In early August, the US Office of Foreign Assets Control sanctioned 44 addresses associated with the Tornado Cash decentralized protocol. Following this announcement, the use of the Tornado Cash protocol became illegal for American citizens, and heavy monetary and non-monetary fines were determined for the violators. Center, the consortium behind the USDC stablecoin, has frozen $75,000 worth of USDCs in TornadoCash smart contracts as a preemptive measure, almost doubling the number of blocked addresses. After these events, various serious discussions about censorship risks were formed in digital currency communities. In this article from Mihan Blockchain, Challenges facing Dai and Forex As two decentralized stablecoins, we will examine and answer the question why these two cryptocurrencies are considered as DeFi diplomats.
Challenges facing Dai and Forex
For obvious reasons, stablecoins have been one of the main topics and turning points in censorship debates. Stablecoins are one of the most widely used components of the digital currency field. Currently, there are more than $150 billion worth of stablecoins in circulation, and their transaction volume reaches tens of billions of dollars. A large part of the activity of stablecoins is related to traders, but they are also used in daily activities such as monthly salaries, money transfers, payments, etc. However, the use of stablecoins is growing day by day and will increase with the increase of DeFi users.
But looking for USDC BlocksOnline discussions and controversies have led to emotional reactions in users. Decentralization fanatics have criticized the FRAX and DAI stablecoins for using USDC as collateral and advocated for other decentralized alternatives. Are these fans right? If a stablecoin can be easily censored, what is the advantage of that stablecoin? The answer to these questions is deeper and different than what is said in the digital currency communities.
The stablecoin triangle
In the design of a stablecoin, 3 main issues should be considered: decentralization, scalability and price dependence (Peg). Currently, only two of these 3 features can be selected.
USDC and USDT (Teter) are centralized stablecoins backed by fiat currency that have chosen scalability in an extreme way and completely sacrificed decentralization. On the other hand, stablecoins such as sUSD, LUSD, and RAI have prioritized decentralization, but their growth has been limited by the amount of decentralized collateral available to them. Is there an intermediate range where decentralization does not sacrifice scalability and price dependence is still maintained?
Currently Forex and Dai stablecoins They are in this intermediate range. The market value of both stablecoins (even after the bear market) is above 1 billion dollars. One of the advantages of these stablecoins is that unlike USDC and USDT, their custody is in permissionless smart contracts instead of a central entity. The fact that their collateral is such provides transparency in custody and allows these stablecoins to adapt to the speed of the digital currency world.
However, these stablecoins have been criticized for relying on centralized collateral in price dependence, and critics have said that there is no innovation in these stablecoins and that they are simply a cover for USDC.
Naturally, it is much easier to pretend to be biased towards decentralization than to plan to embrace change. This is not the first time that people, especially members of the Ethereum community, have fallen into this trap. In 2021, few people imagined a multichain world.
But at the beginning of that year, Binance Smart China grew explosively and several thousand new users joined it, paving the way for economic blockchains like Polygon, Avalanche, Phantom, etc. What maximalists and fanatics fail to understand is that the vast majority of the world’s people cannot always remain in one fixed mindset.
People need to accept the fact that if Dai and Forex completely free themselves from centralized collateral, not only will their volume decrease, but USDC and USDT will grow more and take Dai and Forex’s market share.
Thanks to the power of the network effect, USDC and USDT will soon gain market leadership in a way that no hybrid or fully decentralized stablecoin can compete with. The consequence of resistance to the adoption of centralized stablecoins is to increase the risk of greater censorship for the entire digital currency ecosystem.
Diplomacy in Difai
Dai and Forex stablecoins which are the most popular hybrid stablecoins, have now reached the position of “Diplomats of DeFi”. Both stablecoins have a challenging path ahead in the on-chain and off-chain world.
Dai and forex are an important barrier against centralization by helping to promote decentralization. Stablecoin Forex has set itself apart from other DeFi projects by adopting a win-win approach to cooperation. In fact, most of the USDC Forex collateral is not only in USDC form, but in USDC/FRAX liquidity currency pairs in Curve and UniSwap, which makes the liquidity tokens (LP) and smart contracts of these protocols, from Forex support
If Forex integrates further with DeFi and at the same time moves away from USDC collateral, Circle Inc (issuer of USDC) will have to block Crow and UniSwap smart contracts to block Forex. In addition to destroying DeFi, such a move would also destroy Circle’s business.
Even if Circle really wants to block Dai and Forex, it’s safe to assume that it won’t do so without warning. If such a decision is taken suddenly, it will affect many people. Additionally, just as banks are margined when they have tens or hundreds of millions of collateral, so will stablecoins. Dai and Forex are among the biggest holders of such USDC and blocking them seems impractical.
As Ethereum’s market cap grows and newer lending tools emerge, Dai and Forex can reduce their dependence on USDC without compromising their price dependence and scalability. One of the new tools is Fraxlend, which will provide the possibility of “term sheet” lending. The DeFi community should promote the use of different stablecoins with different scalability and decentralization. If we don’t even consider the issue of scalability, regardless of decentralization, fiat-backed stablecoins will have no competitors and will dominate the market. In the above article, Challenges facing Dai and Forex After the ban, we reviewed Tornadoke and explained the position of these two stablecoins as DeFi diplomats. What do you think about these stablecoins and decentralized stablecoins in general? Share your opinion with us.