In the early days of RAI, I used to say it’s not a stablecoin. It wasn’t because “stablecoin” was a misnomer, but rather because the vast majority of people were only used to see the likes of DAI, USDC and USDT and couldn’t point to any asset that is not pegged to anything and yet it’s stable.

Since RAI‘s launch earlier this year, more people started to realize that, contrary to popular belief, there is a distinction between (dollar) pegged coins and an actual stablecoin. Thus, they challenged my early RAI definitions:

Bankless people get it

Others who’ve already been down the rabbit hole for a while helped with alternative descriptions:

From rebasing balances to rebasing the target price

Leaving aside technical jargon: the way pegged coins try to be “stable” is by tying themselves to a fixed target (aka peg). Stablecoins on the other hand have a variable target that does not try to tie itself to anything in particular.

Thus, there is one thing that should have been said from the beginning: RAI is a decentralized stablecoin. Maybe even the only decentralized stablecoin, given that other options on the market can at best be considered pegged coins.

Are Pegged Coins Actually Stable?

The interesting thing about pegged coins, especially decentralized ones, is that you often see about 2–5% volatility around their pegs. One of the OG examples was with SAI:

The most challenging scenario to handle is when a pegged coin is constantly trading at premium compared to its peg. Usually there are few, if any options to compel the market to restore the balance (one of them being more and more collateral types backing the coin).

This almost makes you wonder: is there a mechanism that can balance price deviations and allow the market to correctly evaluate the cost of maintaining an imbalance? Well yes, that’s exactly what a stablecoin does.

RAI vs Pegged Coins

The main difference between RAI and the usual pegged coin you see on the market is that it doesn’t force a fixed 1:1 dollar peg and so it won’t end up like this:

RAI replaced the fixed 1:1 target with a moving one. This allows the protocol to balance market forces: if the RAI market price is above the current target (aka moving peg), the protocol charges a negative rate to RAI holders so they are incentivized to sell. On the other hand, if the RAI market price is below the current target, the protocol offers a positive rate to RAI holders and incentivizes them to buy. No fiat coin backing and no PSM needed.

The fact that the RAI protocol incentivizes market participants to bring its price back to the target means that it can be solely backed by ETH and still manage to stabilize itself. Moreover, given that there’s only one collateral type and there’s a mechanism that automates interest rate setting, it is also easier to remove governance processes that would have been there otherwise.

So What’s Next?

RAI has gone through a long iteration cycle to automate many of its parameters and still has a many chapters left in its ungovernance journey.

The next months and years will be focused on making RAI an integral part of DeFi as well as exploring a future where RAI can be the bedrock of an entire universe of synthetic assets.