Smart stablecoins and their evolving stack

The compound nature of Ethereum generates a multi-level structure of primitives and DeFi assets. One clear but usually underestimated example of this are smart stablecoins. Despite the fact that Yield Farming is a growing trend at the moment, by digging a little deeper, we can see the extended consequences of using native stablecoins in various smart contracts.

Before describing “smart” stablecoins, let us first estimate an impressive year for the “regular” ones. Stablecoins proved to be an integral part of the crypto universe and showed growth, matching the general market development, which is best represented by an increase in the turnover supply of USDT from ~ $4.1 billion to ~ $15.2 billion. It is equally important where stablecoins are going and what they are striving for. Tether’s smart contract offer has grown from ~ 1.9% to 10.9% since the beginning of the year. The USDC smart contract offer has increased from ~6.7% to 56.7% YTD. This indicates the overall value proposition (although largely due to Yield Farming speculation) of DeFi protocols, which determine the demand for stable coins.

Liquidity Provider (LP) tokens for these stablecoins in credit / AMM / index pools (contracts) are, in fact, so-called proto-stablecoins. For example, aUSDC is a USDC Aave stablecoin that generates interest income that the user receives when depositing USDC into an Aave credit / AMM / index pool. mUSD is another example of an LP Mstable token for their AMM pool with a constant sum consisting of four different stablecoins. has launched y-pool Curve with LP yCRV token. Unlike other stablecoins that let you choose between receiving interest or AMM commission, yCRV included both. yCRV is called a smart stablecoin because it optimizes yield for both credit and trading commissions. Yearn’s Vaults has extended this premise one step further. Users deposit stablecoins into vaults that have certain yield strategies, most of which are based on yield management tokens. Along with individual stablecoins, there is a yCRV repository. The LP token for this repository – yyCRV (now yUSD) includes loan pool interest, AMM trading fees, and Yield Farming profits. At the time of writing, $218 million worth of yCRV is in the corresponding repository.

As more and more aggregators on the supply side connect to the network and compete with Yearn, what are the more serious consequences and the future of smart stablecoins? Liquidity is usually understood as a commodity that moves around the platforms with maximum return. With this in mind, an asset, be it USDC or USDT, has liquidity premiums. A more liquid USDC and the coverage of this liquidity (integration) is akin to a protective moat. So, will certain smart stablecoins provide liquidity premiums and protection for the underlying protocol? Preferably “yes” rather than “no”.

For this to happen, an appropriate smart stablecoin must have broad liquidity (deep pool + integration) and high utility (stability). At the moment, the promise of an attractive APY draws liquidity from the supply side to place assets in vaults, but as friction diminishes, the demand for smart stablecoins (yUSD) will also increase liquidity. You will have a reflexive cycle between users (demand) and LP (supply).

Let’s have a closer look at two projects that solve two different problems, but both help create a potential liquidity premium in yUSD:

Snow Swap – AMM exchange for yVaults stablecoins exchange

Snow Swap removes the current liquidity constraints of yVault stablecoins. The first pool supports yUSDC, yDAI, yUSDT, and yTUSD, while the second pool supports yUSD and ycrvBUSD. You can provide your own stablecoins, and Snow Swap will directly mint and supply the corresponding yToken to the first pool. Based on AMM Curve, Snow Swap pools are designed for low-slippage swap stablecoins. This allows traders to switch between yTokens without having to charge a 0.5% withdrawal fee. Snow Swap LP basically diversifies your risks across different yVaults with additional profits from Snow Swap trading fees.

Snow Swap has a management token and a liquidity mining program. Details can be found here. 50% of the total offer will be allocated to LP within the first year, and with the current liquidity level (~ $7.8 million), this could potentially lead to a very attractive return. Obviously, this depends on the value of $SNOW.

syUSD – “wrapped” stablecoins on top of yUSD

syUSD is an ERC-20 that allows you to convert yUSD into a stable token. syUSD remains stable at $1, but the holder balance increases as yUSD generates income. At the time of writing, yUSD is traded at around $1.16 and fluctuates depending on the basic yield. syUSD simply translates price fluctuations into supply fluctuations. For some users and contracts, this can result in less friction, which causes more integration and demand. More information about this project can be found here.

“Wrapped” future

The concept of such stablecoins is theoretically straightforward. If you believe in the teams, it’s time to take this idea to a whole new level. After all, this approach gives some interesting advantages when people are interested in it. It seems a bit strange to wrap one existing cryptocurrency around another one. At the same time, Wrapped Ethereum exists only on the Ethereum blockchain and is successful in its own way. Keep in mind that these contracts are experimental. At the moment, it is not recommended to invest large amounts, although anyone can analyze the contract to make sure there are no pitfalls.