RAI Founder Rues 'Mistake' of Dependency on ETH

The Tornado Cash sanctions case was supposed to be a boost for censorship-resistant, decentralized stablecoins.

It hasn’t worked out that way.

Six months after the U.S. Treasury Department sanctioned the crypto mixer and triggered a wave of blacklisting across the sector, the market cap and trading volume for two key decentralized stablecoins are down.

Experimental Stablecoin

The market cap of RAI, an experimental decentralized stablecoin minted against ETH, has plunged 90%, to $8M, since its launch in April 2021, according to CoinGecko. Daily trade volume is also down 90% over the same period.

The market cap for Liquity USD, another popular decentralized stablecoin protocol that solely supports ETH collateral, has dropped 80% since the start of 2022. Trade volume receded 99%, according to CoinGecko.

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The Defiant

The performance of both coins is striking given the uproar following the action taken by the Treasury’s Office of Foreign Assets Control (OFAC). On social media, pundits vowed to permanently boycott centralized stablecoins in favor of decentralized alternatives. Protocols like LUSD and RAI were praised for their censorship-resistance, the result of being exclusively mintable against ETH collateral.

Ameen Soleimani, the co-founder of Reflexer Labs, the team behind RAI, tweeted that the team’s decision to exclusively support ETH as collateral was “a mistake” due to the opportunity cost associated with locking up ETH rather than a yield-bearing liquid staking derivative (LSD).

Staking Rewards

Liquid staking derivatives are yield-bearing tokens that allow holders to remain liquid while earning staking rewards. The sector is dominated by Lido’s stETH token, with centralized exchange Coinbase and staking provider Rocket Pool among the many teams also looking to claim a share of the LSD market for ETH.
With many leading DeFi dApps allowing users to mint or borrow stablecoins against stETH so they can continue earning staking rewards, demand for ETH-only DeFi products is shrinking.

A Mistake

RAI’s design means Reflexer cannot change the collateral assets supported by the protocol, so the project will have to be relaunched to support LSD tokens.
“ETH-only RAI was a mistake, Soleimani tweeted on Jan 23. “The ETH staking yield means that borrowing RAI against pure ETH will always have some % opportunity cost… The only option for adding stETH is fully restarting RAI.”

The next day, Soleimani tweeted that Reflexer Labs’ developers threatened to quit should the team decide to relaunch RAI as a multi-collateralized stablecoin.

RAI is an experimental “stable” token that is not pegged to a fiat currency. The token is backed by ETH, and its price algorithmically adjusts over time. According to CoinGecko, RAI’s price oscillated within a 10% price range of between $3.10 and $2.81 during 2022.

Redemption Rate

Soleimani noted that RAI’s redemption is generally negative as a result of the opportunity cost associated with using the protocol. Soleimani said he recently engaged in “interest rate manipulation” to set RAI’s redemption rate positive only for Vitalik Buterin, Ethereum’s co-founder and chief scientist, to seize on the moment as an opportunity for arbitrage trading.

On Jan. 22, a wallet associated with Buterin closed a 400,000 RAI short for 1.22M DAI he’d held for seven months, reaping a $92,000 profit. The same wallet opened a new short position worth 100,000 RAI two days later.