I'm skeptical of any stable coin. Doubly so when they're pegged to U.S. dollars.
Banks holding U.S. dollars follow American AML rules. Those include requirements around tracing beneficial ownership. Since nobody knows who beneficially owns a stablecoin, there is nobody who can vouch for those dollars' beneficial owners.
DAI is really borrowed against collateral (right now it's Ethereum, but there are plans for muliple forms of collateral), and these collateralized debt positions are public info. If the underlying collateral's value falls too far, the position is automatically liquidated and the underlying collateral is sold to pay for the debt before returning the remainder to the borrower.
Those two mechanisms are the only means of DAI creation, which means that it can never get in an undercollateralized position without everyone knowing. Everything about it is transparent, there are no hidden beneficial owners really. Their names may not be known, but all financial positions are known.
Is the idea that someone will guarantee me some basket of consumer goods (or some amount of another currency which can readily be exchanged for said basket) if I give them 1 DAI?
I think there are fundamental problems with Schellingcoins / other smart-contract-based coins which try to dynamically adjust the supply to maintain a peg; the underlying economics seems pretty shaky (e.g. see http://hackingdistributed.com/2017/06/19/bancor-is-flawed/).
I don't think that the same problems exist with fiat-backed coins though, IFF the full reserve is held. The problem with pegs is when you don't have enough reserve to prevent the peg being broken.
Tether is supposed to be full backed like this, but the fact that they broke up with their auditor suggests that they are not being honest about their reserves.
Although, if your USD-coin is issued by Bank of America, and they apply the same fractional reserve rules that they do to their normal deposits, is there any difference at all?
There's nothing in principle preventing a blockchain from tying wallets to KYC'd individuals, thus resolving the UBO for a given payment/settlement; Stellar and Ripple both have KYC protocols built in.
If you are implying Tether is backed by total assets/liabilities, then some people might be OK. On the other hand, some people might be concerned if it was backed by cryptocurrencies which are rather volatile. The volatility of the cryptocurrencies could then result in volatility in Tether.
Not sure how significant permanent drop in price would be handled, as I understand it would cause cascade liquidation and massive loss for all parties involved (issuers and holders of DAI).
I'm also struggling to understand the incentive for people to overcollateralize to receive tokens notionally equivalent to dollars and how that's convenient
To your second point, the collateralized loan allows for very very low interest margin investing. You can use the DAI to invest in something, sell it at a higher price, repay your loan, and make money on the difference.
There are financial incentives to create and destroy DAI. A user of DAI doesn't need to collateralize, he just buys DAI.
DAI demand will grow, if the use cases grow. It is also a good safe heaven for crypto traders.
I love how we've come full circle to uninsured fractional reserve banking.
It's analogous. (More accurately, it's a carry trade.) If Ethereum crashes more than 33% (given 150% overcapitalisation) the token breaks the buck. Betting your less-liquid assets won't fall below your more-liquid liabilities is maturity transformation and presents the classic risks of fractional-reserve banking.
And the positions are set up to where you can borrow less than the maximum amount of DAI per ETH, to make your position more resistant to price drops.
The same thing happens with banks. It turns into a run when this forced liquidation drives prices down further which in turn fuels further redemption requests. It’s very possible to start the day 150% capitalised and end 20% because you sold 10% which tanked the market.
https://www.trusttoken.com/trueusd/
I was at a talk by them last week and they talked through the process they used to stay compliant.
It appears TrueUSD has set up a "legal framework [which] enables you to exchange USD directly with escrow accounts" [1]. When cashing out, you "receive USD from one of the escrow accounts in [their] network of fiduciary and banking partners to purchase or redeem TrueUSD." (You also need to pass "a standard KYC/AML check."
This is much better than Tether. But I'm still skeptical. If a TrueUSD token is frozen as part of a bankruptcy or divorce case, or is involved in criminal proceedings, is the token frozen or the entire escrow account? How do the escrow account managers certify they know the beneficial owners of their escrow accounts? "Know your customer" is a basic American financial principle, and one stable coins of any stripe inherently butt up against.
[1] https://blog.trusttoken.com/trueusd-a-usd-backed-stablecoin-...