JUN 18, 2020 • 4 Min Read
Our past Daily’s on Balancer and Compound highlight the memetic power of “yield farming” and “liquidity mining” within the defi ecosystem. mStable, a stablecoin liquidity and lending protocol, is another project that fits within this narrative. Users can deposit stablecoins into a stablecoin basket and receive a proportional amount of mUSD. mUSD can be redeemed 1:1 for any basket asset. As of writing, the total mUSD supply sits at 671,352.09.
In addition to a stablecoin pool supporting the native mUSD stablecoin, mStable has a ‘saving’ mechanism. Depositing mUSD into a saving’s contract allows one to earn a native APY. The APY derives from the interest accrued from lending assets on compound and aave, as well as trading fees. The historical APY is listed in the image below. The total mUSD supply in savings is currently 469, 395 mUSD.
Traders are able to swap stablecoins 1:1 for any of the stablecoin basket’s assets. The protocol charges a 30bps fee, but this is temporarily dropped to 2.5 bps. The swapping functionality is based on mStable’s unique constant sum pool. This has major impacts for both traders and LPs. Some takeaways are listed below.
Uniswap vs mStable (constant price) vs Curve
All pooled assets can be exchanged 1:1. (See image above)
Zero slippage on trades, and mStable does not require a baseline liquidity level to do so. Scaling pool size is not necessary for attractive stablecoin swapping.
One can mint and redeem any n asset because n assets are 1:1 interchangeable.
With a 1:1 exchange rate, the protocol can institute higher fees as there is no slippage. It may be cheaper to swap on mStable rather than Curve even when fees are higher on mStable, because of the lack of slippage.
Liquidity providers earn fees in times of inter stablecoin volatility as traders look for arb opportunities.
mUSD acts as both a stablecoin, as well as, an LP token for the mUSD basket.
Pool assets become unbalanced when freely exchanged 1:1. This is exactly what happened, and many predicted this. (See image below)
mStable could possibly implement dynamic fees based on pool weights to encourage swapping out highly weighted stablecoins.
Liquidity providers are essentially left with the least scarce or least in demand stable coins. Stablecoins that de-peg upwards will be flushed out of the pool, because they can be swapped for a cheaper stablecoin.Passive liquidity providers are second class citizens when choosing what stable coins they have a claim to.
For example, an LP deposits DAI. DAI is in high demand and is drained out of the pool. Now the LP can only redeem their mUSD in either TUSD, USDT, or USDC. If the LP desperately wants DAI, he or she must incur additional slippage and fees trading on other venues.
Rationale liquidity providers will most of the time only deposit stable coins that trade at par or below the peg.
If a stablcoin’s peg breaks, LPs bear this loss. This is mitigated, however, through the required weightings of stable coins in the mUSD basket. As of now, there is only a max weighting, which can result in a stablecoin having 0% share. In the future, mStable plans to incorporate a minimum weight as well. mStable will also use its native token, MTA for an insurance mechanism. Meta (MTA) token holders essentially take on the tail risk of the system.
mStable is following in the footsteps of Compound for their native token distribution and design.
20,000,000 MTA (20% of supply) will be distributed for user rewards.
MTA is a governance token that must be staked to earn rewards.
System failure (peg breaks) leads to a portion (5-10%) of staked Meta liquidation and/or dilution. This is the insurance component of the token.