Centralised stablecoins such as USDC and USDT are the most transact stablecoins in the crypto space. These are regulated stablecoins that introduce political risk and hinder decentralisation attempts.
The most common decentralised stablecoin is USDS formally DAI which is a collateralised stablecoin. The challenge with collateralise stablecoin is that they are fiat peg and this peg can be lost when the value of the underlying asset depreciate. To address this, complex mechanisms are developed to maintain the peg, example USDH.
Proposed Theory
An LST yield backed stablecoin would offer a more sustainable mechanism. This would be backed by the economic activity of the solana blockchain since that is paying the fees that is generating the yield. This stablecoin will most likely not be pegged and would appreciate over time in a stable way.
Yup, this is a good idea as the whole concept of Sanctum’s LST is not have LP’s for them as that would invalidate the yield bearing price increase on them, we have to find as many use-case as possible with the yield of the LST without disturbing the collateral in Stake Accounts, one such case is lending of LST.
But this protocol has to coded by community only cause there are many things going on in Sanctum and they are trying to be a base layer for everything LSTs, so the community can build as many product on top of it.
This Stablecoin would be akin to Ethena as Ethena also has the risk of decreasing Ethereum Yields and funding rate getting neagative
But LST backed stablecoin would have the drawback of decreasing activity on Solana ecosystem which would also just diminish the staking rewards only and the main risk would be dwindling Solana’s price that would liquidate the loan taken in form of Stablecoin
And this would also take enormous bootstrapping capital to make Stablecoin work thorughout the Solana ecosystem
So, a more interesting approach can be not backing $1 of stablecoin with $1 of LST but instead give loan in the ratio of rewards accured on the LST as users can happily gamble/use the dividend/yield of LST wherever they would like without harming the base collateral amount
For example if junkSOL has value of 1.1, and you have $100 worth of junkSOL, then you can take 10 dollar of interest free stablecoin loan