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Stablecoins: Strengths & Weaknesses -- The Maker Blog

Contributed by @BrianDColwell.

Previously in Part 1: Stablecoins: Use Cases

“Price instability and market speculation have contributed to extreme volatility in cryptocurrencies, creating an ecosystem that is not supportive of vital financial functions. For there to be a modern financial system on the blockchain, there needs to be a stable medium of exchange. There needs to be transparency and accountability, as well.”

Previously in Part 2: Stablecoins: Collateralization Types

“A successful stablecoin implementation would be a major catalyst for disruption to global financial infrastructure, challenging weak governments and mismanagement of national economies. Furthermore, stablecoins allow for decentralized insurance, prediction markets, transparent credit and debt markets, and create a level playing field between small and large businesses in global finance.”

But not all stablecoins are created equal…

With a total addressable market of ALL the money in the world, a fiat-free, digital currency that’s price stable, such as Dai from MakerDAO, represents the opportunity to finally end hyperinflationary policies, economic controls, and mismanagement of national economies by weak governments around the world.

Now let’s explore the strengths and weaknesses of the various types of stablecoins.

Part 3: A brief explainer on stablecoin strengths & weaknesses

The first issue with which all stablecoins must first contend is referred to as “the oracle problem.” This issue revolves around transparency of market conditions and ease of acquiring information about the exchange rate between the stablecoin and the asset against which it is pegged.

There are three primary approaches to resolving this problem:

Use a trusted data source, a centralized solution Use the median from a set of data feeds, also a centralized solution Use a Schelling point scheme, a decentralized solution

The best understood solut...

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