Centralized stablecoins pegged to the dollar are limiting in their use because they can only be backed by dollars. This creates risks for those holding or trading in these coins, as fluctuations in the dollar value could lead to losses. Do Kwon from Terra (LUNA) suggests eliminating these risks by backing centralized stablecoins with bitcoin or altcoins.
Terra (LUNA) founder Do Kwon says that backing stablecoins with the US dollar may limit the use cases of these assets.
In a new interview on CNBC, Kwon identifies the potential risks that come with pegging stablecoins, which are crypto assets backed by a reserve asset such as fiat or another cryptocurrency to offer price stability against the dollar.
“I don’t think that there’s anything wrong, per se, with backing stablecoins in terms of dollars. It’s just that there are some limits to the things that you can do with the use cases of the so-called centralized stablecoins.
The issue is that if you’re keeping a dollar in the bank account for every unit of stablecoin that’s issued, that stablecoin now has an issuer and an operator. What that means is that you have all the attendant compliance and custodian risks of having an operator and an issuer because, for instance, what happens if the company for some reason goes bankrupt? In that case, everybody that built interesting things on top of that stablecoin is now held hostage to the bankruptcy court…
Or given that bank deposits are so easy to regulate, I think one of the things that we’ll start to see with centralized stablecoins is that there’s going to be massive compliance creep, which means that over time, you’re going to start to layer on things like KYC [know your customer] requirements and sort of vetting what types of applications can use a stablecoin, which isn’t necessarily appropriate for all use cases.”
Kwon says that Bitcoin (BTC) and altcoins such as LUNA may eliminate the risks tied with centralized stablecoins, or those backed by traditional currency.
“A decentralized stablecoin, as something that is backed in native cryptocurrency like LUNA or Bitcoin, has the property that there is no issuer, there is no operator because anybody in the world can trade in a dollar’s worth of Bitcoin, can trade in a dollar’s worth of LUNA to issue one TerraUSD. This has the nice property that it makes decentralized finance truly decentralized.”