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If USDC/USDT leaves Ethereum

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Stablecoins may be cryptocurrencies' own Trojan horse.

Original title: "If USDC/USDT leaves Ethereum"

Original author: Emiri

Original compilation: Block unicorn

We've all heard the story of the Trojan horse. The real danger with Trojan horses is that they make you feel safe, that you never expect any threat, and that precisely when you feel safest is when you are most vulnerable. Once the Trojan horse is unleashed, there's not much you can do but watch the chaos unfold.

While this may sound cynical, our beloved Stablecoin could be cryptocurrency's own Trojan Trojan horse.

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Don't get me wrong, I know the benefits of Stablecoin. I have written extensively about Stablecoins in the past. Apologies for the shameless self-hype, for other Stablecoin articles you can click here and here.

If you read my previous articles, then you might ask, "Emiri, do you Stablecoins seem to be rated highly, you seem to think they are an integral part of the system, so why do you say they are Trojan horses?"

Yes, the problem is its success. In my opinion, by far the most useful thing about crypto is stablecoins, and USDC/USDT is the best use case for cryptocurrencies right now. They make it easy to move dollars around the world, they simplify the transaction experience, and they prove to be a better payment system, especially for international transfers.

But Stablecoin completely defeats the original vision and purpose of crypto. Think about it, we are building an alternative financial system, free from any constraints of the traditional financial world, but the best product to emerge from it, is a synthetic fiat currency (USDC/USDT).

USDC Hegemony

Everyone knows about the rise of USDC and how it started to be a very Close to Tether (USDT parent company) USDT competitor. In fact, most people have come to like USDC and seem to believe that it will overtake Tether due to constant rumors of shady dealings behind Tether. I mean, USDC is starting to become so popular that there is a twitter account surrounding USDC bullish: @USDCbull1.

As we have seen over the past few months, many decentralized Stablecoin crashed. For the little fat guy in USDC, it's all going well. Undisturbed on their track, nourished to grow, focus on their track and thrive, there doesn't seem to be any problem on the horizon. Circle is constantly updating the status of their USDC reserves and even announced a Euro Stablecoin, all good.

At present, most of the funds in the DeFi protocol are USDC, the most active liquidity in DeFi Pools, involving USDC in some form or other, hold USDC for a substantial portion of the on-chain net worth of most cryptocurrency participants.

However, recent developments suggest that the Trojan horse has begun to reveal its true self. After OFAC sanctioned Tornado Cash (Tornado), Circle (USDC parent company) complied and blacklisted addresses associated with Tornado Cash. Many users and protocols that have had any interaction with Tornado Cash now have a significant portion of their funds frozen. This is just a small example of the power these centralized stablecoins wield. They can blacklist addresses at any time, meaning that relying on them poses an existential risk to the crypto ecosystem.

USDC started out as a small tumor ignored by most and has transformed into A potentially dangerous cancer afflicting every part of the crypto economy, all we can do right now is watch these events unfold.

Where is the cancer now ?

Let’s start with the most important Dapp in this scene, Curve Finance. The most important pool on Curve (CRV) is 3pool, which at the time of writing has a TVL of $991 million and a trading volume of $95 million. Other large pools such as Frax pool, sUSD pool and USDT pool are all related to 3Pool. In the 3crv fund pool, USDC accounts for 40% of the fund pool, which is about 400 million US dollars at the time of writing this article.

Let's look at Uniswap, 4 of the top 5 pools by TVL There is USDC. These top 5 pools collectively account for $2.5 billion in TVL with a combined weekly trading volume of $5 billion. Therefore, a major part of Uniswap activity is dependent on USDC.

On the AAVE lending agreement, USDC is the second most active currency after ETH . AAVE has a total of $1.4 billion in USDC supply and $470 million in borrowing. On Compound, USDC is the second most liquid after ETH with a total of $700 million in liquidity.

When MakerDAO moved to a multi-asset collateral model, the ETH they held as collateral The amount dropped sharply, while the amount of USDC in reserves increased dramatically. Currently, 60% of DAI collateral is provided by USDC. 47% of the $10 billion DAI TVL is provided by USDC. Therefore, the leading decentralized stablecoins in DeFi rely heavily on centralized stablecoins.

Let's look at Frax, which has a $911 million dollar pool of which 33 % is made up of USDC or USDC derivatives. Even though FRAX is highly collateralized, 90% of the collateral is USDC, making it almost a proxy for USDC at times.

I could go on and on, but I think you'll get the point. USDC is deeply rooted in all basic protocol parts of DeFi. The total TVL of DeFi is 65 billion U.S. dollars. The top five protocols in TVL are MakerDAO, Lido, AAVE, Uniswap and Curve. Of the 65 billion U.S. dollars in TVL, USDC accumulatively accounts for 36 billion U.S. dollars, which is only slightly more than half. The majority of the TVL of four of these protocols is made up of USDC.

Doctor: I can't tell, it looks like stage 3 cancer.

What does an oncologist have Suggestion?

(What is the suggestion for USDT/USDC)

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"Brother, diversification is needed to solve the concentration problem ", seems to be a common solution suggested on Twitter. All treasuries and protocols should move away from supporting USDC and start looking for more decentralized, censorship-resistant alternatives.

This is of course something everyone likes to do, but only if it becomes So Easy. We need to think about what decentralization from these centralized stablecoins actually looks like for DeFi.

People love to talk about DeFi being structured like Lego. However, if you look at those underlying protocols mentioned above, you will find that the DeFi ecosystem depends on them (USDC/USDT) to some extent. They either build on top of these underlying protocols, execute strategies on them, or hold a large number of native tokens in their treasury. Thus, the knock-on effect of moving away from USDC could be catastrophic, with the collapse of the foundation causing the entire building to collapse at once. Unfortunately, many new protocols with real potential will have to close early, as will many existing protocols that are growing steadily.

In my opinion, if you want to get rid of USDC, there are two options. One is protocol diversification into other stablecoins, and the other is diversification into a basket of other cryptoassets.

When it comes to diversifying into other Stablecoins, assume you diversify into other decentralized Stablecoins. At this point, the best options are DAI and FRAX, but as we saw before, they both rely heavily on USDC right now. So diversifying away from USDC could cause some wild swings in DAI and FRAX itself. When it comes to other options, they prove to be very dangerous as most of them are not sufficiently stress tested. We know that Stablecoins are prone to crashes, which is why relying on newer Stablecoins is not a good move.

Even a truly decentralized stablecoin like RAI with no peg. This seems like the optimal solution, but the problem is user adoption. Mentally, it's hard to get people to accept such a stablecoin and start pricing it with RAI, plus it's poorly integrated with the rest of DeFi.

Therefore, the transition from a centralized Stablecoin to a decentralized Stablecoin must be done from a decentralized Stablecoin The switch initially hurt decentralized Stablecoins, and some may survive. This, in turn, will trickle down to the rest of DeFi, leaving a dead ocean in its wake.

Another approach is to diversify from USDC into a basket of cryptoassets. While this makes sense from a "decentralization" perspective, it doesn't make sense from a business perspective. This would lead to a situation similar to what happened before Stablecoins, where each protocol reserve and each protocol treasury would hold high-risk and highly volatile crypto assets that could cause most protocols to shut down under adverse market conditions.

So what should we do? Will the developer offer a breakthrough solution? Or we just get on our knees.

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Do we really need Stablecoin?

< p>All this talk about Stablecoins raises the question of whether Stablecoins are really necessary. There have been many experiments with decentralization, but they were either not truly decentralized or ended up imploding. There has not been, or is likely to be, meaningful competition for a centralized stablecoin.

In short, Stablecoins have 3 main benefits. Transactions, payments and access. 2/3 of that could be resolved, but any unprecedented access to dollars (or other currencies) would only be possible with a fiat-pegged Stablecoin.

Payments and transactions can be settled by ETH itself. If you think of cryptocurrencies as the financial layer of the Internet or the Metaverse, then ETH is already showing signs of becoming the base currency. Admittedly, it's very early days and it will take time for people not to have dollar-denominated ETH wealth, but it's a gradual process. All NFTs are already priced in ETH, and all newly listed Shicoins are already priced in ETH.

One way to look at a Stablecoin is to look at it over a very long time frame. In this case, they are only a temporary solution, acting as a bridge between fiat and cryptocurrencies. Once a significant portion of global liquidity is incorporated into cryptocurrencies, then something like ETH or whatever is popular at the time can start to be the base currency, simply because all cryptocurrencies will be traded against them.