Battle between decentralised stablecoins just got real! Earlier, Founder of DAI called UST (Terra) a 'solid ponzi". In return, UST has come up with a plan to crush DAI and has teamed up with Frax

Stablecoin wars are progressing to the next stage. Stablecoins are a huge part of the defi infrastructure, and whoever controls stablecoin market stands to gain the most adoption in the space. This is why commercial banks and even central banks are interested in the crypto space so much - there is a ton of money to be made.

UST has been making headlines in recent months, both positive and negative. It's market cap has grown to several billions in a short time, and recently has been buying up billions worth BTC to backstop their stablecoin. However it has not gone without criticism and concern, many have pointed out how it is less of an algorithmic stablecoin now and more of an asset backed stablecoin. In reply, Terranauts have maintained that the ends justify the means - the stated goal of Terra is to be the most widely adopted stablecoin. Whether it is purely algorithimic or asset backed is dependent on how the market evolves. If the market feels it is risky for $20 bn worth stablecoins to be just backed by algorithm, then Terra team will ensure the demands of the market are met. With UST, many users were uncomfortable that it is unbacked by assets, and hence they came up with a proposal to buy bitcoins. A comparison can be made with a space flight programme - the goal is to reach space. Whether it uses an internal combustion engine or pivots a few years later to electric ion thrusters doesnt change the goal. Similarly, the only goal of Terra is to be the largest stablecoin in terms of adoption.

Earlier this year, the founder of Maker DAO (DAI stablecoin) called UST a "solid ponzi"

Rune: \"UST and MIM are solid ponzis\"

In return, UST teamed up with another stablecoin Frax to announce a Curve 4-pool as a competitor to replace 3-pool.

Curve 4-pool launched with UST and Frax

What is a curve pool?

Curve is the DEX with the highest TVL for stablecoins, and curve pools provide deep liquidity for stablecoin swaps. For example if you are swapping 1m USDC to DAI, you will find a better rate on Curve compared to other swaps like Uniswap. Curve wars have been going on for a while now, with several protocols looking to capture Curve emissions. Together with Convex (CVX), DAOs are able to gain userbase by directing incentives to pool participants. If Curve is the king of Defi, Convex can be regarded as the King maker. CRV+CVX combo can direct large portions of defi markets and are primitive protocols behind the defi infrastructure.

The Curve 3-pool has been the standard stablecoin liquidity pool across defi till now. Many protocols utilise the 3-pool for their liquidity requirements. Now, UST and Frax are looking to disrupt this. Terra with Frax along with additional partners like Redacted Cartel control a huge portion of the CVX supply. With this, they are able to direct emissions towards the 4-pool, thus they will able to sustain a higer APY for 4-pool over 3-pool and move liquidity from 3-pool towards the new 4-pool. For instance, if the 3-pool has 1.5% APY and 4-pool is able to sustain 5% APY due to their control over CVX, a lot of liquidity from 3pool will migrate to 4pool. Currently, 3pool has around $3.5 BN worth liquidity that is going to be incentivized to move to 4-pool.

What does it mean for DAI?

To put it shortly, a war has been declared on DAI. 4-pool excludes DAI, so if a lot of liquidity from 3-pool moves towards 4-pool, the liquidity of DAI will drop drastically.

DAI liquidity could drop dramatically.

Currently, there is no incentive to provide any liquidity to the 3-pool. With incentives on 4pool, we could see a lot of the TVL migrate.

Do Kwon: The goal is to starve 3pool.

While Maker DAI has been publicly attacking UST and Terra, Terra have been working behind the scenes to make their move and have partnered with influential protocols like Frax and Redacted Cartel. And it is a bold one.

Dethroning 3-pool isnt as easy as most of defi liquidity is based on 3pool currently. However USD+Frax DAOs control a big chunk of CRV and CVX so they will definitely give it their best shot.

DAI liquidity on most DEX is just a few millions.

Everyone is now interested to see what will DAI's next move will be!