Slow Burn
Decentralized Dollars
A leading stablecoin model effectively holds USD (or equivalents) 1:1 in an off-chain account. While ostensibly a logical approach, it is subject to counterparty risk (is USDT really 1:1?), blacklist risk (the Lazarus Group can’t use USDC), and centralization risk (issuers must adhere to jurisdiction-specific regulation). Many teams globally are working to build decentralized stablecoins (such as DAI and AMPL) denominated in the world’s reserve currency, but, theoretically, with fewer choke points and less friction. However, these implementations are notoriously complex and introduce their own set of tradeoffs.
For simplicity, imagine three, distinct banks that offer unique types of paper notes (each worth $1) to townsfolk:
The first bank (like Circle / Coinbase’s USDC) aims to be ultra compliant. It promises that every paper note it circulates is backed by an exact dollar in a separate, traditional bank. Its integrity hinges on regular audits by reputable agents. Transactions are straightforward: deposit a dollar and receive a paper note, or vice versa.
The second bank (like MakerDAO’s DAI) requires users to deposit their gold (i.e., real and crypto-native assets) in a secure vault. For every chunk of gold they deposit, they receive ~75% of its value in paper notes. This precautionary measure ensures that, even if gold prices tumble, each paper note remains asset-backed. However, if gold's value nosedives too sharply, the bank (via smart contracts) might sell a portion of a customer's deposit, preserving its reserves and the trust of its clients. Holding and managing gold isn't free, so the bank levies a minor fee (known as a “stability fee”) for safeguarding the valuables and providing liquidity.
The third bank (like Ampleforth's AMPL) is an "elastic bank." It also issues paper notes; but, unlike the other two banks, the number of paper notes in a holder's wallet can increase or decrease (known as a rebase) daily based on town demand. If the note becomes more valuable than the dollar, the bank magically issues their customers more until each is worth a dollar. Conversely, if the note's value drops below the dollar, notes magically vanish from all wallets. Users of this bank must be comfortable with the daily ebb and flow of their note count, placing faith in the overall system's ability to maintain each note's purchasing power over time.
Given the inevitability of centralized risk, capital inefficiency, or algorithm-induced volatility in any modern stablecoin implementation, we’re confident we’ll witness experimentation with new stability models emerge. And though a USDC-style approach seems to have inspired the most confidence to date, ultimately, user preference at scale will determine the Schelling point.
About Slow Burn
Weekly explorations into emerging crypto trends and how to navigate 2023 from the Slow Crypto Team, Sam Lessin, Clay Robbins, and Caroline Cline.