Traders Search for Stable Assets as Collateralized Stablecoins Falter
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A stablecoin is only as stable as its backing. That’s the lesson crypto traders have learned over the past week when volatile markets sent bitcoiners and etherians scurrying to liquidate crypto assets. Stablecoins were the safe haven sought by the masses, but as the masses were to discover, not all of these assets lived up to their billing. While the fiat-backed stablecoins maintained their dollar peg, crypto-collateralized coins such as MakerDAO’s SAI wobbled and became undercollateralized.

The past week’s events, incorporating Black Thursday, when BTC flirted with $4K, and tens of billions of dollars were wiped off the cryptoconomy, have been educational, if not profitable. Traders have learned, through trial, error, and misplaced trust, which stablecoins they can rely on to store value, and which are prone to becoming unpegged. They have also been given cause to examine alternative assets that can provide price stability – or even a modest yield – when the crypto markets turn red.

DAI and SAI Wave Goodbye to a Dollar

Millions of dollars of single collateral SAI – the MakerDAO-issued stablecoin – was left undercollateralized last week as Black Thursday sent shockwaves through the markets, leaving price oracles off-balance and causing problems for DeFi projects that relied on ETH for collateral. The plummeting price of ETH, which SAI is wholly collateralized with, put significant pressure on the stablecoin and on collateral loans constructed using SAI and DAI, its multi-collateral equivalent.

MakerDAO’s system requires that in order to mint – i.e. create – SAI, it is necessary to lock up ETH worth 150% of the total SAI value. To create 1,000 SAIs, for instance, would require $1,500 of ETH. In the event of ETH’s price slipping dangerously close to the value of the collateralized asset, the ETH would be forcibly liquidated to cover the deficit. Most of the time this system works effectively, enabling decentralized stable assets to be issued and utilized to power an array of defi applications.

The black swan events of last week that caused cascading liquidations and oracle price discrepancies, however, had not been widely foreseen. Only a handful of MakerDAO naysayers had predicted such a scenario, and their concerns were brushed aside by those involved with overseeing Maker’s collateralized debt positions (CDPs). When the markets went wild, up to $4.5M of SAI was left undercollateralized and one individual lost 1,713 ETHs from a CDP that was liquidated. The events prompted MakerDAO to consider an emergency shutdown of its system as the price of SAI trended towards $1.09, having lost its dollar peg.

Traders Seek out Stable Alternatives

Crypto collateralized stablecoins have proven themselves to be a system that works – until it doesn’t. In extreme conditions, assets like SAI and DAI are prone to buckle and bend. Tether, meanwhile, for all its flaws – such as its notorious opacity – has weathered the storm, with traders trusting its attested fiat reserves, or at least trusting them over BTC as Bitcoin spiked to its most volatile in three years.

While there have been few winners to emerge from the crypto market downturn, which shaved as much as 50% off major assets in a single day, a handful of contenders have stood tall. Of these, one token whose economic model is of particular interest is Saga (SGA). Although more of a low volatility asset than a stablecoin, its construction captures the best of the centralized and decentralized worlds: think the fiat backing of Tether with the decentralized governance of a DeFi asset.

Unlike Tether or USDC, however, SGA isn’t backed solely by dollars in bank accounts. Rather, it’s based on the IMF’s special drawing rights (SDR), comprising a basket of national currencies. As anyone who’s been monitoring the performance of SDR versus USD over the past few weeks will be aware, the IMF’s basket is beating the greenback. Crypto assets such as SGA, therefore, serve as both a store of value and a hedge in the face of volatility – while also retaining the ability to rise compared to, say, a dollar-pegged stablecoin. For the past month, while other assets were enduring double-digit losses, SGA has faithfully done just that.

The crypto community doesn’t need a single stablecoin to rely on when the market turns south. Nor should it seek one, for as shown by the fate of Maker’s DAI, coupled with Tether’s lingering legal uncertainty, monopolies lead to points of failure, be they in centralized or decentralized systems. There is untapped demand for alternative assets that can retain their value in even the most testing of conditions. Crypto needs stabler stablecoins and assets that aren’t collateralized against other cryptos. Until that occurs, the industry will remain primed and ready to erupt whenever pressure is applied.

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