Scalability
USDca Scalability
Last updated
USDca Scalability
Last updated
USDca targets a 1:1 backing, making it a far more scalable model than most DeFi “stablecoins” - whose collateral ratios tend to be 150% or more - and it will be on par with the likes of USDT and USDC who have had great success in scaling their stablecoin to the masses.
As CAMP will be utilizing a delta neutral strategy, CAMP will be active in BTC and ETH futures markets and will be reliant upon those markets scaling alongside USDca. We expect ETH open interest as a % of market cap to rise significantly from ~5% today as more derivative products are built around ETH staking cash flows.
We have seen in past bull markets that derivative markets grow at an extraordinary rate as the demand for leverage increases - from late-2020 to early 2021 ETH open interest rose from $1bn to $7bn. In the short-term, having access to $9-10bn of ETH notional on centralized derivative exchanges is expected to allow scalability. In the long-term, the expectation is that these markets will grow alongside USDca.
Ultimately there is little reason the derivative market cannot expand for a given demand which in CAMP’s case would be large increases in short side interest. We saw a similar period in October 2022 during the ETH PoW arbitrage where $8bn of open interest was opened in c2 weeks and the markets absorbed these flows in a reasonably orderly way.
Looking at historical ETH open interest and market cap data, Chaos Labs analysis estimates that open interest moves between 1.2% and 1.45% for every 1% change in ETH market capitalization.
Using that estimate, the below table forecasts the size of the ETH perpetual futures market for an increase in the price of ETH:
Unfortunately, decentralized perpetuals liquidity isn’t sufficient to allow CAMP to achieve its goal of scaling USDca into the billions. Projects like UXD have tried to solely use DEXes, but the lack of liquidity severely limited their ability to scale. With 25x the open interest on perpetual futures on centralized exchanges, a synthetic dollar that leverages that liquidity has the ability to scale exponentially larger than would be possible on just DEXs. CAMP aims one day to have the majority of its hedges onchain, and are excited about the innovations in the decentralized perpetual futures market such as Synthetix v3, which should see a big boost in liquidity for onchain perps.
Consensus view among Ethereum researchers and ecosystem is that 30% of ETH staked is a very realistic near term goal, with 27% of ETH supply staked currently. At today’s prices that’s an extra $11bn of LST growth, on top of an already impressive total of $101bn today. There is more than sufficient LST collateral base to scale this product into the billions.
The scalability bottleneck will depend on the growth of the derivatives market for ETH and BTC, with perpetual futures open interest standing at about $10bn today for ETH and about $23b for BTC. We would note that this figure has seen much higher level at ~$13bn for ETH and ~$35b for BTC. This figure is expected to grow as demand for leverage increases, with derivative market maturing and new exchanges entering the futures market such as Coinbase and Gemini which should lead to a marked growth in the size of the global derivatives market.
After starting to hedge using ETH perpetual futures and USDca massive growth, CAMP is today significant portion of futures market open interest. Assuming there is zero growth from this point in the derivatives market, which is unlikely, decisions can be made to onboard other backing assets in order to scale further, in addition to ETH and BTC.
Like ETH funding rates, BTC rates have averaged positive, with long positions paying short c.6% annually on average, meaning the product could still exist with attractive yield opportunities.
Open interest on centralized ETH and BTC perpetuals has hit a high of ~$40bn during this year. We expect the derivatives market to grow further making extra room for our products scalability.
Yes, assets like raw ETH or BTC can be onboarded as part of our collateral base to ensure USDca can scale to serve the masses while still offering an attractive yield.
While BTC has no embedded yield like staked ETH, it will unlock billions of fresh open interest into which CAMP can scale.
Using the lower end of the Chaos Labs estimate of 1.2-1.45% range for every 1% change in market cap, we can estimate the growth of the BTC open interest for a given increase in BTC’s price:
USDca is targeted to be backed at a 1:1 ratio thanks to a delta-neutral strategy, where short ETH and BTC futures positions offset any changes in value to the underlying collateral. The result is one of the most capital efficient relatively stable value assets in the space. Some onchain overcollateralized stablecoins tend to run collateral ratios of 120-150%, with some even higher, requiring more capital to be locked up than the stablecoin it mints. In effect, we observe real collateralization levels >200% to include a margin of safety to liquidation.
While this approach is a good way to ensure stability when using decentralized collateral, the capital inefficiency of doing so means that the token supply cannot scale into the billions without taking on more centralized collateral, like MakerDAO have done with yield-bearing U.S. Treasuries. This opens up censorship risk and essentially makes the stablecoin a wrapper for U.S Treasuries. The only way to ensure capital efficiency and stability using decentralized collateral is to delta hedge any price exposure.
