Stablecoin Protocol Differences Collateralized by Ethereum Collateralized Liquid Derivatives and Potential of FXS in the Second Half of the Year

Briefly talk about the history of stablecoins and the differences between Prisma and Lybra.

Written by: Sleeping in the Rain

Differences in protocol products between two Ethereum pledged liquid derivatives pledged to generate stablecoins and my expectations for $FXS in the second half of the year⬇️

A Frax proposal sparked a new wave of my attention on stablecoins. A new lending protocol, Prisma, is mentioned in Frax Finance’s proposal. Prisma supports staking and minting stablecoins for various Ethereum staking liquidity derivatives (Frax, Lido, Rocket Pool, Binance, and Coinbase). Unlike the interest-bearing stablecoin made by Lybra Finance, which directly gives the interest of Ethereum pledge to eUSD holders, Prisma’s over-collateralization model is automatic repayment, that is, the use of Ethereum pledge income to automatically repay debts.

Next, let me briefly talk about the history of stablecoins and the differences between Prisma and Lybra. (Corrections and corrections are welcome)

In my memory, stablecoins are divided into centralized stablecoins, decentralized over-collateralized stablecoins, and decentralized algorithmic stablecoins. Centralized stablecoins are USDT, USDC, etc. The derivative problem is that these stablecoin reserves may have the risk of black-box operations, and decentralized over-collateralized stablecoins seem to be better, but the volatility and scale of collateral limit the decentralization Therefore, stable coins like DAI and FRAX have begun to use USDC as a reserve. While this drives the scale of decentralized stablecoins, it also introduces centralization risks. The biggest representative of algorithmic stable currency is UST, and we all know the story after that. FRAX was initially backed 1:1 by reserves and later turned into a partial algorithmic stablecoin as demand grew, but now they are trying to bring it back to 100% collateralization. This is because in the original design, Frax set the collateral ratio as an adjustable parameter.

Now, the popular collateral model has become Ethereum pledged liquidity derivatives.

Lybra is the first protocol to eat crabs.

Lybra’s model is to convert collateral interest-earning profits into eUSD and distribute them to eUSD Holder.

The essence of eUSD will encourage people to hold eUSD and use eUSD as LP or other profitable operations to maximize the capital efficiency of Ethereum pledge liquidity derivatives mortgage.

Then, what Lybra needs to do is to attract the deep liquidity of eUSD and expand the scope of adoption, such as establishing an eUSD pool on Curve, and bribing vetoken holders to increase the discharge of the pool, and cooperate with various agreements to deepen and refine eUSD in different DeFi The adoption of the protocol, and the expansion of eUSD to other chains through some cross-chain centers, we can see from Lybra’s previous statement that it is possible to cooperate with LayerZero.

The ultimate goal of Lybra is to encourage eUSD Holders to hold eUSD.

Prisma will be more traditional. The stablecoin Holder will not miss the interest because the stablecoin is used to buy other things. The agreement will convert these interests into stablecoins and automatically repay the debt. This is also a way to increase the capital efficiency of Ethereum pledged liquidity derivatives collateral, but it is not as aggressive as Lybra.

It can be considered that Lybra’s model is suitable for users who want to obtain higher returns and higher capital efficiency through eUSD, while Prisma is suitable for those traditional mortgage lending users.

Another advantage of Prisma is its ambition to accumulate CRV/CVX positions and its cooperation with LayerZero.

Since the emergence of Prisma was triggered by the Frax proposal, here I specifically mention the strategy after Frax - because Frax is a protocol that I am very optimistic about.

As mentioned above, the Collateral Ratio (CR) of Frax can be changed. In the initial growth period of the agreement, the CR decreases to expand the scale, and after the agreement has gained a certain market share, it begins to control the increase of CR. It is estimated that around mid-June, the CR of FRAX will reach 100%.

In addition to giving market information, this sign will also liberate the flow of protocol revenue. Previous protocol income flowed to the dynamic CR balance - the protocol needed to fund the redemption of FRAX by minting FXS for the residual value. For example, at 85% CR, each redeemed FRAX will provide the user with 0.85USDC and $0.15 worth of FXS minted, therefore, the protocol requires $0.15 of value to be returned to the redeemer.

Protocol flow and protocol revenue growth are a positive flywheel, and the rate of return of frxETH is greater than that of stETH, so more people will choose to deposit ETH in Frax, especially after Lido opens withdrawals. The growing frxETH share will bring more protocol revenue, which will flow to veFXS stakers. The yield of veFXS stakers becomes higher, the demand for FXS exceeds the supply, and the price increases.

Another one is the expectation of Frax V3. Frax V2 introduces an AMO similar to the Fed’s OMO. This is a powerful feature that gives the Frax protocol more variety and revenue streams. V3 has not been specifically explained, but it is related to FRAX’s new stable currency mechanism, which can be expected.

Therefore, FXS will become a token that I will focus on in the second half of the year.

Additional reading:

《Frax 101: What is FRAX? A Complete History of the Protocol’s Flagship Dollar-Pegged Stablecoin》