> One IRON token is always redeemable for $1 worth of collateral, which on IRON is a mixture of TITAN and the Circle and Coinbase-created stablecoin USDC.
[0] https://thedefiant.io/iron-finance-implodes-after-bank-run/
Algorithmic stablecoins don't work
Overcollateralized algo stables such as DAI are much more sustainable. They require substatially more of a user's unrelated capital (whitelisted assets not based on the stablecoin's issuing protocol such as eth or wbtc which also have relatively deep liquidity available on the market) to be locked up and held as collateral to mint the stablecoin. And that makes drawing down the supply much smoother when times get rough as folks with their capital locked up will repay their debt on their own or have the market do it for them in a liquidation of locked capital. This repayment is what burns the supply and keeps the stable from falling far below peg. In fact historically, DAI's problem was that it would go way over peg during drawdowns because damand for DAI to stave off or participate in liquidations would push the usd price of dai way up.
It is highly capital inefficient model, as it takes roughly at least $1.50 of the other asset to mint $1.00 worth of stablecoin, and users will usually go for a much higher ratio to prevent the liquidation threshold from kicking in. And this capital inefficiency really kneecaps growth since you can't mint anywhere near as much of the stablecoin, but it also means the protocol and thus the stablecoin is much more robust in downturns.
Now it still has real risks because the protocol still depends on lively and accurate oracles to watch and report the collateral values, and that liquidations execute properly when collateral values fall enough to trigger them. But those risks are much more manageable compared to the risks undercollateralized stablecoins present.
Everyone is thinking way too hard about this. There's no mathematical or economic way to create a parallel US currency that won't break in a credit crisis. It's called the Impossible Trinity [1] because it's empirically impossible to do the following all at once:
1. Setting a fixed currency exchange rate
2. Allowing capital to flow freely with no fixed currency exchange rate agreement
3. Autonomous monetary policy
If you do number 1 (set a fixed currency exchange rate, aka 1 DAI : 1 USD), you CANNOT allow for the free flow of capital in and out of your exchange regime. It will eventually break every. single. time. Even if you're a massive sovereign nation, you still can't defend a peg against the Trilemma [2]
Crypto investors should understand that they aren't up against ideology here or "haters", they are up against empirical mathematic principles.
[1] https://en.wikipedia.org/wiki/Impossible_trinity
[2] https://www.thebalance.com/black-wednesday-george-soros-bet-...
If you're a fan of crypto and still reading, here's a hint at the next financial innovation after pegged currencies that you can try to replicate in the cryptoverse: XDR [2]
[1] https://en.wikipedia.org/wiki/List_of_circulating_fixed_exch...
You present yourself as deeply knowledgeable about these topics, I’m surprised you missed it:
[+] Dai's monetary policy is not autonomous; new units can only be issued for sufficient collateral and must be destroyed when value falls too low, a constraint that would make a central bank not be regarded as autonomous.
The PSM takes your USDC and mints new DAI and gives it to you. When DAI is >$1 you can make an instant profit doing this. (take 1 USDC, trade it for 1 DAI that you can sell for $1.001.)
The PSM takes your DAI and gives you USDC (while stocks last.) When DAI is >$1 you can make an instant profit doing this. (buy 1 DAI trading at $0.999, and swap it for 1 USDC worth $1.)
Notice the issue? The PSM within DAI is contingent on having enough USDC (proxy for USD) to keep the peg. When that reserve runs out, the PSM mechanism breaks and the peg fails.
To suggest otherwise is financial alchemy.
The auction function doesn't work if USDC suddenly isn't worth 1 USD, because then you're facing down a reserve that isn't worth "more" than DAI, even though the algo still thinks it's in balance.
Basically you've tied DAI to USDC, which in turn is tied to Coinbase, which in the event of a bank run/bankruptcy event will freeze assets and cause massive capital flight causing people to sell their USDC for less than 1 USD as they flee for safety. This causes DAI to become unbalanced because their reserve of USDC isn't actually worth what it should be in USD terms, causing DAI to also lose the peg in terms of real US dollars.
I'm telling you, there isn't a way to make this stuff work. It's financial alchemy.
If USDC loses value, those vaults will be liquidated and the collateral will shift over to alternates - ie. eth. The scenario you are mentioning only plays out if USDC falls so much (and quickly enough that the auction bots don't respond) that it cancels out the overcollateralization from eth. given that dai is 166% collateralized, it wpuld have to drop a ton, which is difficult to imagine when it is credibly backed by real assets.
Exchanges respond by sealing themselves off to protect their $3000 ETH from the $6000 fake ETH trade prices, thus creating a massive freeze in the market, thus wrecking the redemption system that underpins DAI.
It's very, VERY important to realize that all of these things are interwoven. There's no such thing as "USDC collapsing" without it also taking all the crypto traded on Coinbase with it.
Explain to me how you arbitrage USDC falling out of Dai?
I really encourage you to read up more on this. There are real risks that come with Dai as a stablecoin (including eth or USDC collapsing very quickly) but they are not the risks that you are identifying.
I likewise encourage you to think about this from first principles and read up on the mechanics of a currency peg. You MUST be able to quickly sell T-bills on the market swiftly to defend your currency peg, otherwise you will see your currency break from the pegged range. DAI is shifting the reserves from directly holding USD or T-bills to holding USDC instead, which isn't the same thing as USD and WILL cause problems for DAI.
I wish this was a joke. How about you try to collect the $1m Millennium price with your proof of the Riemann hypothesis based on "empirical mathematic principles"? To be 100% clear about this: there's no such thing as empirical mathematical facts, there has never been and there will never be, not in this universe or any other. No matter how many (finitely many) roots of the zeta function you collect, they will never constitute a proof.
To your point: you do realize that stablecoins like Dai have given up monetary autonomy, right? The amount of Dai in circulation is governed by users/the market, not the protocol or a central bank. You seem to be acting in bad faith, because you deliberately only discuss two points, but according to this theory, a stable exchange rate and capital mobility are indeed compatible if you're willing to let the market dictate your monetary policy.
And what is an "empirical mathematical principle"?