Stablecoins & the Crypto Monetary System
DeFi does its arithmetic in one unit. Stable is not the same as safe.
Lending, borrowing, trading pairs and liquidity pools all rest on a reliable unit of account. That is genuinely useful. It also means one slip of that unit reaches every one of them at the same moment.
The problem
Three positions. One unit. One press.
You hold the same stablecoin in three separate places — supplied to a lending pool, posted as collateral for a loan, and provided to a liquidity pool. Press the peg loose and watch what happens to each of them. Not one after another. Together.
Your three positions
ILLUSTRATIVE MODELAll three positions are quoted in the same unit, and the unit reads 1.00. Press the button and read all three rows at once.
One move, three failures, in the same instant — and each one fails in its own way. That is what systemic means here: the three positions were never connected to each other, they were connected through the unit they were all denominated in. Which is why the common claim that stablecoins are practically risk-free in DeFi because they are stable is false. Stability is a design goal the mechanism has to keep hitting, not a property you can assume — and the peg is only one of the things that can go wrong. None of this makes the unit useless: that shared denomination is exactly what lets a lending market, a loan and a pool be measured against each other at all.
The definition
Three things the word “stable” does not cover.
Tap each card for what is actually being claimed underneath.
Hands on
Where the unit actually works.
Every action below belongs to one of three building blocks. Tap one and see which block it lands in, and why. Find all three.
Sort the action
BLOCKS FOUND 0 / 3Lending, borrowing, trading and pools. Tap an action above to see which of the three it belongs to.
In lending the stablecoin is the capital being supplied. In borrowing it is the capital handed out against collateral you keep rather than sell. In trading and pools it is the stable side of the quote. And there is a real advantage to running a loan in it: a loan denominated in bitcoin or ether can change substantially through market movement alone, while a loan denominated in a stable unit of account is far easier to reason about. Easier to reason about — not risk-free. In many protocols the stablecoin is simply the monetary base everything else is measured in.
The bridge
Four risks that do not go away.
Stability makes DeFi more predictable. These four are what it does not remove.
A stablecoin holds up lending, borrowing and pools by giving them one dependable unit to count in — and everything resting on it depends on that unit holding, on the contracts underneath it working, and on collateral staying above its thresholds. The last lesson of this section steps back and looks at the same unit from the market’s side: as liquidity, as the base of trading pairs, and as the depth a market has when somebody wants out.
Check yourself
Five questions.
Answers come straight from this lesson. Submitting completes it.