Problem: Self-Consuming Yield

The main issue with stablecoin deisigns today is that they use endegenous sources of value to fuel yield. This issue is so pervasive that Vitalik famously issued this criticism of DeFi, relating many DeFi designs with an ouroboros.

The Ouroboros

The Ouroboros is a snake that eats itself. Since it does not eat anything but itself, it cannot grow beyond its current size. This is the perfect analogy for most financial structures on blockchains today, as most applications rely on endogenous economic designs.

Token flywheels

Token incentive emissions from the top 5 DEXs are $462M per year ($0 at Uniswap, $35M at Curve,~$400M at Aerodrome, $24M at PancakeSwap, and $3.4M Raydium). A large portion of decentralized stablecoins currently rely on these emissions for their economic flywheels, specifically through some adaptation of the veToken model. These include CDPs, AMOs, and passive strategy-backed stablecoins. They cannot grow without these emissions. As a result, these stablecoins are limited to always be smaller than the top DEXs. This is an extreme limitation to place on decentralized stablecoins.

User fee models

Stablecoins that rely on user fees are more sustainable than token emission models, because cash flows are directly tied to value creation. This is in contrast to value speculation, which occurs in token incentive designs. However, the value created via user fee models is still endogenous: it comes entirely from usage of each platform.

The issue with these endogenous user fee models is that they are capped by demand for individual stablecoins platforms. This is usually a function of leverage demand for volatile crypto-native tokens, which is both cyclical and insufficient for mass adoption.

Exogenous sources

There are several exogenous yield sources that can be used to create scalable stablecoin designs. For example, market making and MEV produced over $2Bn and approximately $686M (Ethereum only) in the past year, respectively. However, no stablecoins have captured the full spectrum of these opportunities. This market is almost untouched by decentralized stablecoin creators.

In addition to crypto-native yield, novel RWAs represent a significant and unexplored yield source for stablecoins that dwarf token incentive schemes. For example, investment grade corporate bonds, whose market stands at a collective $1.2Tn, currently distribute over $56bn per year in interest.

CeFi solutions are monolithic and manual

Monolithic strategies like T-Bill stablecoins can quickly find themselves obsolete due to changing market conditions. Complete solutions need to have multiple concurrent strategies that morph with the evolution of markets. However, the switching cost for strategies on CeFi and CeDeFi projects is quite high, given the reliance on team members to find new strategies, build additional infrastructure, and manage custodians. This lag impedes strategies from adapting efficiently and hurts scalability.

Users are always last

Users are always the most junior party in protocol hierarchies when there are exploits, bankruptcies, or other force majeure events. This is not only true with CeFi projects, but also with blockchains, bridges, and DeFi.

Bridge exploits and dApp hacks have destroyed entire ecosystems, with end users having no recourse against protocols or blockchains that advertised their usage. Hackers are often not found, and decision makers responsible for bad risk management hide behind the common phrase “DYOR”.

This precedent of user treatment and lack of protection is terrible for crypto power users that are constantly burned by bad experiences. It is also counterproductive for the industry, which is subsequently seen by regulators as a danger to the public.