What Can Be Done to Solve the Stablecoin Dilemma?

By Claude Eguienta is the Chief Executive Officer at Mimo

Stablecoins are among the most revolutionary crypto assets ever created. The idea behind them is quite simple – traditional cryptocurrencies like Bitcoin (BTC) and Ether (ETH) can be volatile. This makes it risky to use them as a store of value or medium of exchange. So, in order to eliminate this risk, the inherent volatility needs to be taken away.

This risk is removed by pegging the value of a digital currency to a specific asset. Tether’s USDT, which is now the most popular stablecoin, was one of the first digital assets to do this successfully. Ideally, the value of each token is pegged to something with a stable price (e.g. the US dollar), lending it the stability needed to become a good store of value and medium of exchange.

Tether accomplished its aim quite well. However, there were a few issues, most notably the lack of transparency around Tether’s reserves. This was one of the inspirations for Circle to launch its own stablecoin, USDC. Since then, more stablecoins have been created, like Binance’s BUSD and Maker’s DAI, which are all pegged to the US dollar.

Thanks to this idea, there is now close to $130 billion worth of stable crypto assets in circulation. And while this certainly provides a large enough pillar for the crypto space to lean on, a case can be made that modern stablecoins are yet to represent the best that stablecoins can be. Far from it, in fact. 

Centralization and decentralization both come with problems. 2022 saw a host of centralized entities collapse from various flavors of mismanagement, while decentralized blockchains – stablecoins and otherwise – are still clunky and difficult. 

Centralized vs Decentralized Stablecoins

Most of the current stablecoins are issued and controlled by centralized entities. USDT is issued by Tether, USDC by Circle, and BUSD by Binance. All of these institutions can be censored or engage in censorship themselves and, perhaps most importantly, raise some big questions on transparency. 

Stablecoins like DAI have emerged as a potential solution to this problem. DAI is a stablecoin issued by the Maker protocol. The protocol is controlled by a decentralized autonomous organization (DAO), making it censorship-proof. 

But as history has shown, decentralized stablecoins can…