Decentralization Stablecoin Depth Observation: The Race Is Still On, Who Will Claim Victory?

Stablecoins are an important infrastructure in the cryptocurrency ecosystem, known as the "Holy Grail of cryptocurrencies". With the increasing regulatory strictness, centralized stablecoins are facing more and more challenges, while the importance of decentralized stablecoins is becoming increasingly prominent. This article will delve into the current development status of decentralized stablecoins, the dilemmas they face, and the opportunities ahead.

Why do we need decentralized stablecoins

The necessity of decentralized stablecoins is mainly reflected in the following aspects:

1. Get rid of centralized control. Centralized stablecoins like USDT, USDC, etc. are subject to government regulation, which poses the risk of being frozen or restricted in use. Decentralized stablecoins can avoid this risk.

2. Achieve true minting rights. Centralized stablecoins are essentially a mapping of fiat currency, lacking true minting rights. Decentralized stablecoins can realize autonomous credit creation in the crypto world.

3. Meet specific user needs. User groups that are sensitive to centralization risks require a completely decentralized stablecoin option.

4. Explore new models of currency issuance. Decentralized stablecoins are an important practice for cryptocurrencies to explore autonomous credit creation.

Current stablecoin market landscape

Currently, the stablecoin market is mainly dominated by centralized stablecoins, with the three major centralized stablecoins USDT, USDC, and BUSD accounting for over 90% of the market share. Among decentralized stablecoins, DAI and FRAX have a larger scale, but there are also issues with using centralized assets as collateral.

The scale of truly fully decentralized stablecoins is still very small and faces many challenges:

1. Insufficient scale effect makes it difficult to form a virtuous cycle. Small-scale stablecoins have poor liquidity and high slippage, making it hard to attract users.

2. The lack of unique application scenarios makes it difficult to compete with mainstream stablecoins.

3. Faced with the suppression of traditional financial forces, the development space is limited.

4. There are still technical shortcomings, and stability needs to be improved.

Analysis of Mainstream Decentralized Stablecoins

DAI

DAI issued by MakerDAO is the largest decentralized stablecoin, but it has faced numerous challenges recently:

1. Involves real-world assets ( RWA ), increasing centralization risks.

2. Poor financial condition, with a net loss of $9.4 million in 2022.

3. It overlaps with centralized stablecoins in the user base, making it difficult to form differentiated competition.

FRAX

FRAX adopts a partially algorithmic and partially collateralized model, making it the second largest decentralized stablecoin, but it also has its issues:

1. The collateral assets are mainly USDC, which have not eliminated the risks of centralization.

2. Continuous issuance of FXS tokens is required to maintain operations, equivalent to $210 million in financing in 2022.

Liquity (LUSD)

Liquity is a fully decentralized stablecoin project, main features:

1. Only accept ETH as collateral to completely isolate centralized risks.

2. Adopting an automatic liquidation pool mechanism to reduce the risk of margin calls.

3. Designed additional demand scenarios for LUSD, such as liquidation discounts.

4. However, the stability is relatively poor, and there is a lack of continuous incentives for liquidity.

Inverse Finance (DOLA)

DOLA issued by Inverse Finance is also an attempt at a decentralized stablecoin:

1. Use ETH and OETH as collateral.

2. Designed the DBR coin as an interest rate adjustment tool.

3. Use a bond model to incentivize the use of DOLA.

4. However, the high borrowing rates have limited scale expansion.

RAI

RAI is a decentralized stablecoin not pegged to the US dollar:

1. Use a custom index as the anchoring target.

2. Use the redemption rate to adjust supply and demand.

3. Completely get rid of the influence of the US dollar.

4. However, the cost of establishing consensus is high, the scale effect is insufficient, and development is limited.

Future Prospects of Decentralized Stablecoins

1. It is difficult to shake the dominant position of centralized stablecoins in the short term, but there is room for development in the long term.

2. It is necessary to explore unique application scenarios and value capture models.

3. There is still a lot of room for technological innovation, such as clearing mechanisms, price stabilization mechanisms, etc.

4. New giants may emerge, such as Curve and Aave planning to issue stablecoins.

5. The regulatory attitude is an important variable that may affect the future development direction.

Overall, the decentralized stablecoin sector is still in its early stages, with challenges and opportunities coexisting. It is worth our continued attention to see who can stand out in this field in the future.