Monolith Spotlights: mStable, the yield-bearing stablecoin basket
As decentralised finance has grown over the last few years, stablecoins have become an integral part of the Ethereum ecosystem. But with an abundance of choice between the various different price-pegged assets, stablecoins can suffer from certain limitations. One team focussed on delivering the optimal stablecoin experience for DeFi is mStable. For our latest Monolith Spotlights feature, we take an in-depth look at how the protocol and its stablecoin, mUSD, works.
mStable explained
To understand mStable, it’s worth explaining what we mean when we talk about stablecoins.
Stablecoins are designed to follow the price of traditional currencies. Their primary use is to limit the price volatility cryptocurrency prices are often prone to. Most stablecoins are pegged against the US dollar, and they can be described as a type of synthetic currency.
Stablecoins are particularly useful as a form of collateral for DeFi products. They can also help users preserve their holdings in between trades.
As DeFi has developed, several stablecoins have emerged. But the choice has presented problems for users. As there are so many variants of stablecoin, they suffer from fragmentation, meaning there is no uniformity between them. This can cause liquidity problems. Moreover, many stablecoins rely on the trust of intermediaries, which creates a counterparty risk. Worse still, if a stablecoin’s peg is lost, users could face the risk of losing their entire capital supply.
mStable aims to solve these issues by aggregating stablecoins to create one yield-bearing token. The protocol enables lending, swapping and saving, and it has a clever mechanism for paying out higher interest rates than many other DeFi protocols.
Core to mStable’s design is the mUSD token. mStable and its mUSD token can be broken down into a few sections.
Minting
Users are able to mint mUSD by depositing stablecoin tokens, with mUSD offered at a 1:1 ratio.
Minting involves depositing funds to the protocol’s MINT smart contract running on the Ethereum blockchain, and deposits can be made in sUSD, TUSD, USDC or USDT.
Saving
mUSD holders can earn interest on their holdings by depositing their tokens to the SAVE contract.
When a user provides collateral to mint mUSD, their assets are deposited to lending markets such as Aave and Compound. The interest paid by these protocols forms part of the native interest rate paid to mUSD token holders. Users also earn yield from mStable’s platform fees and other sources. Currently, fees are taken from the swap and redemption functions.
With a recent upgrade to the protocol, mStable launched a new token to represent mUSD locked in the Save V2 contracts, imUSD. This token automatically accrues interest, and thanks to its composability, it unlocks opportunities for other DeFi protocols to integrate a yield-generating stablecoin.
The combination of two yield streams means that imUSD’s interest rate is higher than many other DeFi protocols. It pays out 21.46% APY at the time of writing.
Swapping
mStable also operates a handy SWAP function, allowing users to swap between underlying stablecoins at a 1:1 ratio without suffering from price slippage. The service is offered in exchange for a small fixed fee paid to holders who save funds within the protocol.
Earning
mStable’s EARN function lets users earn tokens by providing collateral to liquidity pools across the DeFi ecosystem. They’re currently available on Curve, Balancer and Uniswap.
Liquidity providers are paid in MTA, the governance token for the mStable protocol.
Governing
As part of the mStable’s aim to achieve decentralisation, community members can participate in governing the protocol by staking MTA tokens. Tokens are staked for a lockup period chosen by the user. These staked tokens give users a “vMTA” balance, which quantifies their voting power on proposals. In return for staking tokens, users are rewarded tokens as staking returns.
In the future, mStable’s governance will transition to V2. It’s hoped that this update will include features such as full onchain voting, a new Staking V2 contract, and even recollateralisation, pending approval from token holders.
Redeeming
Just as anyone can mint mUSD by providing collateral in the form of stablecoins to mStable, it’s also possible to exchange mUSD for another stablecoin. This is made possible by the REDEEM contract, which currently offers 1:1 exchanges from mUSD to sUSD, TUSD, USDC or USDT.
Conclusion
In summary, mStable is an autonomous and non-custodial stablecoin infrastructure that combines lending income with trading fees to produce higher yielding assets. It is a powerful, permissionless protocol that acts as a basket for various stablecoins in the ecosystem, solving issues like fragmentation, and low yields in fiat and other currencies. Users can benefit from high returns on a robust asset thanks to multiple sources of income, while limiting the risks posed by relying on one stablecoin alone.
It also creates liquidity shares for users by enabling them to deposit funds across various DeFi pools, and embraces decentralisation by handing governance of the protocol to users who stake tokens. It achieves all of this within one easy-to-use interface that simplifies the experience of using of stablecoins in DeFi.
Learn more about mStable here.
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