With the rise of Terra and their native stablecoin, UST, other chains are looking into creating their own native stablecoins. UST gained popularity because of the nearly 20% APY that is offered to lenders of UST on Anchor Protocol. Anchor provides some of the best yields for stablecoins on the market, which has attracted a huge userbase. Currently, Anchor is the second largest DeFi protocol by total value locked (TVL), sitting just behind Curve at $19.5B. Seeing this success, the NEAR and Tron blockchains have entered the stablecoin market with their respective USN and USDD tokens, looking to compete with UST by offering competitive yields.
NEAR’s USN
USN stabilizes its price through the main on-chain smart contract that allows for the exchange of NEAR to USN based on the NEAR/USN exchange rate. The buy-back of USN will always be worth $1 of NEAR, which offers constant arbitrage opportunities while maintaining the price of USN. For example, if the price of USN drops below $1, users can buy USN and exchange it for $1 worth of NEAR, resulting in an arbitrage profit. If the price exceeds $1, the reverse can be done.
USN is fully backed by a Reserve Fund, which is managed by the DAO, Decentral Bank. The Reserve Fund is filled with NEAR each time USN gets minted and also contains stablecoins aside from USN which act as external collateral. USN is always backed by an equivalent amount of NEAR and other stables in the Reserve Fund, which allows the fund to buy back USN when there is downward pressure. To maintain the USN exchange rate, the Decentral Bank decided to use the Currency Board model, which increases or decreases the tokens in the Reserve Fund in response to USN being burned or minted. NEAR will be used for smaller, day-to-day market volatility while the stablecoins are for instances of extreme volatility.
USN automatically generates at least the yield of NEAR, which currently sits at around 11% APY. This yield can be higher if the value of NEAR appreciates or demand for USN increases, and Decentral Bank has stated that the first lenders will likely receive ~20% APY. This makes USN a real competitor to UST, which is not fully backed like USN and is issued on leverage.
Tron’s USDD
USDD gets its price through a decentralized price oracle, which takes votes from "Super Representatives" on what the USDD/USD exchange rate should be. The weighted median of these votes is used to determine the true rates. To maintain its peg to $1, the USDD supply contracts or expands to counteract the deviation from $1. Also, similar to USN, when the price de-pegs, there are constant arbitrage opportunities because 1 USDD can always be exchanged for $1 worth of Tron's base token, TRX.
Super Representatives play an especially important role in maintaining USDD's price as they are responsible for absorbing short-term volatility as well as safeguarding the Tron Network. Super Representatives receive fees from stablecoin swaps, which incentivizes long-term participation.
Tron has announced the creation of TRON DAO Reserve, their decentralized reserve fund. The fund will help stabilize stablecoin exchange rates by setting risk-free interest rates and providing liquidity. They will raise $10B from various players in the blockchain industry and hold a variety of cryptocurrencies to help minimize systemic risk. They also intend to create monetary and exchange rate policies and act as the lender of last resort. The risk-free interest rate will be initially set at 30%, which is one of the best rates on the market and well above what UST and USN offers.
USN and USDD have the opportunity to take some market share away from Terra and UST if they can maintain the competitive yields they are advertising. If they are successful, I’d expect more blockchains to follow in their footsteps and create their own native stablecoins. However, I see these moves as somewhat of a desperation move for two blockchains that have nowhere near the growth of Terra. Although these two do have certain advantages over UST, I still expect Terra and UST to dominate at least in the short to medium term. Despite this, I believe that it will be worth it to allocate a percentage of your stablecoin holdings to USN and USDD as long as the yields are high.
Written by: Zach Rampone