Drawbacks of Existing Stablecoins

i. (Mis)Management of Reserve Funds

The stability of a stablecoin pegged to one US Dollar ($1.00) is heavily dependent on the ability of the issuer to maintain a proper reserve of assets. If the issuer does not have enough assets in reserve to back the stablecoin, it may not be able to maintain its peg to the US Dollar. Furthermore, if the issuer mismanages the reserves or there is a lack of transparency about the reserves, it can create a lack of trust in the stablecoin, further eroding its value. In fact, accusations of questionable lending practices have been leveled against several prominent stablecoin projects, such as when the New York Attorney General's office publicly accused one stablecoin project of using funds from their reserves to make a risky loan worth hundreds of millions to bailout an exchange partner. This lack of transparency raises concerns about the stability and trustworthiness of these stablecoins, and highlights the importance of increased transparency in regard to the assets held in reserve by stablecoin issuers.

ii. Profit for Them, Risk for You

The predominant business model for stablecoin projects is problematic, as holders are left to bear hidden risks without any opportunity to share in the potential rewards. This is evident in the way that most stablecoins projects invest the billions of dollars held in their reserves, without any input from the community, and keep the returns for themselves. While this approach is beneficial for stablecoin issuers, it incentivizes them to make riskier investments and obfuscate information about those investments, compromising the integrity of their reserves.

iii. Inflation Risk

Stablecoins pegged to one US Dollar ($1.00) are by far the most popular type of stablecoin in the crypto market, but they are 100% exposed to the same inflationary pressures as the US Dollar. For example, if the US Dollar experiences inflation or a decline in value due to excessive money printing or a default on its debts, the stablecoins pegged to the US Dollar will also lose significant purchasing power. This can pose a risk for individuals and businesses that rely on USD-Pegged stablecoins as a store of value.