Stablecoin arms race: Everything you need to know about blockchain central banks

Stablecoins are gaining traction in the DeFi community despite the $41 billion implosion of Terra’s LUNC (previously LUNA) and UST. DeFi protocols that have sizable liquidity, automated market makers and lending markets are key to the next generation of stablecoins. 

Also read: Ethereum dominance over Bitcoin draws to close, no more flippening?

Stablecoin holy trinity and what’s next

Do Kwon, the infamous founder of Terraform Labs promised UST holders that the algorithmic stablecoin would eventually destroy its main competitor, DAI. The integrated stablecoin powers DeFi applications and blockchain-based games. Post UST’s implosion, DAI is alive and kicking. 

Analysts at Jarvis Labs argue that following regulatory guidance, DeFi protocols that have adequate liquidity, automated market makers and lending market products, considered the holy trinity, can release “stable” stablecoins. 

Aave, an open-source liquidity protocol, recently released a technical paper for its own stablecoin (GHO). Users can borrow (or mint) GHO by supplying excess collateral to Aave protocol. Collateral will take the form of various cryptocurrencies and Aave plans to remain solvent by liquidating the borrower’s collateral once its value falls to a certain level. 

During the course of the loan, the interest paid by the users will go to the protocol’s treasury. GHO stablecoin has not been released yet. 

Jarvis Lab analysts believe that DeFi protocols with their own stablecoin will become the ultimate protocol. The most obvious competitors of Aave are  Compound, Curve, Frax, Maker, and Uniswap. 

With Aave on the cusp of launching GHO, it’s clear that the stablecoin arms race is just starting to heat up. The race is turning into something quite revolutionary with DeFi protocols preparing to act as central banks. MakerDAO’s DAI stablecoin acts in a similar manner as a bank, therefore GHO of Aave is expected to follow in its footsteps.