The Stablecoin Problem: Why Most Fail & How Pi Protocol is Different

Introduction

Stablecoins are meant to provide stability in crypto. However, history has shown that many fail when tested. From Terra's overnight collapse to USDC's temporary depeg and DAI's inefficiencies, stablecoins often struggle with fundamental flaws. These failures can be traced back to three major issues:

1. Over-Leverage

Algorithmic stablecoins rely on market confidence rather than solid collateral. When that confidence is lost, their value can collapse rapidly.

Example: Terra ($40B market cap) functioned through a reflexive mint-burn system. When trust in UST vanished, so did its peg, leading to a complete collapse.

Pi Protocol’s Fix: Over-collateralization and smart liquidations ensure stability, preventing market sentiment from dictating the peg's fate.

2. Weak Collateral

A stablecoin's security is only as strong as the assets supporting it. Many rely too much on a single asset, leaving them vulnerable to sudden downturns.

• Example 1: DAI is heavily backed by ETH. If ETH crashes, DAI's stability is at risk.

• Example 2: USDT & USDC rely on traditional banking reserves, which expose them to systemic financial risks.

Pi Protocol’s Fix: By using multi-asset collateral, including both crypto and real-world assets (RWAs), Pi Protocol diversifies risk and ensures that no single asset failure can threaten the peg.

3. Capital Inefficiency

Most over-collateralized stablecoins require excessive asset deposits, making them inefficient for users and limiting DeFi growth.

• Example: MakerDAO requires users to lock $150 in ETH to mint $100 in DAI, which restricts capital efficiency and utility.

Pi Protocol’s Fix: Optimized collateral ratios unlock greater liquidity while maintaining system solvency, ensuring that capital remains productive rather than locked away unnecessarily.

Stability is More Than Just a Peg

For a stablecoin to succeed long-term, it must be:

• Not dependent on market reflexivity

• To eliminate single-point failures

• Allowing liquidity to flow rather than stagnate

We’ve built Pi Protocol with these principles in mind, offering a stablecoin designed for resilience, efficiency, and true stability.

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