Stablecoins on Hedera: Cash Rules Everything Around Me

From a technical maturity, regulatory, and use case perspective, few innovations have proven as ready for mainstream adoption in Web3 as stablecoins.

Stablecoins are designed to maintain a stable value relative to a reference asset — in Hedera’s case, this is heavily weighted towards Hedera native $USDC, pegged to the U.S. dollar. From early on in DeFi, stable assets have acted as a backbone for healthy on-chain financial ecosystems. With Tether's USDT as a flagship pioneer, to Circle's $USDC now becoming a gold standard for both DeFi and institutional adoption, stablecoins have matured from an emerging technological standard to essential financial infrastructure.

From the perspective of Hedera’s DeFi ecosystem, an influx of stable assets and supporting technologies and integrations brings with it support for onboarding new users to the ecosystem, deepening DeFi liquidity, and supporting stronger and more efficient decentralized economies and markets.

The Lifeblood of Successful DeFi Ecosystems

Stablecoins serve as a universal medium of exchange in DeFi, as well as an asset that enables activities like yield farming, liquidity provisioning, and advanced trading strategies.

Stablecoins open the door within a decentralized finance ecosystem to earn yield by supplying them to decentralized exchanges, lending protocols, and more. They allow for users to both enter and exit volatile cryptocurrencies, or utilize them for advanced strategies like longing and shorting assets. Additionally, they can act as an indicator or gauge of overall market efficiency across an ecosystem.

It’s a Numbers Game

The data speaks volumes about stablecoins' critical role in DeFi success. Across major DeFi protocols, stablecoins consistently represent an outsized amount of active borrows — take Aave v3, for instance: stablecoins make up $7.51B of the $14.96B in active loans, equating to ~50% of all loans.

In addition, across all of DeFi, ~30% of protocol generated revenues are derived from stablecoin assets, as reported by Keyrock.

Beyond revenue, yield earned for supplying and the cost of borrowing stablecoins across DeFi protocols in an ecosystem can act as a gauge for determining overall market efficiency.

Take, for instance, an ecosystem which lacks stablecoin liquidity and offers both decentralized lending and asset exchange: as stablecoin trading volume increases, so do trading fees, which result in higher yields for suppliers.

When combined with the ability to borrow stables from decentralized lending protocols at a variable borrow rate, the demand (and, in turn, variable borrow APY paid) for stables may be significant — this is due to the fact that borrowers are still profiting on the difference by borrowing from a lending protocol and supplying to a decentralized exchange.

As a concrete example, if the $USDC supply APY for a DEX is 105% (significant), and the borrow APY for $USDC is 45% (incredibly expensive), it’s still a profitable endeavor for users to partake in the activity of borrowing from the lending protocol and supplying to the DEX, even accounting for the possibility of impermanent loss. However, it exposes market inefficiencies due to the fact that it’s unreasonable for the average user to be borrowing $USDC at a 45% rate for any other activity outside of this strategy.

One way to alleviate this scenario is by injecting more stablecoin liquidity into an ecosystem, satisfying the market supply / demand curves in order to bring rates back in-line with macro rates found in alternative ecosystems.

An Opportunity for Hedera DeFi

Hedera's DeFi ecosystem exists at an inflection point — while the network boasts significant 30D trading volumes of $USDC (~$102.97M), its overall historical $USDC TVL across DeFi protocols SaucerSwap and Bonzo Finance (~$7.94M) has not matched its utilization in an efficient way.

This discrepancy has resulted in consistently high and volatile average APYs for both paying to borrow $USDC on Bonzo Finance (~20% - 45%) and earning to supply $USDC on SaucerSwap (~27% - 102%) — users taking advantage of this opportunity are showcasing how markets behave under these conditions and are earning from the inefficiency.

There is a big silver lining: Stablecoin liquidity within Hedera DeFi is lacking but appears to be rapidly changing with the following advancements:

• Hedera native $USDC listings on major centralized exchanges (Crypto.com and Binance)
• Relatively high APYs observed across both SaucerSwap and Bonzo Finance for supplying $USDC
• Observations of $USDC liquidity infusions into DeFi on Hedera, starting with Bonzo Finance’s uptick from $4.6M to $8.5M within the past week.

As the Hedera DeFi ecosystem works through this transitionary period towards greater efficiency, one thesis is that it will come out on the other side of it far stronger than ever before.

Hedera’s Stablecoin Flywheel Effect

The increased accessibility and recent injection of $USDC liquidity on Hedera is possibly representative of being a catalyst to a powerful flywheel effect:

1. Initial premium / thin $USDC: Market inefficiencies of $USDC draws in new stablecoin liquidity and users / institutions seeking arbitrage yield opportunities.
2. Increased On-Chain Activity: Deeper $USDC liquidity across DeFi drives efficiency (deeper pools, tighter spreads, reduced slippage) — which, in turn, drives more DeFi activity, including trading volumes, borrows, etc.
3. New Protocol Development: As DeFi volume / liquidity increases, so do protocol fees and revenue, signaling product-market fit and resulting in development of new DEXes, money-markets, and structured-yield apps.
4. More User Opportunities: Each new venue introduces fresh rate differentials or farming opportunities, drawing more liquidity and often recreating inefficiencies for the next wave of capital to profit from — kick-starting the flywheel once again.

Conclusion

As stablecoin liquidity becomes increasingly accessible, with more on/off ramps and deeper DeFi liquidity pools, Hedera appears well positioned to capture significant value through this transitionary period. The flywheel described is in motion. Deeper liquidity begets more activity, which attracts more protocols, which creates more opportunities for more capital.

Inefficient markets typically don't stay inefficient forever and participants who provide liquidity to support their efficiency often profit in the process. On Hedera, cash rules everything around me and it’s an exciting time to be part of this ecosystem.

Disclaimer
This content is for informational and educational purposes only and should not be construed as financial, investment, or legal advice. The analysis and opinions expressed are based on current market conditions and available data, which may change rapidly. Any forward-looking statements, projections, or predictions about future market performance are speculative and subject to significant risks and uncertainties.

Cryptocurrency and DeFi investments carry substantial risk, including the potential for total loss of capital. Past performance does not guarantee future results. APY rates, trading volumes, and other metrics referenced are historical and may not reflect future performance. Always conduct your own research and consult with qualified financial professionals before making investment decisions.