Breaking the Peg: Every Stablecoin Has Its Points of Failure

In the year of bear markets and curbed enthusiasm, stablecoins have emerged as the asset class with which many of the crypto community associate high hopes for the long-anticipated mass adoption.

As any other important sector in the field, the stablecoin space presents a major ideological battlefield for crypto purists and crypto pragmatists.

Over the last several months, an enthusiastic movement of developers determined to produce viable decentralized alternatives came up with a variety of often ingenious and complex stablecoin designs.

"We consider this emerging type of crypto asset of great significance to further the development of the ecosystem. However, not all stablecoins are created equal, as some projects allow issuers to freeze funds. I personally favor the projects building stablecoin protocols that embrace Bitcoin's core values of decentralization, algorithmic issuance, and censorship resistance."

The Dai Stablecoin is issued and controlled by a decentralized autonomous organization called Maker.

As with other crypto-backed stablecoins, Dai's major potential point of failure comes from volatility inherent to collateral assets - from routine "Collateral volatility," to vulnerability, to so-called "Black swan" events, whereby the value of the underlying asset dramatically collapses at a speed faster than the system can sustain.

With regard to Dai itself, stablecoin sceptics such as Preston Byrne often point out that the token is overcollateralized to ETH, so that creating $1 worth of Dai will take >$1 worth of ETH. Byrne is convinced that this does little beyond increasing users' exposure to the value of the underlying coin - and, by extension, to its volatility.

Finally, some developers choose to avoid pegging their stablecoins to other assets altogether.

As this brief survey demonstrates, existing stablecoin models represent a spectrum of tradeoffs between functionality, scalability, and decentralization, and offer varying levels of security and vulnerability to failures.

"We firmly believe that consolidation will take place and the projects that survive will be the ones that garner the most adoption. While the stablecoin market doesn't have to be a winner take all environment, market cap will be won by having more trust than the competition. That competition will only help increase interest and confidence, and in-turn adoption of the asset class."