17th December 2020

mStable: Make Money Make Money

Join Piers Ridyard in a chat with the co-founder of mStable, James Simpson. mStable is a smart contract system built on Ethereum. It is a permissionless protocol that combines stablecoins, lending and swapping into one standard. It is also a liquidity pool with a US dollar stablecoin, exchange and savings account.

mStable: Make Money Make Money

The reasons that led to the creation of mStable

James Simpson co-founded mStable with Henrik Andersson, CIO of Apollo Capital. Both felt that users were facing several core problems when dealing with stablecoins.

  1. The first problem was severe fragmentation caused by the presence of several stablecoins pegged to the same assets, such as the US dollar.
  2. The second issue was that the fragmentation caused liquidity problems and a lack of efficiency when trading those stablecoins.
  3. The third problem was the lack of a unifying force that would enable a user to send, for example, a US dollar stablecoin, which another user, in a different jurisdiction, could redeem for any of the underlying assets, despite those assets having a different set of stability mechanisms and risk profiles.
  4. Another concern was capital efficiency, which mStable tackled by lending out all deposits with an interest rate and earning fees by enabling a swapping mechanism that results in a native yield generation.
  5. The last matter that mStable addressed was the issue of risk exposure when holding lots of stablecoins. mStable diversifies and caps that risk and insures against it.

What people require from a stablecoin

  • They want it to be liquid itself, as well as with other stablecoins and other assets in general
  • They want it to provide them with access to a yield, preferably a high APY
  • They want it to have low-risk exposure and a mechanism to have insurance against it

The mAssets

mStable provides a stablecoin liquidity pool, a noncustodial smart contract that allows deposits of whitelisted stablecoins. The assets mStable offers are the following: 

  • SWAP addresses the issue of liquidity among different stablecoins and assets. The mUSD token is redeemable at any time for any of the underlying assets 1:1, regardless of their price. This way, there is zero slippage. mStable implements a straight-line bonding curve and generates a large swap volume from users that are arbitraging the price differences between the stablecoins. 
  • SAVE addresses the issue of yield by offering a high APY. The primary part of mStable’s total addressable market is users interested in having a high USD interest rate in a world of zero to negative interest rates. Holding mUSD allows users to access the mUSD high savings rate. This yield is a combination of interest gained by automatically lending the underlying assets to Aave and Compound. The protocol adds the income from small fees that people who swap stablecoins (who put one type of stablecoin and take out another) pay to that baseline interest rate. This interest rate is only available to the people who have deposited their mUSD into the SAVE contract.
  • MINT facilitates minting of mUSD, which is necessary to access mStable’s high APY. There are 14 million stablecoins that have created 40 million mUSD, and they are the collateral behind the circulating supply of mUSD. The difference between mStable and products like Curve, Balancer or Uniswap is that when people contribute to their pool, they get a liquidity provider token in return, whereas in mStable, they get a stablecoin.
  • EARN incentivises users to contribute to the mUSD liquidity across DeFi. There are currently four pools across Balancer and Uniswap. The goal of EARN is to make mUSD more useful and liquid. To achieve this, mStable distributes Meta, its governance token, to users who contribute to its utility and growth.

Risk mitigation

DeFi, in general, relies on the concept of composability: protocols working with other protocols. mStable is itself built on multiple other protocols, and its intent is not to minimise smart contract risk. Someone who does not feel comfortable with smart contract risk should probably refrain from getting involved with DeFi because the interweave of the protocols intensifies risk exposure.

mStable attempts to at least cap that risk through a mechanism of maximum weights. In case of failure, the protocol allows the representation of any of the underlying assets up to 55%.

Gas costs

Since mStable is built on Ethereum and its behind-the-scenes computation is relatively complex, it is expensive to use from a gas perspective. In the coming months, however, the team is planning to implement a very significant gas production upgrade, which should reduce particularly the smaller deposits redemptions and swaps by at least 50% in terms of gas.

What is in store for mStable

  • In the coming months, mStable will release mBTC.
  • mStable is also planning to implement upgrades on its AMM to provide more liquidity in stablecoins (particularly Dai, which when people deposit, others immediately trade out to arbitrage) and cheaper gas.

Further resources