Decentralized stablecoins are pitched as crypto’s holy grail, so where are they?

Bitcoin’s media attention is due to the volatility of cryptocurrency prices, which tend to become a little less volatile over time. It’s set to 1. Last year was too much for many potential users to handle.

Due to these price volatility issues, stablecoins have experienced tremendous growth over the past few years and now account for over $130 billion in the total cryptocurrency market.

However, despite what stablecoin promoters may say, the reality is that these alternative digital currencies bear no resemblance to Bitcoin. It consists of a centralized token issued on the blockchain of , and contains a backdoor that allows the issuer to freeze funds or blacklist addresses. Additionally, they can regulate their existence with a pen strike.

are you saying $USDC Do stablecoins allow “all the benefits of cryptocurrencies” across the line from marketing to just lies? (via https://t.co/4Wtf6qrymP)

thought about the point of #bitcoin It was to make transactions that could not be done in a regulated system such as a bank $USDC. pic.twitter.com/DkXRA4pf4B

— Kyle Torpey (@kyletorpey) April 1, 2019

Due to the limitations of traditional centralized stablecoins, decentralized stablecoins have been considered something of a cryptocurrency holy grail for quite some time. The idea is to combine Bitcoin’s censorship-resistant and permissionless nature with a more stable asset.

Human Rights Foundation Chief Strategy Officer Alex Gladstein He told CryptoSlate:

“I think a censorship-resistant stablecoin is a very important short-term humanitarian goal.”

Gladstein added:

“I think people in Cuba, Lebanon, Palestine, Turkey, etc. really need a digital dollar that cannot be frozen or confiscated. Especially for our friends in places like Iran, Cuba. . But the problem is: be it Tether, Circle or Binance, the overwhelming majority of stablecoins [issuance] In the world they are all completely centralized. Let’s be honest, they basically exist at the will of the US government. Also, you can shut down at any time. Addresses are frozen. can be confiscated. And obviously what’s going on with DAI and its reserves – they claim to be decentralized but have similar concerns. ”

sovereign Contributor John Wright We also believe there is value in pursuing censorship-resistant stablecoins.

“Not everyone can withstand fluctuations in BTC purchasing power.”

Wright told CryptoSlate:

“Many businesses operate on thin margins where the value of BTC fluctuates wildly. Low-income earners often cannot afford to save and rely on cash to maintain value until their next paycheck.” In light of these facts, censorship-resistant stablecoins are a highly valuable tool that can be used as an alternative to physical cash and bank accounts, and a short-term complement to using BTC as a long-term savings asset. Or a medium-term savings asset.. One day, the purchasing power of BTC may become stable enough that stablecoins will no longer be needed. I think tablecoins have their rightful place in the world.”

Of course, this concept of a censorship-resistant stablecoin has been tried many times in the crypto space over the past decade, but due to the difficulties involved in creating a stable crypto asset, there have been no real successes so far. There was not. In a way that does not reintroduce attack vectors through various forms of centralization. So does this idea work, or is it just another example of the hyped and insubstantial in the crypto industry?

Failures of DAI and Other Decentralized Stablecoins

To date, MakerDAO’s DAI has been the most successful crypto-collateralized stablecoin. The dollar-denominated value of DAI supply in circulation is now over $6 billion, more than eight times that of his closest competitor in the category of stablecoins intended to be more decentralized than USDC and USDT. .

Additionally, DAI is heavily integrated into the Ethereum Decentralized Finance (DeFi) ecosystem. However, DAI has abandoned its initial promise of decentralization in order to reach its current level of adoption. Most notably, Most of the DAI is now backed by USDC and other similarly centralized assetsIn other words, DAI inherits the centralization seen in USDC and other assets.

Outside of DAI, the most successful project in the history of decentralized stablecoins has to be Terra’s UST. didn’t work. UST was larger than DAI at one point, reaching a top valuation of nearly $19 billion in May. His UST price, which was to be pegged to $1.00, is now around $0.02. Unlike DAI, UST was intended to be an algorithmic stablecoin, not simply backed by cryptocurrency collateral.

Of course, there have been many other decentralized stablecoin projects over the years.Billionaire just last year Mark Cuban Widely Mocked For Being Involved In Iron Finance Algorithmic Stablecoin Project DebacleThe Bitshares white paper that gave birth to the BitUSD stablecoin was released almost ten years ago. Other projects of current interest in this space include FRAX, LUSD, RAI, and sUSD. However, activity around these stablecoins is not particularly high at the moment. Tron’s USDD stablecoin is a bit more widely used, but looks a lot like DAI. chose centralized collateral.

How Should Decentralized Stablecoins Work?

So if the perfect decentralized stablecoin project doesn’t exist today, what should it be?

“The contract model is interesting, and I think it is probably more robust when it comes to resisting state attacks, but ultimately it relies on ideally liquidity between pseudonymous parties.”

Gladstein said:

“The dream is for Bitcoin users in any country in the world to be able to receive Bitcoin from you and me, ideally via Lightning, and peg some of it to dollars immediately.”

Regarding certain projects he finds interesting, Gladstein pointed out Fedimintwhich is effectively anonymous e-cache Bitcoin-backed servers held by federations of multisig addresses. Not only can the Commonwealth issue dollar-pegged tokens for Bitcoin holdings, but this setup also comes with significant privacy improvements.

“The idea is that if you take bitcoin and deposit it in a community bank, you can easily turn anonymous ecash into dollars. Federations can issue whatever they want (any kind of token). will be very powerful just by issuing these anonymous dollars.”

Gladstein said:

“I mean, stablecoins are doing well now, but there are so many different risk areas that I honestly think the Fedimint model might end up with less tradeoffs. So that’s what I’m most interested in right now, but of course, I follow all attempts to bring the dollar to Bitcoin and Lightning, which is also going to be very big in the next few years. because it is important to

At Sovereign, Wright is one of many contributors working on a model that combines a basket of Bitcoin-backed stablecoins to create another token backing. This larger concept is currently under development through a project called mintand their proposed stablecoin is known as Sovereign Dollar (DLLR).

“By aggregating multiple BTC-backed stablecoins, DLLR benefits from BTC’s censorship resistance and the diversity of stability and issuance mechanisms these different stablecoins use. ”

said the light.

“This design is intended to make DLLR more robust against Bitcoin price volatility and peg failures, and to allow issuance to scale with demand.”

Limitations of Decentralized Stablecoins

A common criticism of the argument that stronger restrictions on stablecoins pose serious problems for the DeFi space is that centralized stablecoins are more decentralized and harder for legislators and regulators to control. is replaced by the option of

But as Braun Rudnick’s partner Preston Byrne claimed About 5 years ago that might not have been possible due to issues with sufficient liquidity and the need for excess collateral (which explains why the DAI favors USDC). . The safety and security assumptions of decentralized or algorithmic stablecoins are also quite different from USDC and USDT.

Regarding the scalability of ZUSD, LiquidityOne of the Bitcoin-collateralized stablecoins in the basket backing LUSD and DLLR, Wright said the problem with the stablecoin is its lower over-collateralization requirements (110% for ZUSD vs. 130% for DAI).

This means less crypto collateral needs to be locked up in smart contracts to create more stablecoins. Additionally, the goal is for ZUSD to become part of Mynt’s DLLR stablecoin service. This may further limit the same kinds of scalability issues that led DAI to embrace centralization and limit censorship resistance.

“The diversity of issuance mechanisms available using the various Mynt-supported stablecoins will help DLLR to be more scalable than either of the underlying stablecoins alone. .”

light explained. That said, Light also showed that ZUSD may eventually face its own scaling issues. Only time will tell if DLLR can provide advancements when it comes to the ability to scale decentralized stablecoins. For now, there are clear limitations regarding the level of decentralization, censorship resistance, and scalability that can be achieved with stablecoins compared to Bitcoin.

“All stablecoins must introduce third-party dependencies that BTC itself does not have.”

Light says:

“BTC-backed stablecoins such as DOC, ZUSD and DLLR are no exception. ZUSD is powered by five different sets of third parties: Sovryn Biocracy, Money On Chain Oracles, Powpeg PowHSM Federation, Powpeg Emergency Multisig and Bitcoin miners. depends on.”

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—JuanGalt.com (@JuanSGalt) May 2, 2020

oracle issue It is one of the most persistent (and perhaps overlooked) problems with decentralized stablecoins, as there is no completely trustworthy way to get real-world asset data into blockchains for use in smart contracts. . For this reason, Bitcoin itself will always be a safer bet than stablecoins when it comes to censorship resistance.

Mind you, Bitcoin’s use of proof-of-work mining itself was the solution to Oracle’s problem in ordering transactions in decentralized digital financial systems. To be clear, this is still an area that deserves attention. However, the long-term functionality of this kind of project can be much more limited than originally thought.