1. The Core Comparison

Two fundamentally different stablecoin models:

• TerraUSD → Algorithmic, uncollateralized design

• DAI → Overcollateralized, asset-backed design

  
  

Key Insight

2. How UST Worked

UST maintained its peg through a mint-burn mechanism:

• 1 UST could be swapped for $1 worth of LUNA

• Supply adjusted based on demand

  
  

Core Mechanism

Assumption

• Arbitrage would keep UST at $1

• Market confidence would hold

  
  

Problem

• No real collateral

• Dependent on LUNA price

• Dependent on continuous demand

  
  

3. How DAI Works

DAI is generated through overcollateralized loans:

• Users deposit assets (e.g. ETH)

• Borrow DAI against collateral

  
  

Core Requirement

Mechanism

• If collateral drops → liquidation occurs

• System remains solvent

  
  

Strength

• Backed by real assets

• Risk managed actively

  
  

4. The Collapse vs Stability

UST Collapse

Trigger

• Large withdrawals

• Loss of confidence

  
  

Chain Reaction

1. UST loses peg

2. LUNA supply increases

3. LUNA price collapses

4. Confidence disappears

   
   

Result

• Death spiral

• System failure

  
  

DAI Stability

During Market Stress

• Collateral liquidations triggered

• System remained solvent

• Peg fluctuations corrected

  
  

Result

• Temporary deviations

• Long-term stability maintained

  
  

5. Core Difference

6. The Role of Confidence

Both systems rely on confidence, but differently:

UST

• Confidence = core foundation

• If broken → system collapses

  
  

DAI

• Confidence supports system

• But collateral provides backup

  
  

Insight

7. Lessons from the Comparison

Lesson 1

Algorithmic stability is fragile

Lesson 2

Collateral provides real security

Lesson 3

High yields can mask risk

Lesson 4

Liquidity crises expose weaknesses quickly

8. Operator Framework

When evaluating stablecoins, ask:

1. What backs the stablecoin?

2. Is collateral sufficient?

3. How does the peg mechanism work?

4. What happens during mass withdrawals?

9. Common Misconceptions

Misconception 1

“All stablecoins are equally safe”

Misconception 2

“Algorithmic models can replace collateral”

Reality

10. Real Insight

11. Final Takeaway

UST failed because:

• No real collateral

• Overreliance on confidence

• Unsustainable incentives

  
  

DAI remained stable because:

• Overcollateralization

• Risk management

• Real backing

  
  

The key difference: