How Capital Efficient is USDH?

How Capital Efficient is USDH?
How Capital Efficient is USDH?

Stablecoins can be developed in many different ways. In our previous article on stablecoin capital efficiency, we took a look at how stablecoin developers face a trilemma between focusing on decentralization, capital efficiency, and price stability.

We also asserted that arguments against the capital efficiency of a crypto-backed stablecoin, like USDH, fall short for several reasons. Both fiat-backed and algorithmic stablecoins receive low marks for long-term planning due to their inherent risks and lack of exposure to a market that has shown consistent growth when you zoom out on the charts.

Shifting the focus to USDH, our stablecoin allows users to access three different things: a peg-stable stablecoin and leverage. In this article, we’d like to expand on how these factors contribute to making USDH an effective deployment of capital for DeFi users.

USDH Maintains Peg Stability with Capital-Efficient PSM

Users turn to stablecoins for a specific reason, and that’s their price stability. Although decentralized (not fiat-backed) stablecoins have had a difficult time maintaining their peg in the past, there’s a novel solution to this problem that is inarguably capital efficient, the Peg Stability Module (PSM).

When Hubble launches our PSM, users will be able to swap USDH 1:1 with other decentralized stablecoins, starting with UST*. This is a huge win, as USDH will have a battle-tested mechanism for maintaining its peg, and users can realize profits from something as simple as moving in and out of USDH with total capital efficiency.

If USDH trades above peg, which it is more prone to do, users can mint one expensive USDH with one UST and then swap that newly minted USDH for another token and profit. Conversely, when USDH trades below peg, users can redeem their below $1 USDH for stablecoins held in the PSM.

*UST is no longer an option for the PSM (Updated: May 18, 2022).

Adding Leverage to the Question of Capital Efficiency  

In addition to price stability, USDH provides a way to increase one’s exposure to the crypto market. USDH is more than a stablecoin as a store of value, it’s also a way for users to leverage their collateral.

For example, instead of holding or selling $100 in SOL, Bob can deposit this collateral on Hubble and mint 50 USDH to buy $50 more SOL. Now, thanks to USDH, Bob’s position in SOL is no longer $100 but $150.

If Bob continues to borrow, swap, and deposit SOL (in a process called “looping”), he can acquire even more exposure to the price action of SOL. Additionally, if Bob leverages mSOL instead of SOL, his deposited collateral earns ~6% yield from staking returns.

Compared to holding, Bob will maintain similar exposure to market risks and opportunities, but in the end, he maintains this exposure with the chance for higher gains and less capital needed to reach those heightened returns.

USDH Can Be Used for Leverage Beyond Looping

With USDH, Bob could also diversify his exposure to the market by swapping the USDH he borrowed against SOL for other tokens like BTC or ETH. After that, he could also deposit his newly gotten tokens on Hubble to increase his borrowing power.

Finally, there are a lot of low-risk yield opportunities in DeFi that require stablecoins to participate. If Bob pursues a stablecoin yield strategy with a token other than USDH, he most likely needs to exit his exposure to SOL.

Then, to exit his stablecoin strategy back into SOL, he might find SOL has risen in price since last holding it. If Bob acquires his stablecoins for a DeFi yield strategy by using Hubble, then he can exit that position by retrieving his SOL, which could have appreciated in value since he first borrowed USDH.  

USDH can be an important tool for anyone who wants to participate (and maybe leverage) in the crypto market. Otherwise, the next option is to leave the market entirely by opting for nearly every other stablecoin.

Trustless and Trusted Censorship Resistance in USDH

As an end note, the censorship resistance of USDH makes it a token that can be held or used in a trustless fashion. USDH is collateralized 100% by decentralized crypto assets with a minting process controlled by a smart contract, and this can be verified on-chain.

This means no central authority should be able to freeze USDH or its collateral, and no one can make up the facts or figures supporting USDH. It’s a trustless system that can be held accountable, and it relies on computer code to operate, not human intermediaries.

And users can lend the highest levels of trust to USDH and the code supporting its existence. Hubble Protocol has been audited several times, and it will continue to undergo audits to ensure that USDH remains as secure as possible.

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