Finally, we choose the most representative decentralized stablecoin protocols in the past period of time, DAI (MarkerDAO), FEI (TRIBE), FRAX (Frax Finance). And analyze their shortcomings.
Low capital utilization rate: In order to ensure the security of collateral, users need to maintain a high collateral rate to avoid being liquidated;
Liquidation risk: When the price of collateral fluctuates drastically, the system may suffer from the risk of untimely liquidation due to insufficient liquidity of DAI;
Centralization trend: The PSM mechanism has alleviated the liquidation risk of the system to a certain extent, but it has caused an increasing reliance on USDC in the total collateral, meaning that DAI is getting more centralized.
Bank-run risk: As the current PCV is mainly composed of ETH, when ETH has severe market fluctuations, PCV will not be able to effectively maintain the stability of FEI, and each reweight will trigger a bank run;
Poor liquidity: Direct Incentive Mechanism (DI) greatly curbs the liquidity of FEI, because it punishes both the holders or the seller in an extreme manner. Users who choose to sell FEI when price is less than $1, will be seriously burnt, which in turn results in poor use value of FEI;
FRAX (Frax Finance)
Stability is vulnerable to risks: Since Frax adopts a fractional stablecoin casting mechanism, that is, part of the reserve is composed of another Token FXS issued by Frax Finance, which makes Frax vulnerable to the threat of a death spiral. When a large number of Frax starts to redeem, they will get part of USDC+FXS portfolio, and in order to obtain the full value, usually Trader will choose to sell FXS and convert it into a stable currency, thus causing greater selling pressure on FXS, which in turn amplifies the panic of FXS holders, so the stability mechanism is relatively fragile
The stability of TiUSD is supported by more than 100% sufficient Reserve Assets, and the continuous cash flow support of Rainy Day Fund improves the robustness of the protocol in dealing with the risk of market fluctuations in Reserve Assets so that the protocol can introduce Multi Crypto Asset as Reserve, so this Solved the two most important problems in the Algo stablecoins track: stability and liquidity. In addition, TiTi Protocol proposes the following innovations to solve the above problems:
Strong stability: The 100% back of crypto assets and the continuously generated Rainy Day Fund accumulated by PAV are guarantees of the high stability of TiUSD. Users do not need to worry about price off-peg during the process of using TiUSD. This makes TiUSD better than other algorithmic stablecoins, such as FRAX, Terra, etc.;
Strong liquidity: The most important use scenario for stablecoin assets is to serve as a user's trading medium to reduce the use cost of cross-asset transactions. Therefore, liquidity is an important factor in considering the success of a stablecoin project. So far, the general solution for improving the liquidity of stablecoin projects is to use governance token as incentives to encourage users to actively boost liquidity. The disadvantage of this approach is that liquidity is easily affected by the fluctuation of governance token prices. In TiTi Protocol, the PRV assets obtained during the issuance of TiUSD will be used to increase the depth of MAMM. This guarantees the creation of a stable and highly liquid TiUSD. At the same time, due to the high scalability of TiTi Protocol, The protocol supports more and more crypto assets as PRVs in the future, and TiUSD's liquidity will become better and better, fully meeting the transaction needs of different users, thus realizing the use value of TiUSD as a transaction medium;
Anti-censorship: The protocol is completely decentralized and will be managed by DAO in the future. It is better than USDT, USDC and other fiat-custody mechanisms in terms of anti-censorship;
High user adoption: The Use-To-Earn mechanism ensures that TiUSD users will have revenue generated during use, which greatly improves TiUSD’s market competitive advantage. At the same time, the on-chain and off-chain technical architecture also guarantees the distribution of protocol fees can carry more complex incentive models, which also provides greater flexibility for TiTi Protocol's market operations, such as targeted incentives for users to use TiUSD to purchase NFTs, or targeted incentives to use TiUSD to an external transactions behaviors in the product, etc.;