Decentralized stablecoin at a crossroads – BitcoinBlog.de – the blog for Bitcoin and other virtual currencies

The DAI-Dollar is the only relevant decentralized stablecoin. There is no central issuer and no external banks. This has many advantages, but also disadvantages. This is intended to overcome the “end game” of DAI – by destroying the DAI dollar!

When we talk about money, a means of payment and a store of value, then value is everything. Without him everything is nothing. With a real cryptocurrency like Bitcoin, the market alone determines the value; with stablecoins it is tied to a classic currency and is usually backed by dollars in a bank account.

An algorithmic stablecoin like the Dai Dollar is a middle ground, so to speak: They try to create a currency that holds the value of the dollar, but is not backed by real dollars, but rather only by “crypto assets” whose value fluctuates freely in the market. The appealing claim of algorithmic stablecoins is to be as decentralized as a real cryptocurrency, but as stable as the dollar.

If you accept that the world is thirsting for the dollar rather than the volatile Bitcoin, then a stablecoin like DAI is exactly what you should want. No central external actors, just tokens, no operations in a black box, just shining transparency, no issuers to censor, freeze and confiscate, just a DAO, a decentralized autonomous organization, with clearly defined rights and structures.

Furthermore, the DAI dollars are an experiment in money creation: they accept a “collateral” as collateral, like a commercial bank takes a mortgage, and in return grant a loan in DAI dollars, which are only created at that moment. The money creation mimics that of commercial banks – only more decentralized, transparent and with a much higher equity ratio. In my opinion, this is the most important aspect of DAI, and it should be a shining model for the future of global money creation.

But, and only – the DAI dollars are at a crossroads, and if you take it even halfway carefully, they no longer live up to your ideal.

Between two worlds

In his post on the “endgame of DAI,” founder Rune Christensen leaves no doubt that DAI, the flagship decentralized stablecoin, has lost momentum. From the moment Dai began to scale, the stablecoin was torn between two worlds.

There is one side of pure, decentralized money that emulates Bitcoin. And then there is the other, which is intended to fulfill the real purpose of DAI, which is to be useful and valuable to people and to scale well. These two worlds fundamentally contradict each other. Rune calls this the “stablecoin dilemma”: It is not possible to maintain the dollar peg, achieve pure decentralization and scale to the masses at the same time. As with all trilemmas, you have to make a decision.

For DAI, Rune explains, there are only two options: First, you combine utility and scalability. To do this, you use “real world assets” as collateral – such as centralized stablecoins or tokenized government bonds. As far as possible, you strive for decentralization, but you accept that DAI will adapt to traditional finance.

The second option would be the path of pure decentralization. Back to the origins. DAI remains completely independent of centralized collateral, like other stablecoins, and only accepts decentralized assets, such as Ether, as collateral.

Today DAI is already caught between these worlds. The collateral deposited in the smart contracts consists of around 36 percent Ether and more than 50 percent “real world assets”. In addition to stablecoins, these include an exciting collection of quasi-tokenized securities, from real estate shares and ETFs to bonds and government bonds. The DAI dollar is already the hybrid that Rune describes, and it is actually an exciting creature.

However, the DAI dollar seems to have reached a limit with this concept. The market capitalization has been stuck at just over five billion dollars for almost two years, and the “saving rate” of eight percent, a kind of key interest rate, cannot keep up with what USDC and USDT are earning on the free DeFi market. In order to unleash the real potential of DAI, Rune now wants to start the “end game” this year.

Column what doesn’t fit together

The two options obviously contradict each other. If you back a stablecoin with another stablecoin, such as USDC, you can scale the money supply better than if you use a collateral whose value fluctuates, such as Ether. But in doing so, you make yourself dependent, even vulnerable to blackmail, by the issuers of large stablecoins and indirectly their banking partners. You end up where you didn’t want to be.

A purely decentralized algorithmic stablecoin that only holds decentralized assets in its treasury, primarily Ether (ETH), is free of such dependencies. However, it has much greater difficulties scaling the money supply. Due to the fluctuating value ratio, the loan that DAI dollars essentially represent must be covered with “excess collateral.” The 36 percent ETH in the DAI treasury has therefore only created 17 percent of the DAI in circulation; without “RWA” as collateral, the money supply of DAI dollars would be significantly lower.

With the “endgame”, MakerDAO is now supposed to realize both visions – without compromise, but separately. The DAI dollar is supposed to be broken down into two coins.

One has the working title “NewStable”: It integrates into traditional finance and is intended to be regulatory compliant. It is backed by RWAs and, like other stablecoins but not the existing DAI dollars, will have the option to freeze balances. Decentralization serves here as a “powerful tool” to ensure transparency, resilience and checks and balances, but without violating the rules of the game.

The second coin is called “PureDAI”. It follows the ideals of decentralization from which DAI was actually born without compromise. It is only secured by decentralized assets – this can be Ether, but also decentrally organized tokens. It will be like DAI today, only without the compromise of the increasing integration of traditional financial instruments. The price for this will be to deviate from the value of the dollar and possibly form an independent and autonomous unit of value. It is precisely the aspect of value that could make PureDAI so exciting – but also a dud.

You can then exchange the current DAI dollars for NewStable or PureDAI. However, they remain valid, but will gradually be phased out of MakerDAO’s services, such as interest payments.