The adoption rate of cryptocurrencies continues to rise, and stablecoins are undoubtedly the cornerstone of the on-chain financial system.
You may have already heard of USDT and USDC—the leading stablecoins backed by banks that dominate the fields of trading, lending, and payments. However, a new member has entered the race: the decentralized USD stablecoin. Although both types of stablecoins aim to anchor the value of the dollar, their paths to achieving this are completely different, and their potential risks vary significantly.
So, what exactly is a decentralized USD stablecoin?
Decentralized dollar stablecoins are a type of stablecoin that maintains value stability without relying on bank accounts to hold fiat reserves. They operate based on crypto asset collateral, over-collateralization mechanisms, smart contracts, and a series of sophisticated on-chain incentive mechanisms, driven entirely by code without banks as intermediaries and without any centralized entry barriers.
The collateral for this type of stablecoin consists of crypto assets, which can be liquid staking tokens or a combination of various assets. Ultimately, users trust the open and transparent software programs and rules rather than the verbal promises of a bank or undisclosed internal audits.
How do bank-backed stablecoins operate?
The principle is quite simple: for every stablecoin issued, the issuer will deposit one dollar (or an equivalent asset) into a bank account as a reserve. The issuing company is fully responsible for the minting, redemption, and compliance of the tokens, and maintains close cooperation with banks and regulatory bodies.
This model appears to be smooth and efficient on the surface, but it concentrates enormous power in the hands of a few entities. Once the bank freezes funds, goes bankrupt, or regulatory bodies intervene, the entire stablecoin system may come to a standstill.
Decentralized dollar stablecoins vs. bank-backed stablecoins: What are the core differences?
1. Who holds the controlling power?
Holding bank-backed stablecoins is equivalent to placing trust in the issuing company and its partner banks; whereas decentralized dollar stablecoins achieve complete transparency, allowing users to verify the status of collateral and operational rules at any time.
2. Is there a possibility that funds may be frozen?
The issuers of centralized stablecoins may be required by regulators to freeze user funds or intercept transactions; however, decentralized dollar stablecoins do not have such a 'shutdown switch', and no one can arbitrarily erase your assets or prevent transfer operations.
3. What are the backing assets behind the tokens?
Bank-backed stablecoins have reserves in cash and short-term government bonds; decentralized dollar stablecoins are collateralized by crypto assets and typically lock up additional value assets to cope with market fluctuations. Although this model is slightly inferior in terms of capital efficiency, it is completely free from dependence on the banking system.
4. Where are the risk points distributed?
The survival of centralized stablecoins is deeply tied to the banking system; bank bankruptcies, operational misjudgments, and geopolitical turmoil can all trigger crises. Decentralized dollar stablecoins also have their own risks, such as smart contract vulnerabilities, oracle failures, and extreme fluctuations in the crypto market, but these risks are dispersed and do not concentrate in a single entity.
5. Is it tailor-made for decentralized finance (DeFi)?
Decentralized dollar stablecoins are products born for the DeFi ecosystem, seamlessly integrating with various scenarios such as lending, derivatives trading, and automated strategies without the need for any entity's approval, allowing for smooth collaboration with the entire ecosystem.
Trade-offs and challenges faced
Decentralized dollar stablecoins are not perfect. The over-collateralization mechanism can tie up significant capital, and maintaining the pegged exchange rate during extreme market conditions can be quite difficult; moreover, to be frank, there is still room for improvement in user experience — in contrast, the process of exchanging bank-backed stablecoins for cash is much simpler.
However, the industry's development is changing rapidly. The types of collateral are becoming increasingly diverse, revenue-generating collateral asset models are being implemented, and liquidation tools are continuously upgraded, all of which are improving the shortcomings of decentralized dollar stablecoins.
What is the importance of decentralized dollar stablecoins?
Decentralized dollar stablecoins might be the closest existence to 'truly native currency' in the cryptocurrency field, perfectly aligning with the original intention of cryptocurrencies: openness, resistance to censorship, and user-led rather than controlled by banks or regulatory bodies. Indeed, bank-backed stablecoins currently have advantages in convenience and liquidity, but decentralized dollar stablecoins are carving out a space for themselves — a space that does not yield to the will of banks and regulators.
Decentralized finance is maturing. Decentralized dollar stablecoins will not replace centralized stablecoins overnight, but they are rapidly growing into a cornerstone of a more robust and open financial system.
