Ethereum's Economic Boom, Yield Farming, and the Rise of the Smart Dollar - Q3 2020 STABLECOINS REVIEW - Messari
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Q3 2020 STABLECOINS REVIEW Ethereum’s Economic Boom, Yield Farming, and the Rise of the Smart Dollar A MESSARI REPORT
Q3 2020 STABLECOINS RE VIEW
AUTHOR : RYAN WATKINS
Q3 2020 was insane.
Markets heated up to their hottest point since the 2017 ICO boom, billion dollar protocols
emerged out of nowhere in just weeks, new yield farms attracted hundreds of millions of
dollars in capital flows in just days, and decentralized exchange volumes surpassed their
centralized rivals, defying everyone’s expectations. In short, it was the most exciting quarter
this industry had in years.
There are two key developments over the past year that made this all possible: stablecoins
and DeFi. Since 2019 stablecoins have grown substantially, providing users with a stable
means to store and transfer value on public blockchains, while DeFi protocols have matured
enough to the point where they can now facilitate significant financial activity. The two
combined provided a strong foundation for real financial activity to begin taking place
on Ethereum. All they needed was an igniter to set off the fuse. That igniter came when
Compound launched its liquidity mining program on June 15th.
Since then, economic activity conducted using stablecoins has gone brr.
A Bird’s Eye View
Monetary Base
In Q2 2020 the stablecoin monetary base grew $3.8 billion, leaving stablecoins at $12
billion to start the third quarter. In Q3’20 another $8.2 billion was added, bringing the total
stablecoin monetary base to over $20 billion to end the quarter. Most of this growth can be
attributed to the crypto derivatives venues which require traders to put up stablecoins as
collateral.
Q3 2020 Stablecoins Review 2
Stablecoin Monetary Base Blows Past $20 Billion
The total stablecoin monetary base is growing at an accelerating pace adding $8 billion
in Q3 this year.
As of Sept 30, 2020 • Source: CoinMetrics, Messari
Of these $20 billion in total stablecoins, $15 billion are issued on Ethereum. About a third of
the stablecoins issued on Ethereum are stored on exchanges.
Stablecoin Exchange Balances
Of the $15 billion in stablecoins issued on Ethereum ~33% are
stored on exchanges both centralized and decentralized
As of Sept 30, 2020 • Source: Nansen
Q3 2020 Stablecoins Review 3
To put Q3 2020’s growth in perspective, the $8.2 billion in quarterly growth was more than
the past four quarters combined.
Stablecoin Quarterly Market Cap Growth
Q3 2020 stablecoin growth blew past the previous record of $3.8 billion achieved in Q2 2020
As of Sept 30, 2020 • Note: Includes USDT, USDC, PAX, TUSD, BUSD, HUSD, GUSD, DAI, SAI, SUSD • Source: Messari, CoinMetrics
In absolute terms USDT once again contributed the most by far, growing by $5.5 billion in the
quarter. However, the fastest growing stablecoin on a relative basis was DAI, which benefited
from the recent explosion in yield farming activity (more on this later). Notably, USDC also
benefited significantly from the yield farming trend and became the first stablecoin outside
USDT to grow more than $1 billion in a quarter.
Q3 Stablecoin Growth
Dai was the fastest growing stablecoin by far this quarter
due to yield farming activities
As of Sept 30, 2020 • Source: Messari, CoinMetrics
Q3 2020 Stablecoins Review 4
Transaction Volume Growth
Stablecoins continued their dominance as the leading currency on public blockchains. This
quarter USDT surpassed Bitcoin to become the most transacted currency on public blockchains.
Bitcoin vs Tether Transaction Volume
Tether is officially the most transacted currency on public blockchains
As of Sept 30, 2020 • Note: Tether includes USDT issued on Omni, Ethereum and Tron • Source: CoinMetrics
In Q3 2020 public blockchains settled $358 billion in stablecoin transactions, bringing their
last twelve months total to $689 billion. At their current year-to-date rate, public blockchains
are on pace to settle $804 billion in stablecoin transactions in 2020.
Stablecoin Annual Transaction Volume
Stablecoins are on pace to transact more than $800 billion in 2020
As of Sept 30, 2020 • Note: Includes USDT, USDC, PAX, TUSD, BUSD, HUSD, GUSD, DAI, SAI • Source: CoinMetrics
Q3 2020 Stablecoins Review 5
In recent months they’ve regularly accounted for more than 40% of the combined daily
transaction volume of Bitcoin and Ethereum. However, the recent growth of DeFi on
Ethereum has significantly increased non-stablecoin transactions on Ethereum, causing a
slight pause in this dollarization trend.
Public Blockchains are Dollarizing
Stablecoins regularly account for 40%+ of the combined daily transactions
volume of Bitcoin and Ethereum
As of Sept 30, 2020 • Source: Messari, CoinMetrics
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Q3 2020 Stablecoins Review 6
Ethereum in a Massive Economic Expansion
Q3 2020 provided us with the best glimpse of what Ethereum could look like in a massive
economic boom. As users pushed Ethereum to its limits gas fees rose to their highest levels ever,
blockspace became clogged, and transaction volumes soared. The activity has been so strong
that gas fees reached more than 50% of the total block reward paid to miners at their peak.
Ethereum Block Reward Composition
Increased Ethereum usage has brought fees to their highest percentage of
block rewards ever
As of Sept 30, 2020 • Source: Messari, CoinMetrics
With the rise of DeFi and the yield farming bonanza, Ethereum daily transaction volumes blew
past Bitcoin this quarter. Ethereum now transacts twice as much value daily as Bitcoin and is
rapidly pulling away. Ethereum is now crypto’s dominant settlement layer.
This is what a crypto-economy looks like when it finds product-market fit.
Q3 2020 Stablecoins Review 7
Ethereum vs Bitcoin Daily Transaction Volume
Due to the rise of stablecoins on Ethereum and DeFi’s blowout summer, Ethereum now
transacts two times more value than Bitcoin daily
As of Sept 30, 2020 • Note: Ethereum includes stablecoins, but not other ERC-20s to prevent double counting from DEX columes.
Bitcoin includes USDT issued on Omni • Source: Messari, CoinMetrics
Ethereum’s economic growth has been so remarkable that it may very soon become the first
public blockchain to facilitate $1 trillion in transactions in a year. Already Ethereum transacted
$989 billion in the last twelve months.
Ethereum vs Bitcoin Annual Transaction Volume
Ethereum is now the dominant settlement layer in crypto
and is on pace to settle over $1 trillion in 2020
Ethereum will likely become the first public
blockchain ever to settle $1 trillion in
As of Sept 30, 2020 • Source: Messari, CoinMetrics
transactions over a 12-month period
Q3 2020 Stablecoins Review 8
As mentioned earlier, stablecoins are the key enabler of this. The boom in on-chain liquidity
has sent DEX volumes to their highest levels ever versus centralized exchanges, with
stablecoin AMM Curve now providing, in many cases, best execution on stablecoin swaps in
the industry. Curve alone did $5 billion in trading volume for the month of September, while
AMM king Uniswap did $15 billion.
Decentralized Exchanges Continue to
Surge to New Highs
DEXs now comprise 13.6% of the combined volumes across all centralized and
decentralized exchanges
As of Sept 30, 2020 • Source: Messari, Dune Analytics
Even after the surge in DEX volumes that caused non-stablecoin ERC-20 transaction volumes
to rise, stablecoins still made up about 50% of the total transaction volume on Ethereum.
Nevertheless, this figure is down from ~75% in Q2 this year.
Q3 2020 Stablecoins Review 9
The Dollarization of Ethereum
Ethereum continues to dollarize, although other ERC-20s have started to gain ground
as DEX columes and yield farming rise
As of Sept 30, 2020 • Source: CoinMetrics
Finally, although other blockchains began receiving USDT prints in the past couple quarters,
Ethereum remains the leading public blockchain for stablecoin issuance by far. It stores about
70% of all stablecoins issued and facilitates more than 85% of stablecoin transaction volume.
Q3 2020 Stablecoins Review 10Stablecoin Market Share by Public Blockchain
Ethereum is the home of cryptodollarization securing 70%+ of stablecoins issued and
85%+ of stablecoins transacted
As of Sept 30, 2020 • Source: Messari, CoinMetrics
Yield Farming and The Rise of the Super Dollar
Since Compound launched its liquidity mining program in June, billions of dollars in tokens
have been distributed to liquidity providers across various DeFi protocols. The community has
coined this activity as “yield farming” to analogize this process of users putting their capital to
work in a protocol in return for tokens, to farmers working the fields in return for crops.
Simply put, yield farming offers users a novel method for acquiring tokens. Unlike ICOs, where
users exchange capital in return for new tokens, yield farming allows users to acquire tokens
by simply supplying a protocol with capital. That capital is then put towards a productive
use such as being lent to other users in the protocol (in the case of Compound) or supplying
liquidity to traders (in the case of Balancer). Yield farmers are free to withdraw their capital
whenever they choose and only pay an opportunity cost for having their capital supplied into
the protocol.
Q3 2020 Stablecoins Review 11The Big Business in Yield Farming
Protocols have distributed billions of dollars to farmers since June, and even after a
sharp correction still distribute millions daily
As of Sept 30, 2020 • Source: CoinMetrics, Messari, @dberenzon
With millions of dollars in incentives available daily in exchange for providing liquidity, farmers
have flooded DeFi protocols with capital in search of yield. Much of this activity has been
conducted using stablecoins given they provide the ability to receive these extremely high
yields (in many cases, triple digit APYs) without assuming any price risk. The two most popular
stablecoins for these activities have been DAI and USDC, which as mentioned above were
two of the fastest growing stablecoins in the quarter.
Q3 2020 Stablecoins Review 12DAI and USDC
DAI has long been considered the “DeFi stablecoin” given it was the largest decentralized
stablecoin by supply in existence. While this moniker couldn’t be more true now, I think an even
more accurate description of DAI would be that it’s the “yield farming stablecoin”. An estimated
more than 65% of the DAI supply is currently being supplied to DeFi protocols to farm.
Liquidity Mining Effects on Dai Supply
Liquidity mining programs have caused a significant surge in Dai supply with most of it
being supplied to farms
As of Sept 30, 2020 • Source: Dune Analytics
Furthermore, nearly all of DAI’s growth in recent months has been driven by demand for yield
farming, which has not only sent supply soaring, but also put pressure on DAI’s peg. DAI has
traded well above its $1 peg for more than four months now.
Q3 2020 Stablecoins Review 13Source: Messari Interactive Chart
With similar drivers, USDC has become the centralized stablecoin of choice with DeFi. USDC
issuance has soared following both the launches of Compound and Curve. More than 40%
of the total USDC supply is currently being supplied to DeFi protocols to farm. The biggest
catalyst for the largest increase in USDC supply were the Curve and Uniswap launches, the
first of which since the USDC supply has increased by $1.5 billion.
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Q3 2020 Stablecoins Review 14Liquidity Mining Effects on USDC Supply
Liquidity mining programs have caused a significant surge in USDC supply with a
significant portion of it being supplied to farms
As of Sept 30, 2020 • Source: Dune Analytics
The Rise of the Smart Dollar
Perhaps the biggest development in stablecoins this quarter, regarding their utility, is the growth
of “smart” stablecoins. Smart stablecoins are the LP tokens one receives from depositing
stablecoins into DeFi protocols that programmatically allocate those deposited stablecoins to
generate the highest possible yield. Many of the DeFi protocols that offer this service, like yearn,
can be thought of as robo advisors, if not outright decentralized hedge funds.
To understand how these smart stablecoins work, one first needs to understand all their
underlying components. It first starts with the LP tokens received from depositing stablecoins
into DeFi protocols such as Compound or Curve. For example when users deposit DAI into
Compound they will receive cDAI, which is an interest bearing DAI that represents users’
share of Compound’s DAI pool that is being lent out.
The next component is a basic interest maximization protocol like Yearn’s earliest product
Earn. Earn automatically allocates users deposits to the lending protocols with the highest
interest rates. So if Aave offered higher interest, it would allocate to Aave. If Compound
offered the higher interest, it would allocate to Compound. The LP tokens users receive for
depositing their stablecoins into Earn’s contracts are called yTokens.
Q3 2020 Stablecoins Review 15The next component is to juice the yield on those underlying interest optimized stablecoins
by also using them to facilitate trading activity, thereby earning swap fees. For this Curve
comes into play. Curve’s yPool allows users to deposit their yTokens into a pool optimized for
swaps between yTokens. The pool consists of yUSDT, yTUSD, yUSDC, and yDAI. The LP token
users receive for doing that is called yCRV which represents users’ share of all the underlying
interest optimized stablecoins that are also being used to facilitate trading activity.
The final component involves taking that yCRV and depositing it into Yearn’s yCRV vault,
which uses that yCRV to farm Curve’s governance token, CRV. The vault systematically farms
CRV, then sells it on the market for more yCRV, which is distributed to vault depositors. The LP
token users receive from depositing their yCRV into Yearn’s yCRV farm is called yUSD. yUSD can
be thought of as a super stablecoin that systematically generates yield from the highest yielding
lending protocols, Curve trading activity, and CRV yield farming. yUSD has provided users with
the equivalent of a 52% APY since it launched two months ago.
The Layers of Risk in yUSD
yUSD is an incredible product, but also one of the riskiest stablecoins
available on Ethereum
Source: Messari
Q3 2020 Stablecoins Review 16Yet, while all this yield generation sounds amazing, it’s not without risks. Although some have
suggested that smart stablecoins like yUSD could become the new reserve stablecoins for
DeFi, there are a handful of challenges they will face becoming so.
Zooming in on yUSD illustrates this well.
First and foremost, yUSD is one of the riskiest stablecoins available on Ethereum. Although
Yearn’s vaults do not allocate to strategies that risk impermanent loss, there are a handful
of ways that investors’ principal is at risk. Not only do you assume the smart contract risk of
Yearn, Curve, and the underlying lending and stablecoin protocols when you hold yUSD, but
you also assume the risk of peg loss for every stablecoin underlying yUSD. What this means
is that if even a single one of the underlying stablecoins in the yPool (USDT, TUSD, USDC,
DAI) loses its peg, yUSD will also lose its “peg”. There is nothing insuring against this risk and
Curve is clear about this on the risk section of their website. Effectively yUSD’s risk of peg loss
is the sum of the risk of all its underlying stablecoins losing their peg, combined.
Source: Curve.fi
This peg risk may be addressed in the future by allocating the underlying stablecoins
elsewhere to protocols that backstop against this risk, or don’t introduce it altogether, but for
now it’s there.
Further challenging yUSD’s ability to become DeFi’s reserve stablecoin is liquidity. Currently,
there’s no great way to get in or out of yUSD besides depositing or withdrawing yCRV to
or from Yearn’s yCRV vault. This issue is already being addressed through protocols like
SnowSwap, Curve, and CreamY. SnowSwap and CreamY are new stablecoin optimized and
yield aware AMMs that aim to provide liquidity for yielding stablecoins. Launched just about
a month ago, SnowSwap currently has ~$15 million in liquidity, while CreamY which launched
a couple weeks ago currently has ~$9 million in liquidity. Curve currently has a governance
proposal out to launch a pool for Yearn vault tokens to fend off competition from SnowSwap
and CreamY.
Q3 2020 Stablecoins Review 17Sufficient liquidity for these yield aware tokens like yUSD would make them significantly more
accessible and useful. Not only would increased liquidity allow users to avoid the complexities
and fees involved in moving in and out of smart stablecoins today, but they would also allow
larger users to move in and out of them with less slippage.
Smart stablecoins are an exciting addition to DeFi and if they can overcome their challenges
today, they could have a bright future.
Continuing Quest for a
Decentralized Stablecoin
In my Q2 2020 report I discussed the July Financial Action Task Force (FATF) report that
laid out their views on stablecoins as it relates to money laundering and terrorist financing
risks. I highlighted how the most surprising part of the report was the FATF views on
decentralized stablecoins. In particular they suggested that entities that create and promote
decentralized stablecoins would likely qualify as financial institutions or virtual asset service
providers (exchanges, custodians, issuers), and would need to build in AML/CFT protections
before launching the protocol. On the flipside, however, they acknowledged that while they
doubt the ability of decentralized stablecoins to gain adoption, there may be little regulators
could do if one were successful. In summary what the FATF guidance made clear is the need
for decentralized stablecoin that would be free from censorship, seizure, and surveillance.
Maker
Although it still has not managed to get the DAI peg back to $1.00, Maker had its best
quarter in recent memory. The total DAI supply ballooned 618% from $124 million to $888
million in the quarter, while total value locked rose 331% from $446 million to $1.9 billion.
Most importantly for MKR holders Maker has finally begun lifting interest rates off zero,
translating to significant returns for MKR holders.
Q3 2020 Stablecoins Review 18Maker Annualized Earnings Hit Highest Level Ever
After struggling to meet demand for Dai, Maker has finally begun raising interest rates,
sending annualized earnings to over $27 mm
As of Sept 30, 2020 • Note: Current calculated using current Dai supply multiplied by effective interest rate across all collateral types
Source: Messari, Dune Analytics, Token Terminal
However this growth has not come without criticism. Nearly a third of Maker’s collateral
comes from centralized assets such as USDC and WBTC, throwing into question how
decentralized DAI actually is. While the benefits of collateral diversification are easy to
understand from a risk management perspective, Maker could be overexposing itself to
centralized assets.
Furthermore, there continues to be criticisms about DAI’s lack of scalability as well as Maker’s
lack of competitiveness with other lending and synthetic asset issuance protocols. Perhaps
though, these concerns are overblown as institutional trust is what matters with protocols in
the long-run. After years of successfully operating and maintaining DAI’s peg throughout bear
markets and severe market events, Maker has proven it works and is worthy of users’ trust.
Q3 2020 Stablecoins Review 19Synthetix
While Synthetix’s sUSD hasn’t faced nearly the same level of criticism as Maker’s DAI, sUSD
has had even more issues maintaining its peg. Fundamentally, sUSD faces the same scaling
challenges that Maker does, although slightly different. In theory more sUSD can be issued if
demand increases; however, that issuance is capped at the total possible synth supply and the
total synth supply is capped according to the value of SNX staking (and other collateral types
like ETH). SNX stakers must maintain a minimum collateralization ratio of 800%, which means
if the synth supply hit its limit, sUSD would either need the SNX price to increase to provide
more room to issue synths, or an investor to long SNX, stake, and mint new sUSD (subjecting
themselves to price exposure and debt). Synthetix has launched incentivized sUSD liquidity
pools aimed at increasing sUSD liquidity and confidence in the stability of the peg at $1.00,
but it remains to be seen if this approach will increase stability.
Source: Messari Interactive Chart
Q3 2020 Stablecoins Review 20Terra
Terra’s been an interesting case given its been entirely divorced from the DeFi boom. Terra’s
stablecoins are almost entirely used for real world activity, powering Terra’s Chai payments
app, which now hosts more than two million users. Terra is currently on-pace to reach $3.5
billion in annualized transaction volume by the end of 2020, of which $24 million would flow
back to token holders. More importantly, Terra offers one of the only live scalable stablecoin
models out there (the supply increases in response to demand and arbitrageurs can redeem
and mint Terra stablecoins 1:1 for its underlying collateral).
While Terra’s real world adoption has been nothing short of impressive for any crypto project,
its adoption within crypto has been lackluster so far. However, this may soon change with the
upcoming launch of its Ren bridge, which will bring Terra stablecoins to Ethereum, and its
Anchor protocol which will not only bring decentralized money markets to Chai’s two million
users, but also bring Terra stablecoins to stakers on Proof-of-Stake blockchains around the
blockchain ecosystem. The upcoming quarter will be telling if Terra can successfully break into
more crypto-native use cases like it has with its real world use cases.
mStable, yUSD and other “Meta” stablecoins
In Q3 a number of “meta” stablecoins launched that aggregate different stablecoins into
a pool, then issue an LP token that represents a claim on all the underlying deposited
stablecoins. The idea behind these stablecoins is that you may be able to diversify away
the idiosyncratic risks of any one of the underlying stablecoins (although this is not always
the case as explained with yUSD). While there have been interesting savings products built
around these stablecoins that take advantage of the fact that you can use the underlying
stablecoins to facilitate lending and exchange activities, they still don’t necessarily address
the underlying issue of decentralization. The same criticism about Maker’s collateral being
centralized carries over to these meta stablecoins at well. Furthermore, there’s the ever
looming question of whether the industry ultimately ends up converging on just one or two
stablecoin standards.
Q3 2020 Stablecoins Review 21StableCredit
Although it is not yet live, Yearn’s soon to launch StableCredit protocol (a new lending
and exchange protocol) may provide Ethereum’s DeFi ecosystem with its first scalable,
decentralized stablecoin. StableCredit USD will feature 1:1 redeemability for its underlying
collateral, and the StableCredit protocol will be fully permissionless, involve minimal human
governance, and be tokenless similar to how Uniswap was before it launched its UNI
token. It’s still early and additional details need to come out, but if it works it would be a
breakthrough in decentralized stablecoins.
This is Just the Beginning
Q3 was one of the most exciting quarters this industry’s seen not just because prices were
rising dramatically, but because decentralized protocols were finally being used with size.
Stabecoins and DeFi protocols have created the perfect storm for a boom in on-chain activity.
Stablecoins are no longer just limited to being used to facilitate transfers between exchanges.
They’re now being used to facilitate significant decentralized financial activity.
Although critics would suggest Q3’20 was defined by flash-in-the-pan food coins, valueless
forks, and money grabs, what they miss is that this quarter provided the best glimpse we’ve
had on what an open, permissionless, censorship-free financial system may look like. Many
of the ideas this industry has long theorized around open-source competition and financial
innovation came to fruition this quarter, providing us with mind-blowing opportunities to
create and distribute wealth across the internet. At times it felt like the beginning of a golden
age for crypto.
As we draw closer to the end of the year, expect on-chain activity to continue increasing as new
protocols launch and on-chain financial opportunities multiply. Expect more on-chain liquidity,
more composability both intra and inter-chain, more competition, and more innovation.
More specifically for stablecoins, be on the lookout for continued improvements in smart
stablecoins, more on-chain stablecoin liquidity, and the elephant in the room that’s been
quietly tip-toeing in the background, Libra, which is set to launch by the end of this year.
Q3 2020 Stablecoins Review 22MESSARI PRO
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About Messari
Messari is the industry’s leading market intelligence company focused on the digital asset
ecosystem. Our tools and research solutions provide customers with actionable insights to
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we’ve built strong relationships with the industry’s top thinkers, investors, and builders from
today’s most promising projects. Learn more at messari.io.
Disclaimer
The contents of this report were created by employees of Messari, Inc. This report reflects the opinions of the authors
and does not represent the opinion of Messari, Inc. The authors of this report hold cryptocurrencies.
This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct
your own research, and consult an independent financial, tax or legal advisor before making any investment decisions.
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