12.3.2024
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Centralization and regulation. These are some of the biggest risks we face when it comes to stablecoins. It’s understandable that stablecoins have become an increasingly popular alternative to other, more volatile cryptocurrencies for storing and transferring funds. They are specifically designed to maintain a stable value by pegging their value to a fiat currency, like the US dollar. However, as the stablecoin market cap has grown, so too have concerns about the potential risks—particularly in the current climate. Centralized stablecoins—like USDT, USDC, BUSD, and even DAI to a degree—are susceptible to regulation. This poses risks both to you, if you hold them, and the broader crypto ecosystem. In this blog post, we explore the risks of centralization and regulation for stablecoins and what Sovryn is doing to mitigate these risks.
Centralization poses a significant risk to stablecoins. Centralized stablecoins are typically issued by a single entity, organization, or group of people. This centralized control increases the potential for censorship, manipulation, and corruption, which can threaten their stability and integrity. For example, if the centralized entity controlling the stablecoin engages in fraudulent activity (like FTX) or experiences a hack, there is a likelihood that you could lose your funds or have your transactions censored. On top of that, the value of centralized stablecoins is often backed by reserves held in a bank account. This means that the stablecoin is dependent on the financial health of the issuer and the bank. If, for example, the issuer or bank were to go bankrupt, you could also lose your funds.
Another risk associated with centralized stablecoins is that they may be subject to government regulation, which could drastically limit their potential as a financial tool. Stablecoins that fall under government regulation may be required to comply with anti-money laundering (AML) and know-your-customer (KYC) policies. These policies and regulatory frameworks often require stablecoin issuers to collect and store personal information, such as identification documents, and monitor user transactions. This can obviously compromise user privacy. Additionally, regulatory authorities may have the power to freeze or seize stablecoin funds. This can lead to a lack of trust and a reduction in demand for its use, ultimately harming the stablecoin's value.
As the crypto market continues to mature, these risks are becoming increasingly apparent, and people are naturally choosing to explore alternative options that offer greater decentralization and security with less exposure to regulatory oversight.
To better understand the benefits of decentralization, let’s look again at centralization. Centralization refers to the concentration of power, control, and decision-making in the hands of a single individual, group, or organization. In the context of crypto, centralization can manifest in several ways. For example, some cryptocurrencies are issued and managed by a central authority, such as a company or government, which controls their supply, distribution, and governance. This can pose risks to the security, integrity, and transparency of the cryptocurrency, as you have to trust the central authority to act in your best interests.
Decentralization, on the other hand, refers to the distribution of power, control, and decision-making across a network of participants, rather than in the hands of a single individual, group, or organization. In the context of crypto, decentralization is typically achieved through the use of blockchain technology, which allows for a decentralized, trustless (you don’t need to trust other people to act in your best interests), and transparent ledger of transactions. This means that no single entity or authority has complete control, and governance is distributed among network participants.
Think of it this way. Decentralization is like a flock of birds flying in formation. There is no leader or central authority that controls the movement of the flock. Instead, each bird follows a set of simple rules and interacts with its neighbors to maintain the overall cohesion and direction of the flock. Similarly, in a decentralized system, there is no central authority or leader that controls the behavior of the network. Instead, each participant follows a set of rules and interacts with others in the network to maintain the integrity and security of the system. Just as a flock of birds can adapt to changes in its environment and avoid obstacles, a decentralized system can adapt to changing conditions and resist attempts at censorship or manipulation.
The choice between centralization and decentralization can have significant implications for security, trustworthiness, and resilience. Decentralized stablecoins have a number of benefits over their centralized counterparts that should be considered by anyone, beginner or not, who is currently or looking to hold value in stablecoins.
Decentralized stablecoins are less vulnerable to systemic risks. Centralized stablecoins, such as USDT and USDC, rely on a centralized authority or institution to issue, manage, and redeem them. This centralized control introduces systemic risks, such as the risk of fraud, embezzlement, or mismanagement. Decentralized stablecoins, on the other hand, are typically managed by a decentralized network of validators, which help to maintain the integrity and security of the stablecoin—making them less vulnerable to such risks.
Decentralized stablecoins offer more transparency. Since they are managed by a decentralized network of validators, the transactions and operations on the network are transparent and publicly visible for anyone to see, with a little familiarity with the tools. Anyone can check to see that the stablecoin is backed by the collateral that it claims. This transparency can help to increase the confidence and trust of holders in the stablecoin, as they can easily verify transactions, collateral, and operations on the network.
Decentralized stablecoins offer more independence and freedom from jurisdictional controls. Centralized stablecoins are often subject to the laws, regulations, and policies of the jurisdiction in which the issuer is based. This can limit the freedom and autonomy of people who want to use the stablecoin for cross-border transactions or to avoid currency controls. Furthermore, the threat of changing regulations can create an uncertain environment for those who hold centralized stablecoins. Decentralized stablecoins, on the other hand, are not subject to any central authority or jurisdiction, which makes them more globally accessible and more reliable.
The Sovryn Dollar (DLLR) is a fully transparent, exclusively bitcoin-backed digital dollar. It’s the new decentralized stablecoin from Sovryn. No single entity or organization has complete control over DLLR, which reduces the risk of censorship, manipulation, and corruption. DLLR is an aggregated stablecoin that is pegged to the US dollar. This means that it has a 1:1 peg with the value of USD and is composed of a diversified basket of other exclusively bitcoin-backed stablecoins.
Currently, DLLR is an aggregate of DOC and ZUSD. DOC is the bitcoin-backed stablecoin of the Money on Chain protocol. ZUSD is the overcollateralized, bitcoin-backed, USD-pegged stablecoin issued by the Sovryn Zero protocol. When launched, you’ll be able to exchange DLLRs for the equivalent USD market value of bitcoin at any time.
DLLR will be issued by the Mynt protocol. We’ll dig into this further in a future blog post. In essence, the Mynt protocol aggregates multiple bitcoin-backed, USD-pegged stablecoins to issue an ultra-bitcoin-backed stablecoin. DLLR will be more resilient and scalable than any one of the individual stablecoins held by the aggregator. It will combine the stability and liquidity of each individual stablecoin in the aggregator in a single, stronger asset.
As with anything else, the future of stablecoins is unclear, but it’s likely to be shaped by the ongoing tension between centralization and decentralization. Stablecoins have quickly gained popularity, offering people an alternative to traditional fiat currencies. They hold a relatively stable value and act as a convenient on-ramp to crypto ecosystems. However, the risks of centralization and regulation associated with some stablecoins are of significant concern for the broader ecosystem and should at least be on your radar. As the market continues to mature, the limitations of centralized stablecoins in terms of security, transparency, and autonomy are becoming more evident.
People are increasingly looking for alternatives. Alternatives that offer greater decentralization and less exposure to government regulation. DLLR, the new decentralized stablecoin from Sovryn, offers a promising new alternative. No single entity or organization has complete control over DLLR. It operates independently of centralized authorities, reducing the risk of censorship, manipulation, and regulatory interference—providing you with greater control over your financial activities.
Furthermore, the aggregation of multiple bitcoin-backed stablecoins through the Mynt protocol creates a more resilient and scalable stablecoin that offers the benefits of the inherent decentralization of the bitcoin network. By promoting greater security, transparency, and autonomy, DLLR represents an exciting opportunity for the future of stablecoins—and for us all. It’s likely that we see the shift towards a more decentralized alternative sooner rather than later. And DLLR is at the forefront of this new paradigm shift.
