Introduction
The Cosmos Inter-Blockchain Communication Protocol (IBC) worked flawlessly during the Terra collapse, preserving the rest of the sovereign Cosmos app-chain universe even when Terra halted operations. Nonetheless, the fall of UST left a harsh impact on Cosmos TVL after losing a fundamental component of its thriving ecosystem. UST was accepted as the primary native stablecoin in the Cosmos ecosystem, so naturally many suffered big after its dramatic implosion.
Now Cosmonauts yearn for the next censorship-resistant IBC stablecoin, and with native stablecoin liquidity becoming a fiery new narrative, Cosmos looks to capitalize on it with haste. Luckily there are a few different participants heating up the race to achieve this vision.
Osmosis and the UST Collapse
Osmosis is the Cosmos interchain DEX/AMM, similar to how UST was the Cosmos stablecoin. When Terra was flourishing, its move to enable IBC was a turning point for the broader IBC ecosystem. TerraUSD was the first native stablecoin pegged to the dollar to ever hit Cosmos, so it was no surprise it quickly grew into a foundational liquidity block for the whole network.
Shown above, Osmosis TVL grew almost 5X at its peak the day after Terra enabled IBC. Following the downfall on May 10th, Osmosis lost more than 50% of its remaining TVL. It’s worth mentioning though, Osmosis still has more TVL post-collapse than it did before UST’s launch. Still, a nightmare situation ensued drowning LPs in impermanent loss and kicking $OSMO stakers while they were already down… barely breathing. Now it is obvious that what was once celebrated as the “next best thing” for Cosmos was instead the exact opposite of that, sending a rippling effect within the interchain ecosystem and every other corner of the crypto-sphere.
This left the glaring question “What next?”, but the answer was obvious. Cosmos needed to explore new avenues for strong, native, and ideally decentralized alternatives to UST. This time the community is carefully evaluating the risks of each.
What Next? Immediate Alternatives
Alternative stablecoins began trading on Osmosis even during UST’s dominance, though many were not IBC-native. If they were, they weren’t pegged to the dollar. Bridges like Nomad and Axelar brought popular stablecoins to Cosmos, but brought the usual all-too-familiar bridge risks as well. Evmos slowly began attracting stablecoin liquidity too, but the bridge-risk prophecy was unfortunately fulfilled. The nearly $200 million Nomad Bridge exploit that occurred on August 1 affected several chains, wiping out Evmos TVL in the process.
Cosmos was stuck between a rock and a hard place, forced to default to bridged liquidity and centralized stablecoins which ended up quickly reminding everyone why IBC was built to replace this. Under the hood, teams couldn’t be harder at work to achieve the shared vision of IBC-native stablecoin liquidity for Cosmonauts.
Established Solutions: Bridged Stablecoins
One established option for Cosmonauts are bridged stablecoins. Cosmos has a variety of bridges into the IBC universe, allowing users to provide liquidity on Osmosis with bridged stablecoins, most of which are centralized. Centralized, censorable stablecoins are the least ideal form of money in a decentralized economy, and bridged stablecoins bring along all the dreadful bridge risks of other L1s.
The Nomad Bridge exploit precisely reminded the risk of relying on bridge liquidity. For that reason many Cosmonauts are skeptical or just outright un-accepting of non-IBC stablecoin solutions, and rightfully so.
Established Solutions: eMoney’s IB-Stablecoins
eMoney is a Cosmos app-chain bringing a blockchain-based payment network alongside its $eEUR stablecoin (with more to come!). eMoney stablecoins are backed by an audited reserve of interest-bearing assets (bonds/bank deposits), with the network itself secured by the $NGM token. The eMoney team created software to arbitrage the free-floating “interest-bearing” peg with reserves, rather than relying on the open market to do so. $eEUR’s peg floats upwards when interest rates of the underlying collateral are increasing and vice versa with decreasing rates. It launched on Osmosis in late September of 2021.
While eMoney presents a novel payment network and the only IBC-native stablecoin solution, it offers no dollar-pegged stablecoins. Not just that, but slightly fluctuating pegs may not be the most ideal option for stablecoin holders who prefer a more static peg. eMoney is great for investors who want exposure to the underlying interest rates of the pegged asset’s collateral, but maybe not as ideal for investors who want a more consistent peg on their stablecoin.
Emerging Solutions: Kujira’s $USK
Kujira is a former Terra protocol that migrated to its own Cosmos app-chain following the collapse. Kujira’s network powers a diverse set of “ever-growing” DeFi products for the IBC ecosystem, which currently consists of BELUGA, FIN, ORCA, and BLUE. The network is secured by the $KUJI gas token.
Kujira has the community’s attention with its highly anticipated $USK stablecoin. $USK will be over-collateralized and $ATOM backed initially, but eventually aims to include $KUJI collateral once stability is well-established. $USK will strive for a dollar peg and leverage MakerDAO’s reliable CDP-based lending model according to the team. $USK could offer exactly what Cosmonauts strive for, a decentralized native stablecoin.
However, questions rise about the sustainability of using $ATOM collateral. In the early stages, Kujira will strictly maintain a 60% loan-to-value ratio (LTV) for borrowers. If the value of a loan’s collateral falls too low (LTV >60%), the user will have their collateral auctioned on the ORCA liquidation market. This measure will hopefully be enough to set the sails for Kujira’s $USK, presenting another secure stablecoin alternative.
Emerging Solutions: Agoric and $IST
Agoric is an impressive PoS blockchain looking to enter the Cosmos-sphere, offering an easy-to-use smart contract platform for Javascript developers. Agoric is actively working on becoming IBC-enabled so it can bring its own over-collateralized, $DAI-modeled stablecoin to Cosmos. Agoric’s Inter Protocol will allow users to use collateral vaults, a PSM, or stake $BLD in order to mint the Inter Stable Token ($IST).
Inter Protocol collateral vaults will only accept $ATOM at launch. However, governance ($BLD holders and the Econ Committee) can opt to support an expansive list of collateral types popular in the IBC ecosystem. Governance will evaluate new collateral based on how liquid it is within the protocol’s native AMM, non-IBC collateral risks, overall quality of IBC collateral’s native chain (uptime/latency), regulatory risks, and more. Similarly, users can deposit supported stablecoins into the PSM and swap 1:1 for $IST tokens.
At launch, Inter Protocol’s very own AMM “Swap” will facilitate liquidations of under-collateralized positions. Inter Protocol will manage Swap liquidity pools for supported collateral types using funds from the Reserve Pool, liquidating collateral when necessary using the Swap AMM. There are also plans to support other liquidation methods after launch, according to the team. Agoric brings yet another optimistic solution to the table with its decentralized stablecoin model.
Emerging Solutions: Take $NOTE of Canto
Canto is a brand new EVM-compatible L1 DeFi hub built using the Cosmos-SDK. Canto introduces a top-tier set of DeFi protocols striving to “deliver the promise of DeFi” with its advanced “free public infrastructure”. Canto DEX operates on zero fees for traders or liquidity providers, similar to any other core primitive built on Canto. It follows a dual-token structure using $CANTO the gas token and $NOTE as a unit of account.
Canto’s native stable asset will be $NOTE, a fully-automated and decentralized unit of account. $NOTE is not a stablecoin, but rather a unit of account centered around the dollar whose stability is solely maintained by varying lending rates. This is done via an algorithmic interest rate policy on the native lending platform. $NOTE is always over-collateralized, and maintains capital efficiency by lending out $NOTE collateral depending on current interest rates. This approach has never been taken before, and Canto as a whole brings a new wave of innovative DeFi services built for the public.
Emerging Solutions: The Secret Stablecoin $SILK
Secret Network is a privacy-by-default PoS blockchain that’s well-known in the IBC ecosystem. Secret has already spun up a unique ecosystem consisting of projects like Shade Protocol that can utilize its privacy features to introduce stunning innovations into DeFi.
Shade is working to bring a native privacy-preserving stablecoin, the first in history, to the Cosmos ecosystem. Leveraging Secret Network’s SNIP-20 token standard, $SILK automatically protects user privacy all while striving to embody the major components of decentralized money.
Interestingly, $SILK will follow a hybrid minting framework using bonds, over-collateralized lending vaults, and a protocol-exclusive seignorage mechanism. On the other hand, $SILK allows different redemption methods as well. For the details on each component of $SILK’s stability mechanism, read the Shade docs.
Emerging Solutions: $HONEY is Money
Berachain is a developing EVM-compatible L1 leveraging its unique concept of “Proof-of-Liquidity” consensus allowing users to stake “blue-chip” layer 1, DeFi, and stablecoin assets to receive $BERA staking rewards. While it is not launched yet, a testnet is expected soon and mainnet will be IBC-enabled day 1. Berachain’s economy is maintained by a tri-token structure, include the $BERA gas token, the $HONEY stablecoin, and the $BGT governance token. It started with the Bong Bears NFT Collection.
$HONEY will be the native dollar-pegged stablecoin of the ecosystem with some documentation so far. We know $HONEY will at least be available via CDP-powered lending vaults (similar to MakerDAO) accepting Berachain-staked assets as collateral! $HONEY will also be the base asset for all trading pairs on the native AMM, allowing users to trade supported assets for the $HONEY stablecoin and simultaneously generating deep, viscous liquidity for Beras. Cosmonauts may soon come to realize that $HONEY is money.
Emerging Solutions: $CMST on Comdex
Comdex Network is an important part of the IBC family too, providing a synthetic assets exchange for trading stocks, commodities, and other real-world assets. Its ambitions to develop its own stablecoin have been prominent since the start, similarly looking to model $DAI’s over-collateralized lending vaults.
The $CMST stablecoin named “Composite” will be dollar-pegged and minted against multiple Cosmos ecosystem assets as collateral. It will also have its own governance token aside from the $CMDX gas token.
Instead, the stablecoin will be governed by $HARBOR holders, which will also be the token used to “backstop” $CMST’s peg via a mint-and-burn mechanism. $CMST will ultimately maintain peg with this mint-and-burn mechanism, on top of changing borrow rates. Comdex lays out another attractive option that the IBC family can look to for decentralized money.
Emerging Solutions: Osmosis-Native USDC?
$USDC is a product from Circle, a deeply integrated and widely used building block for the entire DeFi ecosphere. While $USDC is not censorship-resistant, it is backed 1:1 by cash or other hard assets like U.S. treasury bonds. This is what makes centralized stablecoins so useful in the first place, as their backing is extremely reliable and their track-record of stability is irrefutable.
Bridged $USDC on Cosmos lost the same attractiveness it has on something like Ethereum, as its backing was only as reliable as the bridge it came from. Osmosis’ Sunny Aggarwal announced back in July that native $USDC would be launching on Osmosis very soon. A native, non-bridged version of $USDC launched by Circle would be a major turning point for Cosmos in general, finally integrating one of the most-trusted stablecoins on the market into IBC ecosystem.
Emerging Solutions: The Mysterious Cosmos Cash
A final development worth noting is the elusive “Cosmos Cash”. Mentioned by Ignite just recently following its split, Cosmos Cash is an exciting development for the stable asset landscape even beyond IBC. Cosmos Cash is not a stablecoin, but a developer framework / money application for the creation of stable “e-money”. Essentially, it is a way for certain entities to collateralize digital assets on the blockchain in a regulatory-compliant way. These e-money tokens would act as claim-based assets with a fixed value redemption, all powered by Tendermint and the Cosmos-SDK. First discussed back in 2020, the timelines would align as the Cosmos Cash framework was expected to be ready by this year.
With small talk here and there from prominent members and developers, the release of Cosmos Cash this year seems imminent. Cosmos Cash could bring a new frontier building the bridge for regulated entities looking to take advantage of the blockchain, all without compromising the main principles of decentralization.
Conclusion
The Cosmos stablecoin race is on. Individual protocols and the core team alike are igniting the competition, working on innovative frameworks for creating and onboarding stable digital assets. The IBC collective suffered some bruises from Terra’s explosion, but recently has never been stronger on any front imaginable. This race doesn’t assume a single winner either, since multiple victors could be best for $ATOM value accrual and Cosmos TVL. The IBC synergy between different protocols to create a buzzing ecosystem of choices has always been the ethos of Cosmos, and it certainly shows no change of course here.
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