Stablecoins Becoming Increasingly Viable as Staking Collateral

Stablecoins Becoming Increasingly Viable as Staking Collateral

USDC Provides Unique Benefits as Restaking Collateral

Restaking—the practice of staking cryptocurrencies like Ether (ETH) across multiple protocols to generate additional yield—has expanded to include ERC-20 tokens, such as the widely-used stablecoin USDC.

In August, Ethereum research firm Eigen Labs, the team behind the restaking platform Eigenlayer, introduced ERC-20 token restaking. This development has sparked discussions on the merits of using stablecoins as staking collateral.

Why Use Stablecoins as Staking Collateral?

Crypto research firm Gauntlet recently explored this question in a blog post, focusing on the unique advantages of using stablecoins like USDC. According to the research, stablecoins not only enhance security but also improve yields on a risk-adjusted basis.

“There are a number of circumstances where the addition of stablecoins increases the risk-adjusted yield for node operators while simultaneously lowering the volatility in the amount of security held by networks,” Gauntlet’s post states.

Lower Economic Risk and Higher Returns

While stablecoins may not generate direct yield, their low volatility reduces economic risks for node operators, ultimately resulting in higher returns when factoring in risk. This stability makes stablecoins particularly resistant to corruption attacks—a type of malicious activity that profits from the volatility of traditional collateral assets.

“Low-volatility stablecoins, such as USDC, are the most robust choice against corruption attacks in a single-collateral setting,” the research notes.

Multi-Asset Collateral and Drawdown Protection

Gauntlet also highlights the benefits of stablecoins in multi-asset collateral systems. Even during significant drops in collateral value—such as the 22.5% drawdown ETH experienced on August 4th, 2024—stablecoins like USDC can maintain economic security. By making corruption attacks prohibitively expensive, stablecoins provide a level of resilience unmatched by other asset types.

“This is a unique feature of stablecoin collateral that is not provided by any other collateral type,” the post explains.

Industry Endorsements

Jeremy Allaire, CEO of Circle, the company behind USDC, praised Gauntlet’s findings, stating, “USDC is starting to be foundational to crypto economic security.” The research underscores the growing importance of stablecoins as essential components in blockchain security and yield optimization strategies.