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Introduction

Since Bitcoin's inception in 2009, the cryptocurrency space has been searching for its “killer app” that would catalyze mainstream adoption.

But what if what we are looking for is right under our noses?

Stablecoins have emerged as a crucial pillar of Decentralized Finance (DeFi) and the broader cryptocurrency ecosystem and truly deserve their case to be made as the most successful and practical cryptocurrency application to date. 

Different stablecoins fulfill different use cases. 

Initially, they facilitated widespread adoption by providing users with a mechanism to protect themselves from the volatility of cryptocurrency assets.

“Transactional” stablecoins like USDT and USDT provided a cheap alternative to cross-border transfers and on/off-ramping for crypto. 

Nonetheless, this efficiency has come at a cost, as they rely on centralized collateral, raising concerns about dependency on traditional finance (TradFi) assets. 

This led to the emergence of Collateralized Debt Positions (CDP) stablecoins like DAI, which enabled leveraged exposure to ETH and other crypto assets - decentralizing the issuance of stablecoins.

In the rising interest rate environment, yield-bearing stablecoins are drawing increased attention, with the emergence of protocols focusing on crypto-native yield for their stablecoins. 

As crypto gathers more interest as an asset class, this research report analyzes the evolution of its most successful product, stablecoins, and the establishment of decentralized and on-chain alternatives, offering insights into the future of this class of digital assets.

We dive deeper into their offers and approaches, following up with a comparative analysis of a newly formed category of delta-neutral backed stablecoins using the case studies of Ethena and Resolv Protocol.

The Historical Evolution of Stablecoins

Stablecoins are designed to maintain value pegged to $1 through various strategies and using different assets as collateral. Notwithstanding their brief history, they have taken on many forms. 

Stablecoins have taken on many forms in several shapes and sizes in their brief history. The most fitting way to separate stablecoins according to the assets backing them:

• Real-world asset (RWA): usually in the form of fiat-backing or US treasury bills (e.g. USDT, USDC)

• Collateral debt positions (CDP): where stablecoins are minted by locking collateral in a smart contract (e.g. DAI)

• Algorithmic: these regulate their supply and demand using algorithms, aiming to provide a stable digital asset without relying on traditional collateral (e.g. UST)

• Delta-neutral: maintains a stable value by balancing long and short positions to offset market volatility (e.g. USDe, USR)

Today, over 125 million addresses hold stablecoins, and approximately 20 million use them for monthly transfers. This growth reflects a trend that is de-correlated to the spot trading volume of cryptocurrencies.

While there have been many early attempts to create stablecoins, the history of stablecoins, as we know them nowadays, began in 2014 with projects such as BitUSD and Tether.

BitUSD required users to post collateral in BitShares (backed by a range of cryptocurrencies) to mint It. The network held the collateral until the BitUSD was redeemed. 

However, the token ultimately lost its peg to the US dollar and never fully recovered, mainly due to weaknesses in the Delegated Proof of Stake model and inherent flaws with BitAssets's minting and collateral mechanisms. 

Realcoin was also launched in the same year, and it went on to become Tether (USDT), the most successful stablecoin. Tether initially claimed its reserves were fully “backed 1-to-1 by traditional currency”; however, they eventually changed their position in 2019 after revealing that they were only 74% backed by cash and cash equivalents, opening up a window of opportunity for other competitors.

Tether enjoyed a virtually unchallenged monopoly until 2019 when Circle established USDC.

USDC is a stablecoin pegged and redeemable 1:1 for USD and is backed by:

• Cash

• Short-dated US Treasuries

• US Treasury repurchase agreements

Today, USDT and USDC account for most stablecoin transactions, with a monthly volume north of 450b.

Subsequently, the market began experimenting with decentralized and fully on-chain stablecoins backed by crypto assets without requiring a custodian. 

One notable example is DAI, which was launched by MakerDAO in 2017.

DAI differs from centralized stablecoins in several ways:

• It’s not minted by a centralized organization but created through Collateralized Debt Positions (CDP): users deposit collateral in the Maker smart contracts, creating DAI. 

• Overcollateralized: the amount of collateral in CDP has to be greater than 150% of the DAI created

• No centralized collateral: users deposit Ethereum as collateral (in 2019, they expanded their collateral to include USDC, BTC, BAT, and COMP)

• Permissionless and transparent minting processes: anyone can mint DAI by depositing collateral

The launch of DAI and other decentralized stablecoins pushed the frontier of stablecoin design. In particular, the market seemed to have a strong appetite for algorithmic stablecoins, which operate without collateral and rely on algorithms to adjust their supply and stabilize price at $1. 

The most infamous example, UST (Terra Luna’s stablecoin), collapsed in 2022, confirming concerns regarding the viability of algorithmic designs.

UST’s value was linked to LUNA through a burn-and-mint mechanism to guarantee the stability of the 1$ peg. The exact amount of LUNA would be burnt for each dollar of UST minted.  

It’s hard to describe the rise of LUNA and UST for those who were not there then. To put it into perspective, UST became the third-largest stablecoin in April 2022. 

Eventually, UST went down just as fast as it rose. While its design worked well during a period of positive market sentiment, things started to change on May 22, when sentiment turned bearish.

While the market was ready for alternatives to centralized stablecoins, incidents like Terra Luna have shaken the enthusiasm for this category, made users more wary, and brought new challenges that decentralized stablecoins are poised to solve to reach wider adoption and regain trust.

The chart below shows the vacuum left by the UST implosion, with total stablecoin supply and volumes still struggling to reach these previous levels.

The collapse of Terra Luna has left a gap in the market, with new challengers emerging to fill the void. Their proposals demonstrate that with proper risk management, decentralized stablecoins can thrive, potentially offering advantages over their centralized counterparts.

The Emerging Challenges of Stablecoins

The current stablecoin market has a total supply exceeding $160 billion and a daily trading volume of over 40b.

First-generation stablecoins (USDT, USDC) account for most of the supply—nearly $120 billion. However, they face increasing challenges:

• Regulatory challenges: increasing regulatory scrutiny 

• Transparency & Compliance: audit and regular reports concerning reserves and collateral

• Centralization: which might be a make-it-or-break-it for crypto natives

These risks materialized with the USDC crisis of 2023 when the failure of three mid-sized banks in the USA led to a depeg of USDC, falling as low as $0.74 on Binance. These banks were among the most prominent banking service providers to cryptocurrency companies. When Silicon Valley Bank (SVB) failed, Circle had $3.3 billion deposited in it, roughly 8% of the dollar backing for USDC.

While USDC eventually restored its peg, this incident raised concerns about the risks of centralized stablecoins. For many, it was a wake-up call about the real possibilities of systemic risk contagion between TradFi and cryptocurrency.

It turns out that crypto and TradFi are not that decorrelated after all—even if you hold stablecoins.

At the same time, decentralized stablecoins are not without their risks. For instance, DAI's CDP design requires substantial over-collateralization, limiting its capital efficiency and hindering liquidity and scalability.

Regardless of whether they employ fully collateralized solutions or an algorithmic design, decentralized stablecoins face challenges in terms of: 

1. Scalability: Operating in a decentralized manner introduces trade-offs in efficiency, as transactions must be handled on-chain. While decentralized systems perform well on a smaller scale, they are more challenging to scale efficiently.

2. Collateral efficiency: Stablecoins must maintain a stable value while ensuring deep liquidity and capital efficiency.

3. Peg stability: Ensuring 1:1 redeemability is critical, even under stress from market volatility and downturns.

4. Security: As a primary use case that protects users from risk, minimizing exposure to additional risks is essential.

5. Integrations and interoperability: Stablecoins must be usable across various protocols and networks to maximize utility.

Examples like Terra Luna’s UST illustrate the dangers of inadequate risk management.

Many projects have claimed to solve the inherent challenges of decentralized stablecoins, but these designs require stress testing, whether surviving multiple cycles or a black swan event. 

The New Generation of Crypto-Backed Stablecoins

The next evolution for the sector lies beyond traditional stablecoins in the creation of alternatives leveraging yield-bearing designs. 

As stablecoins found PMF on-chain, so has derivatives trading, especially as a hedging strategy. Projects like Ethena and Resolv Protocol are capitalizing on this crossover, leading the charge to a new generation of delta-neutral derivatives-based stablecoins, following in the footsteps of UXD, who pioneered this model in 2021.  

They maintain their peg by combining decentralized collateral with delta-neutral hedging strategies using derivatives, improving the capital efficiency of their collateral and appealing to a more niche, on-chain native audience.

Ethena, for example, has demonstrated the existence of solid demand for derivative-based stablecoins. USDe, its native stablecoin, ranks as the 4th largest stablecoin, boasting a market capitalization of $2.54 billion.

Here’s how Ethena and Resolv compare to centralized stablecoins:

• Decentralized collateral: they leverage ETH as collateral

• Permissionless yield and staking: the protocols are permissionless, and anyone can access the dApps

• Transparent: all transactions are executed on-chain

• Market Neutral: using delta-neutral strategies and hedging collateral using future positions

• Decorrelated from exogenous shocks: isolated from centralized collateral 

• Revenue Generating: programmatic yield distribution through staking yields, funding, and spread

Both of these models point toward a more nuanced, tailored approach to decentralized stablecoins, moving beyond the one-size-fits-all model by introducing innovative design in terms of:

• Collateral management: Both protocols leverage a combination of spot collateral and delta hedging through short future positions. 

• Programmatic yield distribution: They distribute yield to stablecoin holders thanks to the Liquid Staking Tokens (LSTs) and other yield-bearing assets deposited as collateral. Furthermore, their short perpetual positions accrue funding fees, generating yield. 

• Hedging and Risk segregation: Ethena leverages a delta-neutral strategy to hedge the collateral value, minimizing the risks of depeg. Resolv further separates the risks of its stablecoin across two assets, catered for users with a different propensity to risk.

Let’s now dive deeper into Resolv and Ethena for a comparative analysis of their approaches.

A Comparative Analysis: Ethena’s Single-Token Model and Resolv’s Dual-Token Model

This section provides an in-depth comparative analysis of Ethena and Resolv, highlighting their respective tokenomics, collateral management, risk segmentation, and overall user experience.

Ethena’s Single-Token Model

Ethena operates with a single token model.
Its native stablecoin, USDe, is a synthetic dollar that is fully collateralized by:

• Cryptocurrency assets

• Corresponding short future positions

The USDe solvency is maintained through delta hedging, employing short derivative positions against the Bitcoin and Ethereum held as collateral by the protocol. 

This is similar to a synthetic USD position where users simultaneously acquire an asset and short its futures against USD to collect the difference between spot and future prices, known as the “future basis.” 

Each unit of USDe is backed by $1 of ETH and a corresponding short position of 1$ in inverse perpetuals. To open the delta-neutral future positions, Ethena deposits the collateral via custodians as a margin in a derivative exchange.

This mechanism aims to maintain stability relative to the spot value of the crypto assets deposited as collateral, including future positions.

Users can also stake USDe for sUSDe, the yield-bearing version of the token, deriving yield from:

• Collateral: Yield-bearing assets (LSTs) 

• Derivative Positions: Funding and Spread from futures markets

Only whitelisted users who passed KYC/AML can mint and redeem USDe on the primary market; all others can access USDe on the secondary market.

Every time users mint or redeem USDe, any fluctuations in the underlying collateral are offset by adjusting the size of the delta-neutral future positions, ensuring that USDe remains fully backed 1:1 by USD.

This design enhances the collateral's scalability and capital efficiency without sacrificing the security provided by over-collateralization. However, this comes with the trade-off of relying on centralized exchanges (CEXs) for hedging due to the limited liquidity of decentralized perpetual exchanges. 

Ethena primarily focuses on the most liquid perpetual markets, BTC and ETH, but its structure allows for flexibility in accommodating any collateral with a liquid derivatives market, thus enabling scalability.

Ethena simplifies the UX by adopting a single stablecoin token model, focusing on a single exposure targeted to more risk-averse users. 

This implementation evolves decentralized stablecoins beyond “passive” instruments, adding programmable yields to incentivize users to hold USDe.

Nevertheless, this approach introduces exogenous risks, deviating from the traditional decentralized stablecoin model. In particular, the stability of USDe’s collateral and redemption mechanisms is accompanied by additional risks associated with exposure to futures markets. 

Given its reliance on USDT perpetuals, USDe faces vulnerabilities in the event of a USDT depeg, as well as exposure to fluctuations in perpetual contract funding rates, which could turn negative.

Last but not least, Ethena uses several custodians, CEXs such as Binance, Bybit, OKX, and DeFi protocols such as Curve and Uniswap, and as such, it is exposed to off-chain settlement risk concerning funds availability and withdrawals and third-party risk concerning custodians

To mitigate these risks, Ethena:

• Dynamically shifts positions on the exchanges to improve stability

• Leverages additional reserve to protect its trades against sudden market movements

• Has created a dedicated insurance fund providing an additional layer of security. 

Resolv’s Dual-Token Model

Resolv introduces a dual-token model designed to segregate risk and cater to users with varying risk profiles. Its core stablecoin, USR, is a true delta-neutral (TDN) stablecoin fully collateralized with ETH. 

To mitigate USR from ETH price volatility, Resolv employs a delta-neutral strategy, utilizing perpetual futures to hedge its collateral.

Approximately 75% of Resolv’s collateral is held on-chain and staked to generate yield, with the remaining portion allocated to institutional custody as a margin for futures positions and liquidity buffer.

USR has a 170% collateralization ratio. It is fully backed by collateral, with any excess allocated to the insurance layer token, the Resolv Liquidity Pool (RLP). The RLP acts as an additional protection layer for stablecoin holders by absorbing market volatility and counterparty risk.

In exchange for bearing risk, RLP holders receive a significant portion of the profits from the collateral pool. Resolv effectively tokenizes its risk exposure through RLP, creating a high-yielding asset.

Profits from the collateral pool are allocated as follows:

• Base Rewards (70%): distributed to holders of staked USR (stUSR) and RLP;

• Risk Premium (30%): distributed exclusively to RLP holders;

• Protocol Fees (currently 0%): accruing to the protocol treasury.

The collateral pool may occasionally incur losses, such as maintenance costs for future positions (e.g., funding rates). If the protocol realizes a loss over a 24-hour period, RLP absorbs it as the tranche bearing the risk. 

RLP’s value represents the ETH backing a single unit of the RLP token and can vary, affecting the collateral required to mint or redeem RLP.  RLP yield is also dynamic and self-balancing to the liquidity provided in the RLP pool.

Resolv users derive yield from:

• Staking of assets: LSTs such as Lido, up to the delegations of Proof-of-Stake tokens

• Funding Rate on Perpetuals: Typically, short positions receive net funding, contributing to yield generation.

Resolv’s dual-token model can be better understood by comparing its two tokens with the following:

• Senior Tranche (USR): Designed for risk-averse users seeking security and low volatility.

• Junior Tranche or Mezzanine (RLP): This product absorbs funding rates and market fluctuations, targeting users with a higher risk appetite.

By segregating risk, Resolv isolates the senior tranche from reliance on third-party exchanges or custodians. It provides low-volatility, low-risk exposure via USR while offering RLP to users seeking higher yields and willing to bear greater market risk.

Through this offer, USR caters to more conservative users seeking exposure to low-risk crypto-sourced yields, such as TradFi funds, DAO or protocol treasuries, and reserve funds. On the other hand, RLP will be the preferred choice of more degen users looking for higher risks and returns, such as DeFi whales and power users, yield farmers, and DeFi funds.

The risks involved in Resolv’s dual token model mimic Ethena’s USDe:

• Counterparty Risk: involving exposure to the margin held on exchanges and unrealized gains to the insolvency of trading venues utilized.

• Market risk: risk of losses due to negative funding rates for the derivative positions open.

• Liquidity risk: in case of significant withdraws from the protocol (e.g., RLP), which could affect systemic stability

Resolv balances the above risks as follows:

Counterparty risk

• Holds collateral with custodians and not exchanges

• Covers unrealized gains with RLP

• Uses multiple trading venues to avoid a single point of failure

Market risk:

• Covers funding rate losses with RLP

• Allocates funds to high-liquid exchanges 

Liquidity risk

• If the USR collateralization rate falls below 110%, RLP redemptions are suspended.

Furthermore, the market exposure to other stablecoins is isolated within RLP, so there is no spillover to USR. Through its architecture, Resolv can segregate risks across two different tokens, enabling crypto-sourced real yield.

Different Approaches to Derivative-based Stablecoins

In summary, Ethena and Resolv offer decentralized alternatives to centralized stablecoins using derivatives-based designs. This innovation brings several advantages, including:

• Independence from centralized collateral

• Improved capital efficiency

• Price stability through arbitrage opportunities and 1:1 redemption

• Programmable yield generation from staking and funding fees

• Scalability by leveraging the liquidity of perpetual markets

• Trustless and permissionless frameworks

Ethena and Resolv generate real yields on derivative-based stablecoins, transforming them from a passive asset to a yield-bearing instrument.

While they share a similar approach to hedging their collateral using short derivative positions, the two protocols differ in their approaches to:

1. Collateral Management:

• Ethena’s USDe collateral is held in custodians and exchanges (except for the reserve funds and the funds used for minting and redeeming), which makes it harder to audit in real time, although they provide monthly updates.

• Resolv employs a hybrid collateral pool: over 75% of its collateral is on-chains, 70% in ETH liquid staking (in Lido, Dinero WBETH), and 5% as liquidity buffer (on AAVE, Morpho). The remaining 25% is allocated to institutional custodians for the leveraged perps positions on CEXs and DEXs (Binance, Hyperliquid, OKX, Deribit, Bybit, etc.).

2. Risk segmentation

• Ethena focuses on a single and unified risk exposure for USDe, using a single token model to abstract the risks of using an algorithmic stablecoin design. 

• Resolv leverages tranching to segregate risk between two tokens, isolating market volatility and counterparty risk for high-risk users through RLP while offering stability to low-risk users of its native stablecoin, USR.

3. User Target

• Ethena’s USDe is designed for risk-averse users. It offers a simplified model for yield-bearing stablecoins while minimizing their risk exposure. 

• Resolv caters to a broader user base, with USR appealing to even more conservative users. Most of its risks are absorbed by RLP, which targets higher-risk DeFi users.

4. Market Risk and Volatility

• Ethena is exposed to market fluctuations in perpetual funding rates and to the risk of USDT-depegging, which could destabilize USDe.

• Resolv faces similar market risks, especially concerning negative funding rates in its derivative positions, but its RLP token absorbs the impact of any losses, offering a buffer for USR holders. Furthermore, they have reduced exposure to USDT-based futures, as their primary exposure is Hyperliquid, which only accounts for 30% of total future positions. All other positions are settled in ETH and against USD (inverse perps).

5. Insurance and Protection Mechanisms

• Ethena offers a dedicated insurance fund as an additional protection layer to safeguard users against extreme market fluctuations. This complements its dynamic position adjustments and reserve management to mitigate risks.

• Resolv uses the RLP token as a built-in insurance layer, with RLP absorbing market losses and fluctuations, protecting USR holders from downside risks. The design of RLP distributes a Risk Premium share of the protocol profits, in exchange for taking on higher risks.

6. Strategic Focus

• Ethena’s single-token model targets a one-size-fits-all audience—specifically, risk-averse users looking for easy-to-understand stablecoins with yield generation. It is currently focusing on adding more RWA assets as backing, following a similar model to Maker DAO. 

• Resolv appeals to a more targeted audience, focusing on stacking crypto-native yields and segregating risk away, enabling controlled exposure for more conservative capital allocators. Focused on expanding the range of instruments for different market conditions.

The Future of Decentralized Stablecoins

The future of decentralized stablecoins lies in models that achieve scalability without compromising decentralization or transparency. Derivative-based stablecoins represent a significant step toward creating fully decentralized, crypto-native financial primitives.

While current solutions are competitive, the future landscape of stablecoins will likely consist of multiple models coexisting in different niches, each targeting distinct user groups while complementing one another. As more liquidity and Total Value Locked (TVL) move on-chain, decentralized stablecoins can scale, reducing their reliance on centralized collateral and further distancing themselves from traditional fiat currencies.

New forms of collateral are expected to play an essential role in the evolution of stablecoins, moving beyond the current heavy reliance on BTC and ETH. Yield-bearing primitives such as LSTs and Liquid Restaking Tokens (LRTs) are also anticipated to become more integrated, enabling users to leverage yield-generating assets directly within their wallets.

This model has been championed, among others, by Blast, an L2 that has integrated native yield for USD (USDB) and ETH directly in users' wallets.

Furthermore, the risk segmentation proposed by USR and RLP opens up the possibility of creating different liquidity pools, where investors can customize their exposure to individual entities and trading venues.

In the near future, we envision protocols to: 

• Continue isolating the on-chain part of delta-neutral stablecoins from their centralized module, allowing smart contracts to work independently. 

• Outsource the collateral hedging to providers via intents

• Isolate counterparty risk exposure within the relevant liquidity pools

As regulatory uncertainty continues to cloud the future of centralized stablecoins. Decentralized alternatives offer a more flexible and adaptive solution, particularly appealing to crypto-native users.

As user behaviors evolve rapidly, future stablecoin designs must reflect this complexity by offering tailored exposure without compromising the overall product offering. Customization will also be vital to capturing a diverse user base in an increasingly multifaceted market.

To each his own exposure.

Conclusion

Stablecoins' primary purpose was initially to provide users with a means of protecting their wealth from cryptocurrency volatility. Over time, their role has expanded to offer decentralized alternatives to first-generation stablecoins.

With the advent of yield-bearing collateral through instruments such as staked ETH, the case for yield-bearing stablecoins has grown stronger. This report has explored two innovative approaches—Ethena and Resolv—each offering solutions tailored to different risk profiles.

However, these innovations come with risks. Although to different extents, Ethena and Resolv rely on custodians and centralized trading venues and are exposed to counterparty risk.

The potential for another event similar to the FTX collapse underscores the importance of exploring decentralized alternatives for derivative-based stablecoin issuers to hedge their collateral.

By embracing new technologies, such as intents and advanced on-chain order books, these platforms may gradually reduce their reliance on CEXs, further enhancing decentralization.

While it remains to be seen how these systems will perform during bear markets or unforeseen crises, the decentralized stablecoin sector appears poised for a comeback. As new models emerge, Ethena and Resolv are well-positioned to lead toward more flexible, decentralized, and scalable stablecoin models.

The stablecoin renaissance has just started. 

What to expect next?

Only time will tell whether these primitives will reach mainstream adoption and solidify as a cornerstone of DeFi or whether new volatility will affect their adoption again.

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