After $UST fell apart, users started feeling uncertain about other stablecoins. The most vivid example is $USDT, which has transparency issues.

The market cap of $USDT has significantly declined since $UST downfall. This means that the number of $USDT in circulation has decreased, pointing to mass redemptions. Source.

$USDT dominates Curve’s 3pool, which is mainly used for stablecoin swaps in the DeFi space. This points to people massively exiting from $USDT. Source.

While a run from USDT can be partially justified because of Tether’s long-standing transparency issues, the fear spreads beyond it. Holders are so nervous about where they park their money that they also run from decentralized stablecoins like $DAI.

$DAI holders have been actively repaying their loans, burning $DAI. Source.

Given the circumstances, it’s likely that you’ve also been wondering about potential options to park your money. For now, $USDC and $BUSD look like safe havens, but in the long term, they expose you to a centralization risk and things like KYC that come along with it. 

If you’re going a decentralized route, you may think about $DAI or $FRAX. But, they have some risks too. That’s why today I will tell you about what I think is a hidden stablecoin gem.

Before introducing the token, let me review a couple of popular decentralized stablecoins. This will provide you with the necessary context for evaluating your options.

MakerDAO’s $DAI is the oldest decentralized stablecoin in existence. The process to create it is simple: give the protocol some funds and borrow a portion of what you gave. This setup may not make sense initially, but it’s a great way to get additional liquidity on your assets like $ETH. Plus, minting $DAI instead of selling into some stablecoin has tax benefits.

$DAI’s downside is that it became pretty centralized under the hood after it opened different types of collateral. Letting people borrow against USDC helped with liquidations but made $DAI look like a wrapper around a centralized stablecoin.

Source.

The same goes for Frax Finance. While it has a beautiful design, the token is mostly backed by $USDC. Theoretically, if Circle, the company behind $USDC, decides to block Frax Finance’s $USDC, it can easily do so, effectively destroying $FRAX.

In this tweet, the screenshot shows that the $USDC smart contract already has a blacklisting feature.

Is there a reliable decentralized stablecoin then? We’re still in the discovery phase in this regard, but I would argue that the little-discussed $RAI might be it.

$RAI is a fork of $DAI, built by Reflexer Finance as ‘the first non-pegged, stable asset which is only backed by ETH.’ It is a ‘stablecoin’ with a heavy focus on decentralization.

Interestingly, Reflexer Finance decided to come up with $RAI because $DAI’s turning to multi-collateralization and moving away from $ETH. It turns out that their vision makes a lot of sense.

$ETH is one of the most decentralized types of collateral. The network’s node structure is relatively well distributed, and Vitalik Buterin doesn’t unilaterally call shots. This is not to say that there is no speculative value built into the price of $ETH, but it certainly has a robust, developed economy to fuel the value of its token.

$RAI focuses on removing volatility from $ETH. Therefore, it’s not tied to $1. It started from a random USD value and auto-adjusted to around $3 because of its algorithm.

I know you may be put off by the “algorithm” word after the $UST debacle, but there are important differences. Unlike $UST, $RAI is overcollateralized, meaning that it doesn’t need to bootstrap a backing fund like Terra needed to; the money is already there. Also, the algorithm that $RAI uses is over 100 years old and has been actively used in fields like robotics.

The team’s goal is to have every part of the system autonomous and, if possible, remove all human control. This reduces the risk of an arrogant person or group of people driving the project where it shouldn’t be.

So far, $RAI has been working quite well, albeit the project is a bit small with only around $70 million locked as collateral. The price hangs around $3 with small and acceptable volatility.

$RAI most significant drawdown pushed the price to $2.89, which isn’t too far from $3. Plus, volatility was higher when the project started and is lower now.

So there you have it, a fork of the oldest stablecoin in existence focused on decentralized collateral and minimal governance. Although it’s not nailed to some number like $1 and uses an algorithm to determine the price, the overall package is good enough to consider it a stablecoin diversification candidate.

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Disclosure: At the time of writing, the author held ETH and USDT and several other cryptocurrencies. Read our trading policy to see how SIMETRI protects its members against insider trading.

Happy fishing