Revisiting the Idea of a Delta-Neutral Stablecoin

The stablecoin market has grown significantly over 2021 and remained sizeable even in 2022, leveling off at almost $150B. In general, collateralized stablecoins have captured the lion’s market share, whereas overcollateralized alternatives like DAI have relatively lower adoption. As expected, the most capital-efficient stablecoins have the highest adoption. Still, the problem remains that these options are highly centralized, with all of the backing collateral held in custody by a single entity. This results in significant counter-party risks, where a centralized custodian may not exercise sufficient risk management over the collateral it holds.

The alternative to fully centralized custodial stablecoins would be DAI, a stablecoin that is overcollateralized with various crypto assets. However, as of this writing, over 52% of the collateral backing DAI is made up of USDC, a centralized stablecoin. This has serious implications since Circles, the custodian of USDC’s collateral, can single-handedly censor USDC transfers, giving it the ability to freeze over 52% of DAI’s backing. As such, there have been efforts to create a better alternative, such as a delta-neutral stablecoin like UXD and Lemma.