Nico Oefele, Dirk G. Baur, Lee A. Smales, Ganesh Viswanath-Natraj
DAI is the world’s largest stablecoin that is not fully backed by fiat assets. Its collateral structure has evolved from pure crypto-backing to a diversified composition including fiat-backed stablecoins and real-world assets (RWA). At its peak, more than 60% of DAI was backed by US Treasury bills held in custody at commercial banks. An analysis of changes in DAI’s collateral and their effect on price dynamics highlights its current hybrid status, bridging crypto and fiat systems. We identify two trade-offs. First, while fiat-backed stablecoin collateral reduces volatility by relaxing limits to arbitrage, greater reliance on this type of collateral introduces run risk, as seen during the March 2023 banking crisis. Second, a higher share of RWA collateral is associated with increased volatility and greater arbitrage frictions.