What is mStable and how does it work?

Learn how mStable works and how interest is generated.

Josh Reyes avatar
Written by Josh Reyes
Updated over a week ago

mStable is a DeFi protocol that allows you to reduce the risk associated with holding one stablecoin by holding mUSD - which you can think of as a token representing a ‘basket’ of stablecoins.

For example, rather than solely holding USDC you can hold mUSD instead, which is backed by several stablecoins and the mStable native token MTA.

Should any underlying stablecoin depeg, MTA is sold to re-collateralize and the depegged mUSD is burned.

As a saver, when you deposit into mStable your deposits earn interest from Aave and Compound.

Aave is a decentralized finance protocol. It is a series of liquidity pools controlled by smart contracts (code) that you can interact with using a self-custody wallet like Minke.

Users can deposit assets into the pool to earn interest and can also lend assets from the pool in the form of loans.

These liquidity pools generate income from fees and interest paid by users who have taken loans. That income is then paid out to the users who have deposited assets in the form of interest.

The higher the utilisation of a lending pool, the higher yield for depositors. As such, this means that when demand for borrowing drops (e.g. in a bear market), interest rates can be lower.

mStable interest rates are often higher than Aave due to the combined underlying assets earning different interest rates along with added liquidity fees earned from stablecoin swaps through the mStable token Swap feature.

For example when a user swaps from USDT to DAI, fees are earned by mStable savers.

We can see interest rates increase in sync with other happenings in the market. An example would be if there is a surge in users swapping between cryptocurrencies and stablecoins to repay or add liquidity to their Aave loans. This generates swap fees which in turn increases the interest rate.

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