Stablecoin Collateral & Reserve Rates Illogical

1

Collateral Ratio of stablecoins seems to me inconsistent and risky, and may have effect of subsidizing DAI holders

Stablecoins are nearly 1:1 against each other and therefore probably should have very high collateral ratios (i.e. small haircuts or large maximum leverage). I would also think less liquid stablecoins should have a higher reserve factor, i.e, in a panic the stablecoins that could flee the fastest in volatile market.

Current Setup:
USDT: 80% Collateral / 10% Reserve
BUSD: 80% Collateral / 10% Reserve
DAI: 60% Collateral / 10% Reserve
UST: 80% Collateral / 20% Reserve

For comparison major cryptos are 80%/20% like UST. Unlike nonstable crypto, UST cannot have a short squeeze liquidity event since it can be converted back and forth with LUNA. If anything, I would think this would require it to have a lower reserve requirement than other crypto. DAI, by contrast, has no such mechanism, and thus its price can spike in short term liquidity events as we have seen in the past especially when liquidations occur and start sucking out the supply. Shouldn’t this make UST have at least as low a reserve requirement as the others, with DAI if anything deserving the highest of the stablecoins?

On the other hand, DAI with its forced liquidation mechanism has a collateral factor of only 60% compared to other stablecoins 80%. Not only is DAI older and considered more of a safe haven, but also I would expect it to be vulnerable to a run in case of a crypto crash because of the forced liquidation sucking out the extra supply.

Shouldn’t this encourage borrowing DAI (low reserve), exchanging for UST, and then depositing? This means lots of UST collateral is backing lots of DAI loans. What if there is another liquidity event and DAI price spike where DAI becomes unpegged to the upside?

2

DAI is mainly backed by USDC.

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It is also 169% over collateralised.

UST is an algorithmic stable coin which traditionally has not worked due to the death spiral effect.

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Which is why Bitcoin is being used to build a currency reserve to defend the peg.

I would also add that UST is being massively pushed across multiple chains, which is another risk e.g. the wormhole hack DAI is less used outside of the ETH ecosystem from I can tell.

DAI has also survived the mass liquidations during Covid without going down much, while UST has had bigger drawdowns.

While I’m bullish UST and think it will survive I am not blind to the risks.

I prefer DeFi stablecoins as the centralised alternatives could have the collateral seized from the associated bank accounts or be straight up lying about it. They also have frozen addresses before.

3

I didn’t realize DAI was so heavily backed by USDC, thanks for sharing that. It still seems to support the idea that there is a speculative attack against the UST being conducted and subsidized by Venus, although perhaps less risk specifically against the DAI

4

Now UST has become unpegged and there is $9M of deposited UST at 100% utilization so users cannot withdraw, and presumably someone has shorted it all so stands to profit massively if UST goes to 0.
On the other hand if it goes down and rebounds, we could also get in a stuck situation if the rebound is fast. It got down to around $0.7, but if it rebounds to $1 thats enough to cause underwater liquidations
We need to fix the risk parameters of stablecoin.