Stablecoins are facing a tough time in 2022. In May Terra failed and about $60 billion got lost within weeks. The aftermath of the crash is keeping the market and regulators still busy. Even established stablecoins as USDT and USDC came under scrutiny by investors, despite the fact that none of the rumors about their balance sheets have been proven so far.

Curve DAO is developing its own stablecoin and it seems that its approach is very different from Terra and UST.

Only a few details are available

Michael Egorov, CEO, and founder of Curve, confirmed that the AMM is working indeed on its own stablecoin solution. So far, only a very few details are known but Egorov said that the stablecoin solution will be overcollateralized.

The public is still waiting for a release date or any other specifications. Overcollateralization means that the stablecoin is pegged to the US-Dollar or another fiat currency by a basket of digital assets. The idea is very simple. In order to mint stablecoins, investors have to provide more collateral than needed. They have to transfer way more cryptos into the protocol than they are going to receive in stablecoins in return.

This provides more security than a system like Terra. UST was only backed by LUNA which carried the risk of a death spiral should UST ever lose its peg. In an overcollateralized stablecoin system, there are simply so many assets locked that the value of the stablecoins in circulation can be guaranteed even if the price should dump dramatically. Needless to say, such a protocol also depends on its liquidation engine. Should the borrower not return the stablecoins plus interest, his crypto assets are getting liquidated. The same happens if the price drops sharply.

Maker is using a similar model

This model is not new but in fact, proven. MakerDAO is issuing the decentralized stablecoin DAI, using a protocol that demands that users borrow against their assets in order to receive stablecoins. It seems that this is the only decentralized model that is sustainable.

Other approaches have failed so far even though the market is asking for products that have higher availability and offer scalability which is not easy to achieve with overcollateralized stablecoins. While critics remain skeptical of all attempts to improve stablecoin products it remains to be seen which model will offer the better incentive and options.

Overcollateralized stablecoins can also be yield-bearing and Curve is not the only player that is looking into this topic. Only three weeks ago Aave also opened up a discussion on GHO which is also designed to be an overcollateralized stablecoin.