shifted: commercial paper has been nearly eliminated, replaced by a substantial increase in U.S. Treasury Bills (~71%) and money market funds (~13%). This enhances its ability to handle redemptions. However, like all centralized stablecoins, it remains exposed to risks within the traditional banking system that holds its assets.
Liabilities
USDT's primary use remains as a trading pair and on-ramp/off-ramp tool on exchanges. Its penetration into DeFi protocols is lower than USDC's, meaning a larger portion of its supply is held on CEXs, requiring robust liquidity management for exchanges.
Liquidity
USDT uses a 1:1 fiat settlement model with batch processing. Its high liquidity allocation to Treasuries and cash equivalents means it can likely handle hundreds of billions in redemption pressure under normal market conditions, as these assets are highly liquid.
Use Cases
USDT dominates as a medium of exchange for crypto trading and as a base pair for many other stablecoins.
USDC (USD Coin)
Assets
USDC's structure is notably conservative. Its reserves are comprised solely of cash and short-duration U.S. Treasury bonds. As of March 2023, it held ~$81 billion in cash (22% of reserves), with the rest in Treasuries. This high cash allocation provides immense strength for handling mass redemptions quickly. The SVB crisis, however, revealed the counterparty risk associated with where that cash is banked.
Liabilities
USDC's circulation has decreased post-SVB. It sees much deeper integration into DeFi protocols (e.g., Aave, Compound) compared to USDT, often having double the locked value. This creates a different redemption pressure profile, as DeFi users might be less likely to mass-exit compared to exchange traders.
Liquidity
Employing a 1:1 fiat model, USDC's high cash ratio allows it to theoretically withstand immediate redemption requests for a vast majority of its circulating supply, assuming its banking partners are solvent.
Use Cases
USDC is the preferred stablecoin for DeFi applications, serving as a key settlement asset, collateral type, and the benchmark for many other decentralized stablecoins' reserves.
UST (TerraUSD)
Assets
UST's reserve was predominantly its expectational native asset, LUNA (~90% of reserves pre-collapse), with a smaller portion of BTC and AVAX. The fatal flaw was that LUNA's market cap was propped up by speculation rather than tangible value. During a crisis, the realizable value of these assets was a fraction of their paper value, leading to insolvency.
Liabilities
UST's liability structure was dangerously concentrated. Approximately 75% of all UST was locked in the Anchor protocol, attracted by an unsustainable ~20% yield. This created a massive, single point of failure. When confidence waned, the outflow from Anchor was too large for the system to absorb.
Liquidity
UST relied on a seigniorage share model with arbitrage. If UST deviated from its peg, arbitrageurs could mint or burn LUNA to profit and correct the price. This mechanism had a daily cap and completely broke down under extreme selling pressure, triggering a death spiral where minting LUNA to redeem UST accelerated both assets' collapse.
Use Cases
UST was almost entirely confined within the Terra ecosystem, with Anchor being its killer app. It lacked diverse, organic demand outside this Ponzi-like yield environment.
DAI
Assets
DAI is an over-collateralized stablecoin backed by a diversified basket of assets. A significant shift has occurred: USDC now comprises over 65% of its collateral, followed by ETH (~14%) and Real-World Assets (RWA) (~12%). This reduces its decentralization but increases its stability relative to purely crypto-native backing. The collateralization ratio is managed by MakerDAO governance.
Liabilities
Around 60% of DAI is held in external wallets (EOAs), indicating strong organic holding demand. Significant amounts are also locked in bridges and DeFi protocols, cementing its role as a core DeFi primitive.
Liquidity
DAI's stability is managed through its Peg Stability Module (PSM), which allows for efficient swaps between DAI and USDC, and deep liquidity pools like Curve's 3pool. Its diverse and over-collateralized backing provides a strong buffer against market volatility.
Use Cases
DAI remains a cornerstone of DeFi as a decentralized collateral and settlement asset, though it's often criticized for its heavy reliance on centralized assets like USDC and its relatively low savings rate for holders.
FRAX
Assets
FRAX has undergone a major shift. It has moved to a 100% collateralized model and is phasing out the use of its native FXS token as backing. Its collateral now consists primarily of other stablecoins like USDC and DAI. This pivot away from a "fractional-algorithmic" model towards a fully collateralized one significantly de-risks the project.
Liabilities
A large portion (~50%) of FRAX is deployed in Curve's 3pool to earn yield and provide deep liquidity, which helps maintain its peg. Its 30-day trading volume is substantial, indicating healthy demand.
Liquidity
FRAX uses Algorithmic Market Operations (AMOs) to manage its reserves, automatically deploying collateral to earn yield while maintaining redeemability. This, combined with its high collateral ratio, provides strong liquidity backing.
Use Cases
FRAX has achieved significant adoption across multiple chains as a trading and liquidity asset, arguably surpassing DAI in certain DeFi metrics.
MIM (Magic Internet Money)
Assets
MIM is backed by interest-bearing yield tokens (e.g., yvWETH, yvUSDC) from various DeFi protocols. This makes it a crypto-native solution for unlocking liquidity from deposited assets. However, the collateralization ratios are relatively low (110%-130%), making it vulnerable to sharp downturns in the underlying DeFi markets.
Liabilities
Most MIM is held in liquidity pools on DEXs like Curve and SushiSwap, or in cross-chain bridges. Its on-chain transparency is a strength.
Liquidity
MIM relies on the redeemability of its collateral and a small protocol-owned treasury for stability. Its low collateralization ratio and modest treasury mean it has limited capacity to handle severe market-wide deleveraging events without de-pegging.
Use Cases
MIM serves a specific niche: providing liquidity for holders of yield-bearing assets. Users typically swap MIM for more universal stablecoins for broader use.
FEI
Assets
FEI is backed by Protocol Controlled Value (PCV), which is predominantly ETH (~75%), with smaller allocations to DAI and LUSD. The system has a high collateralization ratio of 175%.
Liabilities
A peculiarity of FEI is that a majority of its supply is owned by the protocol itself (~60%), with only 40% in external circulation. This indicates a lack of organic demand and adoption.
Liquidity
FEI uses a combination of direct protocol intervention (buying and selling FEI on the market) and incentive mechanisms (penalties for selling below peg, rewards for buying) to maintain its peg. Its high collateral ratio supports redemption demands.
Use Cases
FEI's use cases are very limited, primarily confined to its own ecosystem and related protocols like Volt, having failed to gain significant traction in the broader DeFi landscape.
Frequently Asked Questions
What is the most important factor in evaluating a stablecoin?
There is no single most important factor. A holistic view is essential. Strong assets ensure solvency, a balanced liability structure prevents concentrated risks, effective liquidity management ensures short-term stability, and real use cases create organic demand. Weakness in any of these four areas can lead to failure.
How did USDC de-peg, and what does it mean for "safe" stablecoins?
USDC de-pegged briefly in March 2023 due to concerns over its exposure to Silicon Valley Bank (SVB), where a portion of its cash reserves were held. This wasn't a failure of its assets' value but of their immediate accessibility. It highlighted that even the most asset-secure centralized stablecoins carry traditional banking counterparty risk, a factor that must be considered.
Can algorithmic stablecoins like UST ever work?
The collapse of UST demonstrated the extreme perils of relying primarily on expectational, non-yielding assets like a native token for backing. While algorithmic mechanisms can aid in peg stability, they cannot create value from nothing. The trend is clearly moving towards over-collateralization with high-quality, liquid assets, whether crypto-native or traditional. 👉 View real-time market data
What is the future of decentralized stablecoins?
The future likely belongs to decentralized stablecoins that can effectively balance several factors: sufficient decentralization (avoiding over-reliance on centralized assets like USDC), capital efficiency (through acceptable collateralization ratios), and integration into diverse, high-demand use cases within the web3 economy, such as gaming, NFTs, and DeFi.
What does "over-collateralized" mean?
It means the total value of the assets locked in the protocol to mint the stablecoin is greater than the value of the stablecoin issued. For example, to mint $1000 of DAI, you might need to lock up $1500 worth of ETH. This buffer protects the system if the collateral's value declines.
Are stablecoins regulated?
The regulatory landscape for stablecoins is rapidly evolving. Major jurisdictions like the U.S. and E.U. are developing frameworks that will likely require stablecoin issuers, especially those backed by fiat, to comply with banking-style regulations concerning reserves, redemption, and disclosure.
Conclusion
The stablecoin landscape has matured through a process of brutal Darwinian selection. Key lessons have been learned:
- Asset Quality is Paramount: The choice of reserve assets is the first and most critical decision. High-volatility or purely expectational assets are inadequate anchors. High-quality, liquid assets—whether fiat-based or established cryptocurrencies—are essential. Capital efficiency must never compromise stability.
- Liability Concentration is a Key Risk: A stablecoin whose supply is overwhelmingly concentrated in a single protocol or use case (e.g., a high-yield farm) is vulnerable to a bank run. Diverse, organic holding demand is a sign of health.
- Liquidity Mechanisms Must Be Robust: While arbitrage-based systems are efficient, they can fail in extreme conditions. Protocols need resilient, well-capitalized mechanisms to directly defend the peg during market-wide stress.
- Use Cases Drive Long-Term Value: The killer use case for stablecoins may not be replicating traditional finance but enabling the native economy of web3—virtual worlds, NFT marketplaces, and decentralized governance. The next major stablecoin will likely be catalyzed by a breakthrough in one of these areas.
The era of purely algorithmic, unbacked stablecoins is likely over. The future will be dominated by projects that offer verifiable asset backing, transparent operations, and deep utility within the digital economy.