Maker Dai: Stable, but not scalable
The least understood thing about stablecoins is how they come into existence. Who creates the supply of Tether, USDC or Dai that you can buy on your favorite exchange? We will take a look at how professional arbitrageurs expand and contract the supply of a stablecoin based on the current demand of the market, how Dai’s model is different and why the lack of a professional arbitrage model makes Dai fundamentally unscalable.
There’s a common misconception that Dai can scale to any size, as demand for the stablecoin drives the price over $1, which leads arbitrageurs to lock up ETH (or other assets) in CDPs and create more Dai. This chain of logic is usually used to support the narrative that higher demand for Dai leads to higher demand for Ether, but both statements are wrong.
How stablecoins scale
Let us define a stablecoin as scalable if its supply can closely track the demand to hold it. To do that, a stablecoin relies on the existence of professional arbitrageurs that react to market signals and keep supply and demand in a constant balance.
Professional arbitrage requires a closed cycle. The faster and more efficient the cycle can be iterated through, the more closely…
