What Makes a Stablecoin So Stable?

One of the central pieces to a strong DeFi ecosystem are stablecoins that people can trust will maintain their value. This allows participants to sell their tokens for profit, cut down further losses, and remain on the network for future investments.

There are a large number of stablecoins on Ethereum and Polygon, some more trustworthy than others. This article compares the different types of stablecoins, how they maintain peg to $1 USD, and why I love Qi DAO’s MAI stablecoin so much.

What does it mean to maintain the peg?

Compairing the stability of MAI (blue) versus DAI (orange) on Polygon

Why do stablecoins change value?

How collateral helps a stablecoin maintain value

Mai.finance’s analytics shows you the collateral-debt ratio and more

Not all stablecoins are alike though and their relationship to collateral can be different depending on their mechanism to maintain peg.

What are the various types of stablecoins?

  • Overcollateralized stablecoins
  • Guaranteed stablecoins
  • Partially collateralized stablecoins
  • Algorithmic stablecoins

The list above goes from tokens that have the most collateral behind them, to the least. I’ll detail more on each below.

You can find a massive list of stablecoins here.

Overcollateralized stablecoins

The benefit of an overcollateralized stablecoin is that it is very easy to maintain (once the smart contracts are created it can exist persistently). The risk of this type of stablecoin is that the collateral behind it exists in the same market setting as the stablecoin itself.

Guaranteed stablecoins

Guaranteed stablecoins are typically seen as less risky than the other types since their backing collateral exists outside of the same market as the stablecoin. These types of stablecoins are somewhat expensive to maintain since they require work outside of creating a smart contract. These types of stablecoins can still be risky though since the centralized authority that oversees the stablecoin could fail entirely at backing up its guarantee (a worry many have of the USDT stablecoin).

Partially collateralized stablecoins

The IRON stablecoin is an example of a partially collateralized token that failed

Algorithmic stablecoins

MALT was a recent example of a failed algorithmic stablecoin

My favorite stablecoin on Polygon

MAI is made by vaulting MATIC and then minting from this collateral, or by swapping for USDC.

How does MAI maintain its peg?

  • If MAI on the open market is above the peg folks can buy it and arbitrage using the USDC swap on Mai.finance. For example, if MAI is worth $1.05 at the time, someone could swap $1.01 of USDC for MAI, sell it, and make around 4% profit — increasing the number of MAI on the market and bringing its value nearer to $1.
  • The swap also works if MAI is under the peg since the price floor to sell it on the swap is set to $0.99. For example, if MAI’s value decreases to $0.96 someone could buy it for $0.96 USDC on the market and then swap it Mai.finance for $0.99 worth of USDC.
The USDC/MAI swap brings stability to the price of MAI
  • The collateral-to-debt ratio of MAI must always be above 150% for each vault that has minted MAI. If it falls below that the vault can be totally or partially liquidated. When the price of MATIC falls this causes more liquidations and fewer MAI to be minted. When it increases the number of MAI can increase. The back and forth of the market brings stability to MAI as users repay their loans by buying the stablecoin off the market, or increase their loans as the collateral-to-debt ratio changes

What’s the benefit of MAI?

With MAI a user is able to take out a 0% loan and take a long position on MATIC (and in the future other collateral). As well, that MAI can then be used on DeFi apps elsewhere allowing users to “HODL” but still engage in DeFi. Further, MAI can be used to buy other assets like ETH to cut down on exposure to an asset like MATIC, or another stablecoin to pay off debt elsewhere. Learn more about the use cases here.

I’ve loved investing in MAI to decrease my exposure to a volatile market. Especially as things get bearish it’s nice to be able to mint some MAI and combine it in a stablecoin LP with USDC. And because the Qi DAO incentivizes that LP pair with their governance token Qi as a reward I can then take that over to a site like Adamant Vaults to increase my yield on two stablecoins.

You can quickly see why having a rock-solid stablecoin on Polygon is a huge thing for DeFi.

About the Qi DAO

The Qi DAO is the organizing community behind the stablecoin MAI and the governance token Qi on Polygon. Their protocol allows you to make loans on your MATIC collateral and mint the stablecoin MAI. Learn more at Mai.finance

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About Revolutionary Spaces

At Revolutionary Spaces I bring the latest news, discussion, and how-tos on the DeFi world, especially on Polygon. I love helping folks out and can usually be found on the Discords for Adamant Vaults, the Qi DAO, and Balancer Protocol. I am currently looking for opportunities in product management, documentation or technical writing, and community management in the DeFi space. Reach out!

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