Decentralized Finance (DeFi) has quickly grown into one of the most significant narratives in crypto, through its promise of transparency, openness, and composability, disrupting everything we know about finance. This is where stablecoins come into the picture. Stablecoins are instrumental in the crypto ecosystem. At the same time, Automated Market Makers (AMMs) ramp up this innovation by providing crucial liquidity. This article will provide further context on the mechanics of stablecoins, including their many forms and their crucial role in DeFi. How AMMs work is the subject of scrutiny. It focuses on leading protocols such as Curve Finance and Uniswap, illustrating their advances in liquidity provision and trading efficiency. It points to the growing wave of Real World Asset (RWA) tokenization. We are incredibly proud of this innovation, which we believe will transform the DeFi space even more.
Understanding Stablecoins The Bedrock of DeFi
Stablecoins are cryptocurrencies designed to maintain a stable currency value. They usually tie their value to some underlying asset, whether that be a fiat currency, like the US dollar, or a stable asset like gold. Along with low latency, this stability is important for money-lego DeFi applications. It provides a stable and consistent medium of exchange, protecting users from the price fluctuations common with other cryptocurrencies. They are broadly categorized into four main types: fiat-backed, commodity-backed, over-collateralized, and algorithmic.
Fiat-backed stablecoins are the most straightforward, backed 1:1 by a reserve of fiat currency held in custody. Each stablecoin that is in circulation has a corresponding dollar of fiat currency stored in reserve. This is what keeps its value strongly pegged to the fiat currency. These choices are often considered the safest bets. Their reliance on centralized custodians creates worrisome transparency and regulatory oversight issues.
Commodity-backed stablecoins are backed by physical assets. These assets could be something like gold or silver, oil, or even property. Its value as a stablecoin is linked to the market price of that underlying commodity. This gives a more concrete asset backing. However, valuation and storage of the underlying commodity can be difficult.
Over-collateralized stablecoins back their tokens with other cryptocurrencies. Indeed, the value of its collateral is greater than the combined value of all its stablecoins in circulation. This significant over-collateralization makes these stablecoins relatively immune to price fluctuation in the underlying cryptocurrency collateral. Unlike fiat-backed stablecoins, they are much more decentralized. They need a lot of capital and run the risk of liquidation if the value of the collateral plummets suddenly.
Algorithmic stablecoins, the most complicated form of the species, are not backed by fiat or other collateral. They use complex algorithms and self-executing smart contracts to balance the supply and demand for the stablecoin. Their aim is to keep a very constant price. Other times, these algorithms may require burning (removing from circulation) or minting (creating new) tokens to contract or expand the supply depending on current market conditions. Among stablecoin types, algorithmic stablecoins have the most decentralization potential. Yet, they have been the most volatile and subsequently failed most often—in very high-profile fashion with the collapse of TerraUSD (UST).
AMMs Revolutionizing Decentralized Exchanges
Automated Market Makers (AMMs) are the foundation of DeFi, allowing decentralized exchanges (DEXs) to operate without traditional order books. AMMs are different in that they don’t match buy and sell orders. Instead, they use complex mathematical formulas to determine asset prices and allow trades directly from liquidity pools. In these pools, users contribute liquidity by depositing their tokens and are incentivized to do so. In exchange, they generate income from the fees as liquidity providers (LPs).
Uniswap is the largest and most well-known AMM. It’s based on a constant product formula (x * y = k) that maintains the balance of two tokens in a liquidity pool to allow for trading between them. This formula dictates that the product of the quantities of the two tokens (x and y) must remain constant (k). Every time a trade occurs, the ratio of tokens within the pool changes. The formula just adjusts the new price for this new addition.
What’s really attractive about Uniswap’s constant product model is its simplicity and popularity. It is not immune to slippage, especially on larger trades. Slippage occurs when the price of an asset moves between the time you place or fill an order. This change happens in the seamless dark before your trade is matched. This means that the fees funneled back to LPs are greatly reduced compared to other Dex exchanges.
Curve Finance addresses slippage and impermanent loss, particularly during stablecoin swaps. It does this in part through a novel hybrid model Automated Market Maker (AMM). This new model is a hybrid between constant-sum and constant-product functions. This speeds up trades and, in turn, decreases slippage and impermanent loss, particularly for similar-value assets such as stablecoins. Curve’s specialization in stablecoins has made it a key piece of infrastructure for the greater DeFi ecosystem.
The Mechanics of Curve Finance and 3POOL
Curve Finance’s success can largely be attributed to its unique approach to liquidity provision and specialization in stablecoin trading. Its hybrid AMM model therefore enables efficient stablecoin <> stablecoin swaps with very low slippage. One of Curve's key innovations is the 3POOL, a liquidity pool consisting of three stablecoins: $DAI, $USDC, and $USDT. This pool serves as the base for most of Curve’s stablecoin trading pairs. This results in an exchange that provides deep liquidity and makes swaps more efficient.
The 3POOL is underappreciated, but a very important component to keeping the entire DeFi ecosystem stable. Most importantly, it makes a liquid market for these three leading stablecoins. This design ensures that it is easy to swap them for one another thus reducing the chance of de-pegging episodes. The stability of the 3POOL is additionally reinforced, given that it consists of over-collateralized stablecoins.
Liquidity providers who deposit stablecoins into the 3POOL earn yield on trading activity. To attract liquidity providers to incentivize liquidity provision, Curve Finance rewards LPs with additional rewards through $CRV tokens — Curve Finance’s native governance token. Investors can increase the market-making returns of liquidity providers through locking $CRV. This action can boost the $CRV rewards that LPs receive in the Curve pool by up to 2.5x. Profits are distributed via 3CRV tokens (3CRV is the liquidity pool token of the stablecoin exchange pool 3POOL, redeemable at a 1:1 ratio for other stablecoins).
The Anchor Protocol and UST's Rise and Fall
The Anchor Protocol, a lending platform in the Terra ecosystem, is what piqued the initial interest. It provides GREAT risk-adjusted annualized returns, as high as 20% on UST deposits. The premium yield further attracted a tidal wave of new money. Consequently, UST quickly became one of the most popular stablecoins in the DeFi space. At the time, many doubted how sustainable such high returns would prove. They identified that these returns were mostly subsidized and not purely created from lending activity.
The Anchor Protocol’s dependence on subsidized yields meant it was built on a house of cards. Market conditions changed and these subsidies began to dry up. This had investors begin to withdraw their UST deposits, setting off a death spiral of a sell-off. This set off a massive de-pegging event. This caused UST to lose its peg to the US dollar – the last straw that broke the entire Terra ecosystem’s back.
The perilous nature of algorithmic stablecoins was made abundantly clear with the collapse of UST. It highlighted the importance of sustainable economic models in the DeFi ecosystem. The event’s conversation highlighted just how interconnected the DeFi ecosystem is. It underscored the dangers that emerge whenever a protocol—or now, a stablecoin—goes under. Sadly, the Anchor Protocol and UST collapsed, sending shockwaves through the DeFi space. As investors lost billions in real-dollar losses, investing confidence was shattered across the entire market.
Tokenization of Real World Assets (RWA)
As we approached 2025, the tokenization of real-world assets (RWA) had become one of the hottest buzzwords in the DeFi space. RWA tokenization involves representing ownership of physical assets, such as real estate, commodities, or art, as digital tokens on a blockchain. This provides opportunities for fractional ownership, more liquidity, and wider access to these assets.
When it comes to connecting traditional finance with decentralized finance (DeFi), tokenizing real-world assets (RWAs) is key. Combined, this innovation reduces risk and delivers tangible real-world value and stability to the decentralized ecosystem. Investors of all types—from retail to institutional—can more easily break into the real estate market by tokenizing the assets, such as a property. This method removes the barriers of huge capital expenditures and cumbersome legal processes. The same holds true for tokenizing commodities such as gold, making it more efficient and accessible for users to invest in these assets.
Though RWA tokenization does present exhilarating possibilities, the obstacles loom great, too. These are regulatory ambiguity, complicated valuation challenges and the demand for trusted custodians to safeguard the underlying assets. Addressing these challenges will be the key to successfully embracing RWA tokenization. It will guarantee its effective incorporation into the overall DeFi ecosystem. Those challenges are no joke, however the benefits that come with RWA tokenization are massive. Where we’re going, it’s going to be a real motivating factor to create the future of DeFi.
