Stablecoins Becoming Increasingly Viable as Staking Collateral, Research Shows

The research, which focuses on Circle’s USDC stablecoin, is part of a series of posts on restaking by crypto research firm Gauntlet.

USDC Provides Unique Benefits as Restaking Collateral

Restaking – the practice of staking cryptocurrencies like ether (ETH) on multiple protocols to generate additional yield – can now be accomplished with ERC20 tokens, including popular stablecoins such as USDC.

Ethereum research firm Eigen Labs, the company behind restaking platform Eigenlayer, announced ERC-20 token restaking in August.

But why would a node operator hold a stablecoin as collateral instead of another type of token – typically a much more volatile one – that generates yield? Crypto research firm Gauntlet recently published a blog post explaining that the use of stablecoins not only improves security, but it also improves 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,” the blog post states.

Essentially, stablecoins, while not directly generating yield, can provide lower economic risk for node operators resulting in higher returns when risk is factored into the equation.

An example of such risk, the post states, is where a malicious entity profits from corruption due to volatile assets, also known as a “corruption attack.”

“Low-volatility stablecoins, such as USDC, are the most robust choice against corruption attacks in a single-collateral setting,” the post goes on to say.

That benefit of stablecoins extends to multi-asset collateral as well, according to Gauntlet, even where collateral value drops significantly from its peak price, a situation known as a drawdown.

“Even in cases where ETH experiences large drawdowns (like the 22.5% drawdown ETH experienced on August 4th, 2024), stablecoin collateral can still defend economic security by making corruption attacks prohibitively expensive,” the post states. “This is a unique feature of stablecoin collateral that is not provided by any other collateral type.”

Jeremy Allaire, CEO of Circle, the company behind USDC, praised the research and said that “USDC is starting to be foundational to crypto economic security.”