4 ms·

Direct backed stable coins require trust in the custodian. Algorithmic stable coins don't require the same trust, so there are benefits. And there are some that

by zeven7 4y ago

Direct backed stable coins require trust in the custodian. Algorithmic stable coins don't require the same trust, so there are benefits. And there are some that have been working well for a long time, and continue to work well in current market conditions. Look into DAI.

AlexandrB 4y ago
In practice most people are trading one trusted party for another. Instead of trusting the custodian, algorithmic stable coins require trusting the designer/developer of the smart contract(s). Not just because the code could be buggy, but also because the developer could have missed (or lied about) a corner case that could lead to a death spiral as what happened with UST. That's not to mention that, as what's happening with DEI, the developers could do something like halt redemption making your holdings suddenly illiquid at the pegged price. DAI seems safe given how over-collateralized it is. But a drop of 60+% in the collateral basket used by DAI is not inconceivable. In particular what happens if USDC's custodian is found to be untrustworthy? And the value of non-pegged cryptocurrencies tend to be strongly correlated, so a mix of crypto assets is not a diverse as one would hope.
- zeven7 4y ago
  > But a drop of 60+% in the collateral basket used by DAI is not inconceivable. Dai has survived a 94% drop in the value of its backing collateral in 2018, and it maintained the peg well. It would, however, be a problem if the drop was _instant_ and sustained. But it should be able to handle the speed of the drop we saw in Luna. Your point is taken regarding trading types of trust with respect to bugs or backdoors. There is certainly a level of trust required there.
  - AlexandrB 4y ago
    Yeah, I was not aware of the liquidation mechanics used by DAI. Your other comment was very informative.

4 ms·

Direct backed stable coins require trust in the custodian. Algorithmic stable coins don't require the same trust, so there are benefits. And there are some that

by zeven7 4y ago

AlexandrB 4y ago
In practice most people are trading one trusted party for another. Instead of trusting the custodian, algorithmic stable coins require trusting the designer/developer of the smart contract(s). Not just because the code could be buggy, but also because the developer could have missed (or lied about) a corner case that could lead to a death spiral as what happened with UST. That's not to mention that, as what's happening with DEI, the developers could do something like halt redemption making your holdings suddenly illiquid at the pegged price. DAI seems safe given how over-collateralized it is. But a drop of 60+% in the collateral basket used by DAI is not inconceivable. In particular what happens if USDC's custodian is found to be untrustworthy? And the value of non-pegged cryptocurrencies tend to be strongly correlated, so a mix of crypto assets is not a diverse as one would hope.
- zeven7 4y ago
  > But a drop of 60+% in the collateral basket used by DAI is not inconceivable. Dai has survived a 94% drop in the value of its backing collateral in 2018, and it maintained the peg well. It would, however, be a problem if the drop was _instant_ and sustained. But it should be able to handle the speed of the drop we saw in Luna. Your point is taken regarding trading types of trust with respect to bugs or backdoors. There is certainly a level of trust required there.
  - AlexandrB 4y ago
    Yeah, I was not aware of the liquidation mechanics used by DAI. Your other comment was very informative.