Native USDC on Cosmos to Fill Vacuum Left by Terra’s UST Stablecoin

Collateralized USDC is assuming a role formerly held by Terra’s algorithmic UST stablecoin – raising questions as to whether decentralized finance can mature with decentralized money at its core.

AccessTimeIconSep 28, 2022 at 7:30 p.m. UTC
Updated May 11, 2023 at 3:34 p.m. UTC

The collapse of Terra in May left a vacuum in the Cosmos ecosystem, where Terra’s UST stablecoin – which was algorithmically pegged to the U.S. dollar – was used heavily across Cosmos’ interconnected family of blockchains. Now, with the help of the stablecoin issuer Circle, Cosmos is replacing code with collateral.

Circle said on Wednesday that it plans to launch its USD coin (USDC) stablecoin – the second-largest dollar-backed stablecoin by market capitalization – natively on Cosmos in early 2023. The announcement came alongside news that Circle would begin issuing USDC natively on four other ecosystems in addition to Cosmos.

Cosmos’s fledgling decentralized finance (DeFi) ecosystem previously relied on the promise of Do Kwon’s digital dollar, and the algorithm that supposedly backed it, to build up its on-chain lending, borrowing and exchange markets. When UST came crashing down, its role was assumed by various different stable currencies – the most popular being wrapped USDC, a synthetic version of the centralized USDC stablecoin issued on the Ethereum blockchain – but these alternatives didn’t offer the same security to users that a natively issued stablecoin could.

There’s currently $18 million wrapped USDC sitting in liquidity pools on the Osmosis blockchain, which is home to the Cosmos ecosystem’s largest decentralized exchange.

Each wrapped USDC token was initially minted on Ethereum to represent $1 in Circle’s treasury. Moving those tokens from Ethereum to Cosmos today means using a cross-chain bridge – a kind of technology that locks up tokens on one chain and reissues them on another.

“When it’s wrapped tokens, you're ultimately trusting the security of the bridge and the security of that intermediary,” Jelena Djuric, ecosystem lead at Cosmos research and development shop Informal Systems, told CoinDesk. “It's gone through all of these hoops to get to this wrapped point.”

Cross-chain bridges have fallen prey to numerous multi-million dollar hacks – the most recent being the $190 million Nomad bridge attack, which rendered some wrapped tokens on Cosmos and other ecosystems virtually useless.

Eliminating the blockchain bridge risk

Starting in early 2023, Circle will begin minting a version of its dollar-backed currency directly onto its own Cosmos blockchain.

From there, other Cosmos chains, like Osmosis and the upcoming dYdX chain, will be able to use USDC sans bridge, so long as they enable Cosmos’s inter-blockchain communication protocol (IBC) – software that allows independent Cosmos chains to send assets back and forth.

The news this past June that dYdX, one of the largest crypto exchanges, would be moving to a standalone Cosmos blockchain was evidence that Cosmos – and its vision for interoperable, “sovereign” app-chains – is beginning to breach the mainstream. But as the Cosmos ecosystem matures, its embrace of fully collateralized stablecoins suggests it is no longer aiming to do so with fully decentralized money at its core.

DYdX’s move from Ethereum to Cosmos may have even played some role in expediting Circle’s Cosmos expansion plans.

“[DYdX] are actually the largest consumer of USDC in the crypto market, because all of their perpetual swaps or future contracts are actually held up in USDC until that contract is triggered,” explained Djuric. “I think [dYdX] just trusted that because there's so much organic demand for their platform and thus, by extension, demand for USDC, [USDC issuance] was just like a natural kind of thing that they knew they would have to focus on.”

CORRECTION (Sept. 28, 19:42 UTC): The USDC token will be issued onto its own Cosmos-based blockchain. It will not be issued directly onto the Cosmos Hub blockchain, as originally stated.


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Sam Kessler

Sam is CoinDesk's deputy managing editor for tech and protocols. He reports on decentralized technology, infrastructure and governance. He owns ETH and BTC.