UST collapse vs DAI stability
What you'll learn in this Analysis
How UST and DAI were designed differently
Why UST collapsed while DAI remained relatively stable
The role of collateral, incentives, and confidence
A framework to evaluate stablecoin safety
1. The Core Comparison
Two fundamentally different stablecoin models:
TerraUSD → Algorithmic, uncollateralized design
DAI → Overcollateralized, asset-backed design
Key Insight
Stability does not come from mechanisms alone. It comes from what backs the system when stress occurs.
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
1 UST↔$1 of LUNA1
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
Collateral Value ≥ 150% × DAI Borrowed
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
UST loses peg
LUNA supply increases
LUNA price collapses
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
Confidence without backing is fragile. Confidence with backing is resilient.
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
Design determines survival
10. Real Insight
Stablecoins do not fail gradually. They fail when confidence and structure break at the same time.
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:
One was belief-basedOne was asset-backed
