As Shiba and Aave launch new stablecoins, here’s what to watch for
After the collapse of Luna and the troubles of USDT, here’s what to look for when buying stablecoins.
Despite the woes in the stablecoin world, two more stablecoins are headed to market from the teams behind Shiba Inu (SHIB) and Aave (AAVE).
Stablecoins, designed to match the value of an asset like the US dollar, are an important part of the crypto ecosystem because they act as the “glue” between various blockchain networks and fiat currencies. But this year has shown not all stablecoins are stable.
Have Shiba Inu and Aave learned enough from the collapse of TerraUSD (UST) and the issues that plague DecentralizedUSD (USDD) and Tether (USDT) to avoid headaches? Here’s what investors should know
Shiba Inu and Aave stablecoin plans
Aave has proposed to create a decentralized algorithmic stablecoin, called GHO, with the goal to improve the features of its lending platform.
This is said to be an overcollateralized stablecoin with ample backing to support its value, and native to the Aave ecosystem. Initially, it will be available on the Ethereum network as well.
Users will be able to create, or mint, GHO after supplying collateral. This collateral will earn interest. To reclaim their collateral, users will have to destroy, or burn, their GHO.
1/ Calling all GHOsts 👻
We have created an ARC for a new decentralized, collateral-backed stablecoin, native to the Aave ecosystem, known as GHO.
Read more below and discuss your thoughts for the snapshot (coming soon)!👇https://t.co/P7tHl9LbBe
— Aave (@AaveAave) July 7, 2022
The team behind Shiba Inu, on the other hand, has a wider plan that includes adding their own layer 2 protocol called Shibarium, a metaverse project with 100,000 land plots, a Shiba Inu Collectible Card game and a stablecoin called SHI.
At the moment, there’s not much info about SHI’s development or backing. We know that independent developers have worked on this project, and they have submitted a version of SHI said to avoid the problems that brought down UST.
The team says more information would follow and that the release should be sometime this year.
Terra Luna collapse and algorithmic stablecoins
Similar to Aave’s stablecoin, UST was an algorithmic stablecoin backed mostly by its sistercoin Luna (now Terra Luna Classic). The idea was run algorithms that burned Luna to mint UST and vice versa to keep the stablecoin at $1.
The Luna Foundation Guard (LFG) started to accumulate other crypto assets as collateral, including Bitcoin, but that wasn’t enough to hold the peg as UST had soared in billions of dollars of market value. Once the sell-off started, both Luna and UST lost value and collapsed in a matter of days.
This exposed the main reason critics say to avoid algorithmic stablecoins — that you can’t keep them stable by using a volatile asset like a sister crypto as collateral.
Decentralized USD (USDD) is another algorithmic stablecoin, and the team behind it says they learned lessons from UST’s collapse. One step to avoid UST’s fate was to overcollateralize their coin with other assets; another was to slow the minting of new USDD.
Despite that, USDD lost its peg in June. It took more than a month to return to a price close, but not at, its $1 peg.
The most popular alternatives to algorithmic stablecoins are collateralized stablecoins including USDT and USDC. These two have the highest market caps among stablecoins.
However, Tether (USDT) has its own controversies. Tether claims the value of its stablecoin is 100% backed by assets in its reserve. However, Tether has never been audited. Instead, it provides quarterly attestations that break down those assets. According to their report, Tether holds cash,
cash equivalents, commercial paper, corporate bonds, loans and other investments including digital currencies.
Because Tether hasn’t been audited, some investors worry that the company that issues USDT does not have enough hard assets backing their coins.
On the other hand, USD Coin (USDC) holds only cash and short-term US government bonds, and these assets are held in the custody and management of BlackRock and BNY Mellon. Because USDC is the most transparent of these coins, it’s slowly gaining on USDT and will likely pass it in market cap.
For comparison, this year alone USDT dropped from $83 billion to $65 billion in market cap, while USDC grew from $42 billion to $55 billion.
What to watch for when investing in stablecoins
UST incentivized investors with a massive 19.5% annual percentage yield (APY). This proved unsustainable. USDD offers over 20% APY for those who lend their USDD on Tron’s platform.
Typically, high APY should be a red flag because it’s unsustainable in the long run. Another thing to study is the collateral backing the stablecoin. Make sure the stablecoin is fully backed by hard assets, and that you can redeem your coins in a 1:1 ratio at any moment.
We don’t know the full details of the proposed GHO and SHI stablecoins yet. But keeping the rules in mind can help you make an informed decision when they open up to investors.
Trying to get a handle on the markets? Explore strategies for how to trade crypto or see if there's a better platform for you with our guide to the best crypto exchanges.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.
Kliment Dukovski owns cryptocurrencies as of the publishing date.