Centralized Stablecoins Sucks
Traditional solutions cannot achieve scalability, stability, and censorship resistance at the same time.
Last updated
Traditional solutions cannot achieve scalability, stability, and censorship resistance at the same time.
Last updated
According to , USD fiat-backed stablecoins take up 98.9% market share (as of 2023). Yet, the current fiat-based centralized stablecoin system faces several challenges that hinders its adoption and development:
Centralization allows for the concentration of authority in the hands of a single company or organization. If the organization fails or engages in fraudulent activities, it can lead to misuse of fund and undermine confidence in stablecoin.
Furthermore, centralization requires users to trust the issuing entity to manage reserves, maintain stability, and uphold contractual obligations. This trust dependency contradicts the principles of decentralization and peer-to-peer trustlessness that has served as the backbone of the alternative finance world.
To make matter worse, users cannot observe how centralized stablecoin is managed. Unlike decentralized cryptocurrencies, which operate on public blockchains where transactions are transparent and verifiable by anyone, centralized stablecoins may operate with a degree of opacity, leaving users in the dark about the true nature of their underlying assets and the stability of the stablecoin.
Centralized stablecoins' lack of transparency regarding their reserves and auditing practices further lead to doubts about their actual backing and stability. Without community's monitor, users must rely solely on the word of the stablecoin issuer, creating a potential conflict of interest and increasing the risk of fraud or mismanagement.
Fiat-backed currencies are subjected to the same risks associated with fiat currencies, such as inflation and geopolitical instability. These stablecoins are inherently tied to the traditional banking system, as they rely on bank deposits or reserves to back the value of the stablecoins. This dependency introduces risks associated with the banking system, such as bank failures, liquidity shortages, and regulatory changes, which can impact the stability and availability of fiat-backed stablecoins.
Furthermore, being tied to fiat-currency subjected stablecoins to censorship and regulatory pressure. Regulatory scrutiny around stablecoins is increasing, with concerns about potential risks to financial stability, money laundering, and consumer protection. Issuing entities may freeze or confiscate funds, restrict transactions, or comply with government regulations that limit user access or impose restrictions on how stablecoins can be used. This undermines the decentralized spirit of cryptocurrencies and may not allow users to seek financial freedom and privacy.
While traditional fiat-based stablecoins are not exactly risk-free, users are not compensated for their risks as these stablecoins usually do not earn yield. Meanwhile, issuers of centralized stablecoins get access to enormous money reserves that allow them to earn interest and investment income from.
