RAI, The Free-Floating Stablecoin That Actually Works | IntoTheBlock

In my opinion stablecoins are a critical component of crypto solutions. Native tokens like Bitcoin and Ethereum are important, but there are vast capabilities that you can unlock if you remove or lessen volatility. I first ran into RAI several months ago it it made my head hurt a bit. It doesn't work at all like a traditional stablecoin.

While using stablecoins can reduce the risks associated with volatility, there are concerns about counterparty risk. The price stability is maintained by their issuers, which means that they are subject to the same risks and vulnerabilities as traditional financial systems. Additionally, the mechanisms used to maintain stablecoin prices can be complex, opaque and may not always function as intended, which can create a new set of risks. So, would it be possible to have a stablecoin that is also decentralized?

This is why USDC dropped off peg when news of Silicon Valley Bank broke and people realized that Circle, the centralized organization behind USDC, had $3.4B in its reserve at SVB. This is also the constant worry with USDT (Tether) as proof of its backing is nearly impossible to prove.

So how does RAI work to set a stable price?

This is a complex technical topic, but putting it simply into a one-liner: RAI achieves price stability by dynamically adjusting its circulating supply based on supply and demand. This is achieved by comparing the RAI market price with the RAI target price (named redemption price, since in case of a protocols shutdown that is the price that the protocol would settle all debt). If the price of RAI is above its target price, the supply of RAI tends to increase. If the price of RAI is below its target price, the supply of RAI tends to decrease. This is done with a controller smart contract that economically incentivizes the users of the protocol, RAI borrowers and RAI Holders, to keep the market price close to the redemption price.

It uses math. 🤓 The Proportional-Integral-Derivative (PID) controller comes into play.

RAI has remained less volatile than the other currencies, despite not being the currency that has devalued the least. For example, during most of this period, holding RAI instead of EUR would have resulted in less losses compared to the dollar.

Holding value like that through these market conditions is notable. ⚖️