I've worked and thought about digital native stablecoins. I think we should use supply inflation. I'm skeptical about stable tokens building on top of a limited supply Store of Value.
Original Post:
https://bitflate.org/post/2020/03/14/the-problem-with-dai.htmlBitflate is a cryptocurrency with constant inflation of 7% per year.When you are involved long enough with crypto, you’ll see a lot of stupid ideas. DAI is one of them. Its ecosystem had a meltdown a few days ago during a crypto price crash. You can read about the story here:
https://www.coindesk.com/defi-leader-makerdao-weighs-emergency-shutdown-following-eth-price-drop.
DAI - Digital Native StablecoinFor those who don’t have time to get into the weeds, DAI is a “digital native” stablecoin. It wants to create a 1-1 peg to USD using an underlying volatile asset, Ethereum. If you want to use USD, it’s probably most efficient to go get USD.
But for some ideological reasons (decentralization), DAI wants to be USD but also digital native. So they “lock” the underlying asset, Ethereum, and issue DAI coins. The premise is with intelligent computer algorithms, we can maintain 1-1 peg between a digital asset (Ethereum) and a real-world asset (USD).
The ProblemDigital assets are digital. Humans are the arbitrageurs. Humans are emotional. DAI is trying to create stability on top of Ethereum volatility. It’s kinda like building a stable house on a shaky foundation. Your building will collapse or you will spend so much money patching the flaws of your shaky foundation. This is a laughable idea for those who live in reality. But I guess some computer programmers/investors live in alternative realities too long. They forget about reality.
Whatever your algorithms are, you need to arbitrage risks. So you will always need to lock up more USD-ETH to account for risks. To be safe, maybe, you need 1.5 USD-ETH for a DAI USD. However, with digital scarce and volatile assets like Ethereum, there’s a chance that 1.5 USD-ETH will drop to 0.9 USD-ETH. At that point, you will be underwater. A couple of days ago, it did. If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It’s a dumb idea to use 1.5 USD to get 1 USD.
DAI has a lot of jargon and technology (more layers on top of the shaky foundation). These things make it look sophisticated and fool people. The basic problem is very simple. You only need elementary school arithmetic and logic to know its flaws and inefficiency. You can say it is interesting to develop technology to build stabilization technology on a shaky foundation. That is fine for a hobby project if you have a lot of time and money to waste. People who put money into DAI are exposing their money to a lot of unknown risks.
A potential fix for DAI will require the MakerDAO team to move to a centralized bank model. They are somewhat centralized already. With control, they’ll be able to manage the risks. They may even get USD reserve to reduce Ethereum volatility. In this case, the MakeDAO will become a kind of hybrid crypto and fiat bank. I don’t know how this would work. It could be an interesting model. But it’s going to be a centralized stablecoin.
Bitflate - Digital Native (Somewhat) StablecoinA potential prospect for digital native stablecoin is Bitflate. Bitflate is similar to Bitcoin but with a 7% inflation of supply. Bitcoin has proven to be a good model for creating decentralized money. By adding inflation to the supply, Bitflate creates incentives for people to spend. Its supply is still limited by the inflation rate. This is why it will retain some value. Even when Bitflate gains adoption, its price will not be completely stable. This is the tradeoff we have to live with for decentralization.
