How does mStable achieve an annualized return rate of over 20%? Let's explore the latest DeFi platform mStable with you.

During this DeFi wave, many innovative DeFi protocols have emerged, and mStable is one of them. Besides generating a new stablecoin called mUSD, the platform also offers over 20% passive income through savings. What exactly is this project? Let's explore.

What is mStable, a Stablecoin Aggregator Platform?

mStable is essentially an asset aggregation platform that allows users to deposit underlying assets (bASSETS, basket assets) and withdraw mStable assets (mASSETS) issued by the platform. Currently, mStable only supports stablecoin assets. In simple terms, it consolidates various stablecoins in the market into one stablecoin called mUSD.

【Note: bASSETS, basket asset refers to a basket of stablecoin combinations. Currently, mStable uses USDT, USDC, DAI, and TUSD as the stablecoin combination】

With so many stablecoins already existing, why introduce a new one? Most people may have this question in mind. However, mStable's goal is not just to issue a new stablecoin. In one sentence, what mStable aims to address is the "fragmentation of the stablecoin market."

Currently, USDT is the largest stablecoin in terms of total market capitalization and circulation, but due to concerns surrounding the company behind USDT, Tether (uncertainty about whether Tether has sufficient USD backing), alternatives like the supposedly more transparent and compliant USDC (issued by CENTRE), TUSD (issued by TokenTrust), and decentralized stablecoin DAI have emerged. The existence of so many different stablecoins in the market ultimately leads to issues of fragmented trading liquidity and market inefficiency.

What are the Benefits of mUSD?

mStable allows users to collateralize USDT, USDC, DAI, and TUSD to mint mUSD. This approach offers several advantages:

Centralized Liquidity

As mentioned earlier, an excess of stablecoins in the market leads to fragmented trading markets (especially on decentralized exchanges with poor original depth). When mUSD has a certain level of liquidity in the market, trading pairs based on mUSD can replace stablecoin pairs like USDT, USDC, DAI, and TUSD, concentrating the liquidity of these pairs in the same trading market. Even if users hold USDT, USDC, or DAI, they can simply exchange them 1:1 for mUSD to facilitate trading.

Higher Risk Tolerance

Since mUSD is a composition of other stablecoins, holding mUSD results in lower price volatility compared to other stablecoins. Additionally, even if the stablecoin composition experiences a decline or goes to zero due to a market-wide crash (like the Black Swan event in March this year), a governance organization composed of Meta (MTA) token holders can sell all pledged MTA by voting, repurchase mUSD from the market, and rebalance the pool.

What Functions does the mStable Platform Offer?

The mStable platform primarily consists of four functions and an upcoming feature expected to be launched in Q4 2020. The platform functions include:

Minting (MINT): Allows users to deposit USDT, USDC, DAI, TUSD with mStable for custody and mint new mUSD.

Saving (SAVE): Enables users to save mUSD in the SAVE contract to earn passive income. The earnings come from third-party lending platforms and transaction fee earnings when users convert (SWAP). At the time of writing, the seven-day annualized return rate was approximately 23.32% (floating rate).

Swapping (SWAP): This function allows users to convert USDT, USDC, DAI, TUSD tokens at a zero slippage, 1:1 ratio. However, the platform charges a 0.1% transaction fee for each trade, providing arbitrage opportunities for market makers or large investors.

Redeeming (REDEEM): Allows users to return mUSDC to mStable, where mStable will burn it and redeem the specified stablecoin or redeem the four stablecoins based on the system's stablecoin composition (further explained below).

Yielding (EARN): mStable issues its governance token MTA, which can be obtained through liquidity mining. In the future, the mStable team plans to decentralize governance, allowing token holders to stake collateral for governance participation and allowing stakers to receive cash flow returns from governance. (This function is not yet launched, and the official plan is to go live in Q4 2020).

Asset Ratio Limits

Currently, the three functions of minting, swapping, and redeeming are subject to stablecoin ratio limits in the treasury, as shown in the figure below:

In simple terms, the proportion of USDT, USDC, DAI, and TUSD in the treasury cannot exceed 55% of the total treasury funds. This mechanism is designed to ensure sufficient risk tolerance in the system.

If the USDT proportion reaches 55%, users cannot mint, swap, or redeem any single stablecoin using USDT because these actions would cause the USDT proportion to exceed the limit. Therefore, minting and swapping users can only choose other stablecoins, and in the case of redemption, users will be forced to use "multi-redemption."

"Multi-redemption" means that users must redeem stablecoins according to the current coin proportion in the treasury. For example, in multi-redemption, if the current ratio of USDT, USDC, DAI, TUSD in the platform's treasury pool is 5:3:1:1, and a user wants to redeem 100 mUSD for stablecoins, but one stablecoin (like USDT) reaches the upper limit, the user can only redeem "50 USDT, 30 USDC, 10 DAI, 10 TUSD," and cannot choose to redeem a single stablecoin.

Key Breakthrough: Leading Market Deposit Rates, How?

As mentioned earlier, mStable's seven-day average return rate is 23.32%, with earnings primarily derived from third-party lending platforms like Compound, Aave, and transaction fee earnings from swapping. However, the interest earnings from these DeFi lending platforms are typically no more than 10%, and transaction fee earnings are only 0.1%. How can mStable provide a 23.32% return rate? The chart below shows the mStable SAVE 7-day average annualized return rate trend.

Let's explain with a simple example. Tom's Bear Playground opens 100 users to exchange tokens at a 1:1 ratio with Taiwanese Dollars. Assuming all one hundred people spend one Taiwanese Dollar to exchange for a token, Tom's Bear Playground will take the 100 Taiwanese Dollars to the bank for storage (assuming a 3% interest rate).

The key point is that users have two choices for tokens: "to play with playground equipment" or "to save (SAVE) with Tom's Bear Playground to earn interest." Not everyone will choose to save tokens with Tom's Bear Playground to earn interest. If 70 people choose to play with tokens, and 30 people choose to earn interest, it means that 70 people give up the right to earn interest, and the remaining 30 people share the income from 100 people, increasing the return rate from 3% to 10% annually.

In conclusion, mStable's high interest rates are logical. The more people mint (MINT) mUSD and the fewer people participate in SAVE, the higher the interest rate will be.

DeFi Craze and ICO Bubble

While many believe that the DeFi craze is a bubble similar to the ICO bubble of 2017-2018 and that this bubble could burst at any time, the difference with the DeFi space is that most projects can bring significant changes to the blockchain ecosystem and financial technology field. mStable is one of the most noteworthy projects in the current market. Furthermore, the USD stablecoin is just the first step for mStable. In the future, the platform will support more underlying assets (bASSETS) and generate more types of mStable assets (mASSETS), with platform adoption set to increase further with the growth of DeFi.