Stablecoins may be the least exciting tokens in the world of cryptocurrency, but even these projects have their share of drama.
Last week, the New York Attorney General’s Office accused Bitfinex of masking $850 million in losses with the reserves of their stablecoin, Tether. This is the latest of many accusations against Tether, and exposes a fundamental weakness for fiat-collateralized tokens. Even in the best-case scenario, such stablecoins rely on trusted central actors such as banks, financial institutions and regulators.
In response, several decentralized stablecoin models have also appeared. Some projects have tried algorithmic-based models for ensuring the stability of the token, but have since closed their doors.
Others are backed by cryptocurrency. MakerDAO’s stablecoin, DAI, and Alchemint’s SDUSD, both store collateral in smart contracts, without trusted actors. At present, DAI is struggling to maintain its dollar peg; it remains to be seen if SDUSD can do any better.DAI at a discount
At present, nearly 2% of circulating ethers are locked in DAI contracts. ETH tokens are used to purchase collateralized debt positions (CDP) via smart contracts that ‘mint’ and ‘burn’ the DAI stablecoin. MakerDAO also establishes collateral rates, or “Stability Fees,” to control the token’s supply.
These stability fees are “designed to address imbalances in supply and demand for the DAI token that could result from….periods of low or negative growth.” By raising the fee, it becomes less profitable to open CDPs, encouraging users to redeem their DAI for ETH.
Stephen Becker, president and chief operating officer of MakerDAO, told Cointelegraph that “the price [of DAI] has hovered below $1 simply because the supply has outpaced the demand for DAI. As a result, the MakerDAO community has been increasing the Stability Fee in order to incentivize CDP owners to close out their positions and thus reduce the supply.”