How big is the market for decentralised stablecoins?

The stablecoin market consists mostly of fiat-backed stablecoins — USDC, USDT (the backing is less clear, discussed earlier here), and BUSD.

Decentralised stablecoins like DAI and LUSD (and Frax, which I think is highly risky) are a much smaller portion of the stablecoin market cap.

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Where are fiat-stablecoins better?

Fiat backed coins are exchangeable for one fiat US dollar.

Decentralised stablecoins — like DAI and LUSD — are exchangeable for one dollar worth of collateral. This collateral is not fully denominated in US dollars (e.g. LUSD is backed by ETH, and DAI is partially backed by ETH and WBTC). There is always some risk that large changes in collateral price will make it impossible to get back one dollar worth of collateral.

(Well regulated) Fiat-backed stables are safer than decentralised stables from a collateral standpoint.

Where are decentralised stables better?

If USDC addresses are blacklisted by the US Office of Foreign Assets Control (OFAC), then Circle blacklists those addresses and nobody can use that USDC.

By contrast, if OFAC blacklists LUSD addresses, non-US people can still redeem that LUSD for ETH. This is in theory. In practise, many other countries may copy the blacklist restrictions of OFAC, so this becomes moot.

So, how important are decentralised stables?

My guess that most stablecoins won’t be blacklisted by OFAC. The risk of many businesses/individuals being blacklisted should be fairly low. So, most stablecoin users should prefer fiat-backed stables because they have better collateral quality. Therefore, I expect the demand for decentralised stables won’t be that big.

If there is low trust in the US dollar and institutions (e.g. blacklisting becomes prevalent), then why use a currency that is pegged to the US dollar. Something like ETH or BTC or RAI perhaps makes more sense.

What do you think? What are the counterarguments?

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