Decentralized Stablecoins on the Decline

The two most popular decentralized stablecoins, $DAI, and $FRAX, are primarily backed by $USDC, a centralized stablecoin. While decentralized stablecoins offer the potential for increased security and autonomy, their reliance on centralized parties has proven to be a weakness.

In recent years, we have seen several centralized stablecoin issuers experiencing financial difficulties, which has caused problems for users and damaged trust in the stablecoin market.

Overview of $DAI     

DAI is a decentralized stablecoin designed to maintain a stable value relative to a specific asset or basket of assets. It is one of the first stablecoins issued on the Ethereum blockchain. As a result, it is widely used to store and transfer value within decentralized finance (DeFi) applications. DAI is issued by the MakerDAO (MKR) protocol, a decentralized autonomous organization (DAO) that its token holders govern. The MakerDAO protocol is designed to provide a decentralized platform for creating and managing stablecoins, digital assets designed to maintain a stable value relative to a specific asset or basket of assets.

The value of DAI is pegged to the US dollar and is maintained through a system of smart contracts designed to adjust the demand-supply of DAI in response to changes in demand. In addition, the MakerDAO protocol uses several mechanisms to maintain the value of DAI, including a collateralization system that requires users to collateralize their DAI with other assets to receive a loan in DAI.

In addition to being a stablecoin, DAI is also used as a medium of exchange within the DeFi ecosystem. It is widely accepted as a form of payment by decentralized exchanges, lending platforms, and other DeFi applications. DAI is also a collateral asset in various DeFi protocols, including stablecoin lending and margin trading platforms.DAI has gained significant adoption and recognition within the cryptocurrency community and has become a vital component of the DeFi ecosystem. It is widely seen as a pioneer in the stablecoin market and has set the standard for other stablecoins to follow.

Overview of $FRAX     

$FRAX is a decentralized stablecoin that is built on the Ethereum blockchain. It is designed to be a stable and transparent alternative to traditional stablecoins such as Tether and USDC.FRAX is an algorithmic stablecoin not backed by a physical asset such as gold or the US dollar. Instead, it is pegged to an external reference rate, such as the US dollar price or a basket of currencies. The value of FRAX is maintained through a combination of a collateralized debt position (CDP) system and a buy/sell mechanism that adjusts the supply of FRAX to maintain its peg.

One of the main advantages of FRAX is that it is transparent and auditable. All of the transactions on the FRAX protocol are recorded on the Ethereum blockchain, meaning anyone can verify the supply and demand of FRAX at any given time. Additionally, FRAX is governed by a decentralized autonomous organization (DAO), allowing community participation in the decision-making process.FRAX has several potential use cases, including a stable store of value, a medium of exchange, and a collateral asset in decentralized finance (DeFi) applications. It is currently listed on several cryptocurrency exchanges and is available for trading against various other assets.

Decline and the negative aspects

One potentially harmful aspect of DAI is that it relies on other centralized assets, such as USDC, as collateral to maintain its value. This means that if the value of the collateral falls, it could also impact the value of DAI. Additionally, the MakerDAO protocol has faced criticism for its complex governance structure, which some argue makes it difficult for stakeholders to participate effectively in decision-making processes.FRAX is also designed to maintain a value of 1 US dollar.

And One potentially harmful aspect of FRAX is that it relies on a centralized oracle system to provide price data for its collateral assets. This means that the accuracy and integrity of the price data depend on the oracle system’s reliability. Additionally, FRAX has faced criticism for using a governance token, FXS, which some argue gives specific stakeholders disproportionate influence in decision-making processes.

Conclusion

This trend is hoped to reverse, as decentralized stablecoins offer a more secure and autonomous alternative to centralized stablecoins. However, the current trend towards centralization is cause for concern, as it highlights the need for improved regulation and oversight in the stablecoin market.

The future of stablecoins will depend on the ability of decentralized stablecoins to gain a more significant market share and establish themselves as a reliable and secure alternative to centralized stablecoins. In addition, it will be necessary for decentralized stablecoin issuers to demonstrate their commitment to transparency and accountability to rebuild trust and confidence in the stablecoin market.