How Capital Efficient is USDH?

Note: This article is not financial advice. Hubble Protocol does not endorse any tokens or platforms mentioned in this article.

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

The previous article 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, but by no means guaranteed, growth when zooming out on the charts.

Shifting the focus to USDH, Hubble's stablecoin allows users to access three different things: a peg-stable stablecoin, leverage, and yield. This article will expand on how these factors contribute to making USDH a capital-efficient stablecoin 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).

With the Hubble PSM, users can swap USDH 1:1 with other stablecoins, starting with USDC. USDH has a battle-tested mechanism for maintaining its peg, and users can participate in risk-free arbitrage from moving in and out of USDH with optimized capital efficiency.

If USDH trades above peg, users can mint one USDH at a premium with one USDC and then swap that newly minted USDH for another token. Conversely, when USDH trades below peg, users can redeem their below $1 USDH for stablecoins held in the PSM.

Adding Leverage to the Question of Capital Efficiency  

Note: This is not financial advice. Hubble does not endorse any tokens mentioned in these examples.

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 trading $100 in SOL, Bob can deposit this collateral on Hubble and mint 50 USDH to swap for $50 of 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 SOL. Additionally, if Bob borrows against mSOL instead of SOL, his deposited collateral earns yield from staking.

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 acquired tokens on Hubble to increase his borrowing power.

Finally, there are yield opportunities in DeFi that require stablecoins to participate. However, if Bob pursues a stablecoin yield strategy with a stablecoin other than USDH, he most likely needs to exit his exposure to SOL by trading instead of borrowing.  

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

Trustless and Trusted Censorship Resistance in USDH

As an end note, the decentralized nature of minting 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, not a central issuer, and this can be verified on-chain.

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

Hubble Protocol has been audited several times, and it will continue to undergo audits to ensure that USDH remains as secure and decentralized as possible.

Keep in Touch

Website | Twitter | Telegram | Discord | Email | Reddit

You've successfully subscribed to Hubble Blog
Great! Next, complete checkout to get full access to all premium content.
Error! Could not sign up. invalid link.
Welcome back! You've successfully signed in.
Error! Could not sign in. Please try again.
Success! Your account is fully activated, you now have access to all content.
Error! Stripe checkout failed.
Success! Your billing info is updated.
Error! Billing info update failed.