Table of Contents:

1. Introduction

2. What is the bill?

   1. Contents

   2. How close is to being passed?

3. What does this means for current stablecoins?

   1. Centralized stablecoins

   2. FRAX

   3. Overcollateralized stablecoins (DAI, LUSD, MIM)

4. The future of stablecoins

   1. How stablecoins will have to change

   2. New innovation of stablecoins

5. Conclusion

Introduction

Crypto is no stranger to regulatory bills entering the House attempting to gain control over our digital assets. Today, a draft bill in the House of Representative was released, focused on regulating stablecoins, specifically impacting issuers and and the collateralization of stablecoins. Stablecoins as an aggregate are the third largest crypto asset, almost as large as Ethereum with a market cap of $152.8b.

Will this bill kill one of the largest crypto asset type? What does this mean for the current and future stablecoins?

What is the bill?

(Main sources from The Block and Bloomberg)

Contents

The main point of the bill is introducing a framework around who can issue stablecoins and how they can issue them. Stablecoins will need to be “fully backed by cash or highly liquid assets”, what classifies as a “highly liquid asset” is still unknown but includes US Treasury bills. Issuers of stablecoins, which includes banks and nonbanks, will need to be approved with penalties being up to 5 years in prison and 1 million dollars in fines.

A two-year grace period will be put in place for current stablecoins for them to comply with the bill. It will also be illegal to create a “endogenously collateralized stablecoins”, likely meaning a stablecoin that is collateralized by a token within its existing ecosystem (eg. creating a UST-LUNA type stablecoin).

How close is it to being passed?

Generally, there is a 5 step process to these bills, 1) introduced, 2) pass senate, 3) pass house, 4) go to president, and 5) become law. This bill is in phase 0 and hasn’t even been officially introduced yet. This bill is still extremely new and will likely experience multiple revisions before moving on to the next phase.

Wen bill? Not soon. For context, the Lummis-Gillibrand Responsible Financial Innovation Act that caused a ruckus on CT was first introduced in June… and still hasn’t passed senate yet (step 2/5). Multiple hearings are held before the first vote is made. Since January 3, 2021, only ~4% of bills have been made into law. So what are the chances this bill passes? Pretty low, especially in its current form.

But what if it does pass? No worries, anon. Keep reading.

What does this means for current stablecoins?

Centralized Stablecoins

The 3 largest stablecoins are all centralized and currently occupy 91% of the stablecoin market. USDT ($67.97b), USDC ($49.52b), and BUSD ($21.03b). Not only are they intrinsic to DeFi, most users hold their stables in these stables. So what risk does this bill pose to the super majority of stablecoins? Not much.

All three of these are fiat backed by a combination of cash, treasury bills, and other real world assets. This makes them already compliant with the current state of the bill, only requiring further approval.

FRAX

Why is FRAX so special that they get their own section? Well they’re the largest non-centralized and not overcollateralized stablecoin. With a market cap of $1.36b, FRAX is the 5th largest stablecoin (and largest algorithmic stablecoin).

A quick ELI5 of how FRAX works is that it is partially collateralized by USDC and FXS, their utility token. The collateralization ratio between USDC and FXS is adjusted algorithmically, depending on the price (demand) of FRAX. Currently, FRAX is at a 92.5% collateralization ratio, meaning 92.5% of the collateral backing FRAX is USDC.

If this bill is passed in Frax’s current form, it will be subject to scrutiny as it relies on an “endogenous” asset as collateral (FXS). However, FXS only makes up 7.5% of FRAX, and their founder, Sam Kazemian, has said that “we should simply take the CR to 100%. That will make the danger here 0%.” This means FRAX would be 100% collateralized by USDC (or perhaps a mix of USDC and assets like ETH), and thus would not be at risk of the bill.

Ok, so the bill is also (mostly) a non-problem for Frax, what about the rest of stablecoins?

Overcollateralized stablecoins (DAI, LUSD, MIM)

Overcollateralized stablecoins are one of the most common type of stablecoin for decentralized protocols. The 4th largest stablecoin, DAI, uses this model, as well as many other such as LUSD (14th largest) and MIM (12th largest). So how at risk are they? It all depends what is considered a “highly liquid asset.”

DAI is mainly collateralized by USDC, ETH, WBTC, and also RWAs (real world assets). If ETH and BTC are considered “highly liquid assets”, then DAI should be completely fine as well! What might lead to a bit of trouble is their RWAs. Through Centrifuge, MakerDAO has lent out ~40m DAI collateralized by things like real estate, real estate loans, and freight invoices. Are these “highly liquid assets”? Maybe not. But even if they aren’t, DAI will likely still be fine as RWAs make up a tiny percentage of DAI collateralization.

For MIM and LUSD, a similar story can be told. LUSD is fully collateralized by ETH. MIM is backed mostly by stables, ETH, wBTC, and FTT, all of which is probably “highly liquid”, except maybe not FTT. In the case that FTT is not considered highly liquid, MIM will likely be alright, they survived a multi-billion dollar collateral and supply drop due to the LUNA collapse.

The future of stablecoins

How stablecoins will have to change

The current largest stablecoins will likely have to do little to nothing in order to comply with this new bill. 95%+ of the stablecoin market cap are fully collateralized by either fiat, ETH, wBTC, or other stablecoins. In my interpretation of the law, they will all be fine. Perhaps some protocols will have to adjust their models (such as Frax), but I doubt it will have a large impact on the greater stablecoin market.

What I do believe this impacts is the potential new innovation of stablecoins.

New innovation of stablecoins

Novel models or innovations in stablecoin models will be stunted by the bill. It makes algorithmic stablecoins near impossible to create in the US without the fear of penalty. However, this does not mean no innovation can be made in stablecoins. For example, protocol level stablecoins such as GHO can still be created, as well as delta neutral stablecoins that rely on (highly liquid) perpetuals, such as UXD. This bill might mark the end of algostables in the US, but certainly does not mean the end of stablecoin innovation.

Conclusion

To summarize:

• The stablecoin bill restrict stablecoin issuers in the US to be approved and fully backed by “highly liquid assets”

• The bill is still in its extremely early stages, and will likely change a lot before finalization

• Centralized stablecoins are already mostly compliant with this new bill

• FRAX will have to make small adjustments to become compliant with the bill

• Overcollateralized stablecoins will be fine, depending on the definition of “highly liquid”

• The future of stablecoins will probably look similar to the current landscape, but the bill does stifle innovation, however it does not make it impossible

So what does this mean? This bill probably isn’t as bad as everyone was expecting for the vast majority of stablecoins. However, depending on how they define certain terms, most stablecoins will likely not need to change at all. I would expect more legislation like this to come to both crypto as a whole and stablecoins as a way to gain more control.

Thanks for reading.

Special thanks to Haym, Clonescody Dickson for their help in this article.

General Overview of Sudoswap

Sudoswap is an NFT marketplace that is “highly flexible, gas-efficient, and fully on-chain.” What makes it different from other NFT marketplaces is the fact that it is an AMM protocol rather than a P2P exchange. Sudoswap is also fully permissionless with anyone being able to create their own pools or interact with the protocol.

Both buyers can sellers can buy/sell NFTs instantly using Sudoswap’s bonding curves. There is also the additional option to make an offer for a counterparty to accept. Currently, there are only two types of bonding curves, linear and exponential. Sudoswap as a protocol takes 0.5% of volume as fees.

Technical Specifications of Sudoswap

Pairs

Three types of pairs can be created from the PAIR_FACTORY contract. A “Token” pair holds tokens (ETH or ERC20) and can pay for an NFT in a collection at a given price. An “NFT” pair does the inverse, holding NFTs and can sell it at a given price. A “Trade” pair holds both and can both buy and sell at specified prices. Trade pairs allow LPers to earn fees based on the delta (explained later). Any NFT or ERC20 can be set by the caller of the contract as well as specifying the type of bonding curve used.

Bonding Curves

To determine the price of the NFTs, two types of bonding curves can be used. They both rely on something called a “delta”, which is the factor that the price changes by each time.

Linear curves add or subtract the price of an NFT by the given delta linearly. For example, if the starting price of the NFT is 1 ETH and the delta is set to 0.1, each time an NFT is bought or sold in the pool the price of the NFT increases or decreases by 0.1. Here are some graphs to demonstrate:

Exponential curves multiply or divide the price of an NFT by the given delta. Using the same parameters as the previous example, each time an NFT is bought or sold the price of the NFT is multiplied or divided by 10%. Here are some more graphs to demonstrate:

Swaps

In order to make swaps, the PAIR_ROUTER contract is called. When swapping NFTs and tokens, there are two types of swaps that can be performed, a normal swap and a robust swap.

Both swaps consists of a maximum input (what you’re sending), minimum output (what you’re receiving), the swap route (which pairs you’re using to swap), and a deadline. The difference between a normal and robust swap is how the slippage is checked. A normal swap checks if the slippage is exceeded at the end in aggregate while a robust swap checks the slippage after each swap and skip the route if the slippage is exceeded. Robust swaps avoid the transaction from totally reverting and can partially fill the order while refunding the rest if the slippage is too high.

Additionally, NFT to NFT swaps are also possible by swapping the NFT for tokens then the tokens for the an NFT.

How Sudoswap Compares to Other NFT Marketplaces

Statistical comparisons were made mainly using these two Dune dashboards, NFT Market Overview by Hildobby and SudoAMM by 0xRob.

Decentralization

Sudoswap as an NFT marketplace protocol is completely decentralized, allowing anyone to use the protocol permissionlessly. The team has no control over the creation of pairs or orders filled by the smart contracts. This is much more decentralized when compared to other marketplaces such as OpenSea or LooksRare that have centralized authority over their platforms with the ability to freeze or delist specific NFTs or blacklist users.

Marketplace Mechanisms

As mentioned in the introduction, the majority of other NFT platforms such as OpenSea, LooksRare, and Rarible use a traditional P2P marketplace mechanism where users can list or make offers on certain NFTs. NFTX is a more unique NFT marketplace allowing users to lock and wrap their NFTs into ERC20s to make collections more liquid.

Volume, Fees, & Users

Sudoswap is currently averaging ~600 ETH in daily volume, which equates to roughly $900,000 at a price of $1500/ETH. This would make it the second largest NFT marketplace by volume, behind OpenSea and comparable to LooksRare. They make up ~5% of total NFT marketplace volume.

Sudoswap takes a 0.5% of volume in fees, compared to 2.5% by OpenSea and 2% by LooksRare (100% of which goes to LOOKS stakers). This would put Sudoswap as the third largest NFT platform by fees generated (~3 ETH or $4500 at $1500/ETH in daily fees). However, if you consider that not all or even most of the fees that LooksRare generates goes directly to the protocol, Sudoswap may be generating more than them as a platform.

Sudoswap is averaging ~1300 daily users with ~800 of them being new users. This makes them the second largest NFT marketplace by daily active users, about 3x more than their next closest competitor, LooksRare. However, this only makes them ~3% of the total NFT marketplace daily active users.

Closing Thoughts

Sudoswap has rapidly grown in the past month to become the second largest NFT marketplace. What really sets them apart from other marketplaces is the way it was built. Their disruption in both the decentralized nature and innovative marketplace allows for novel projects to be developed using their platform, and brings more control to the users.

If you want to learn more about Sudoswap read their docs.

Thank you for reading.

Special thanks to 0xmons for their help in this article.

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Lately, however, the risks of centralized stablecoins have become more pressing, leading to the rise of protocol native stablecoins.

What are Protocol Native Stablecoins?

Though there is no official definition of a “protocol native stablecoin”, I would classify it as the recent trend seen of DeFi protocols creating their own stablecoin while it is not their primary application. Other protocol issued stablecoins such as DAI, FRAX, and MIM would not be considered protocol native stablecoins as their express application is their stablecoin. Centralized stablecoins such as USDC are not issued by a protocol and thus are not considered a protocol native stablecoin.

sUSD

A protocol native stablecoin that has existed for a long time now is sUSD, with a supply of 170m making it the 15th largest stablecoin. sUSD is the protocol native stablecoin of Synthetix, a derivatives platform specializing in synthetic assets. sUSD is a fully collateralized stablecoin and is able to be minted on the protocol using SNX. SNX stakers can also earn yield in the form of sUSD from the fees generated by the protocol.

DPXUSD

Another protocol native stablecoin that is currently in the works called DPXUSD, the planned stablecoin of Dopex, a derivatives platform specializing in options. DPXUSD will be fully collateralized by LP positions of the protocol’s native assets of DPX and rDPX. This protocol native stablecoin was first announced in March 2022 and recently Tetranode on the NIA podcast has said that it is about to come out.

Curve, AAVE, and GHO

More recently, in July, two of the largest DeFi protocols have also announced their own protocol native stablecoins, Curve (5.7b TVL) and AAVE (6.3b TVL). Curve’s stablecoin plans to be overcollateralized, but not much additional information has been given on it. AAVE’s stablecoin, GHO, has already been discussed and voted on with a 99.99% approval. GHO plans to be collateralized with several different “facilitators” being able to mint or burn (redeem for the collateral back) GHO. Some of these facilitators include AAVE, real world assets, and even potentially a credit score allowing for uncollateralized minting of GHO.

Why Protocol Native Stablecoins?

The rise of these protocol native stablecoins can be attributed to both the downside of using centralized stablecoins, the benefit of having a native stablecoin, and the ability to capture a share of an evergrowing market.

Downside of Centralized Stablecoins

The reliance of centralized stablecoins such as USDC is extremely dangerous for DeFi as they have the ability to be frozen, and gives a large amount of power to these centralized parties. A reliance on these stablecoins makes much of DeFi susceptible to censorship. For example, if the USDC collateral for large protocols were suddenly frozen due to them no longer being accepted by the feds, entire ecosystems could collapse due to the sudden void of collateral. By moving away from centralized stablecoins a higher level of safety and decentralization can be achieved by the protocols.

Benefits of Protocol Native Stablecoins

Protocol native stablecoins can provide protocols with many benefits, depending on how they’re designed. Dopex’s DPXUSD creates stronger liquidity for the protocol since the stablecoin is minted from LP positions. It can also create better tokenomics for the protocol’s native token through giving it more utility within the ecosystem. Ultimately, protocols can design their own stablecoin depending on their needs and utility while also increasing decentralization.

Growing Market of Stablecoins

Stablecoins currently occupy 15% of the total cryptocurrency marketcap, and likely will continue to grow as both the broader industry but also the DeFi ecosystem grows. This makes having your own stablecoin a lucrative opportunity to capture a share of the growing market.

The Future of Stablecoins

To recap so far:

• Centralized stablecoins currently occupy a large share of stablecoin in DeFi

• Protocol native stablecoins exist (ex. sUSD), and are rising in popularity (ex. DPXUSD, crvUSD, GHO)

• Risks of censorship from centralized stablecoins, the benefits of having a native stablecoin, and the opportunity to capture marketshare in a growing market are potential reasons for the rising trend

It is hard to say with certainty, but I believe this trend of protocol native stablecoins are here to stay and will become more dominant among DeFi protocols in the future. Having an entire ecosystem relying on a single stablecoin has a large risk, whether it be the risk of censorship or even collapse (ex. the Terra ecosystem after the UST depeg).

However, there are still issues that will come from the fragmentation of liquidity by having multiple stablecoins. Less liquidity makes the stablecoin less reliable when there are large swaps and make them more susceptible to depegging. This will require protocols to invest (either directly or through incentives) to create deep liquidity for their stablecoin. Either way, the future of stablecoins will certainly be interesting as new models and applications for them arise.

Thanks for reading.

Special thanks to YoniJMel and CryptoCondom for their help in this article :)

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