There's not a single week without a new stablecoin launching. The issue with the multiplication of stablecoins is that it fragments liquidity, it creates frictions for users and overall makes markets less efficient than if there were fewer alternatives available.

How often do people find themselves swapping stablecoins at inconvenient prices on a liquidity pool, paying transaction fees, only to realize they need to swap again to another stablecoin to bridge to a different blockchain? This has become the daily life of many DeFi users.

With fewer stablecoins, all this complex UX, these transaction fees paid to Liquidity Providers on Curve, this value lost to arbitrageurs could be avoided. Maybe the space would be better off with a smaller set of well-managed and competing centralized stablecoins (like USDC, USDT).

Going further, with most decentralized stablecoins falling back to similar reserve-backed modules with centralized stablecoins in the backing comes the question of the value these decentralized stablecoins are really bringing into the market. Do we really need them in the end?

The obvious and often addressed answer to this is the fact that decentralized stablecoins are censorship resistant assets. That's true to some extent: when you hold DAI, you know that no one is going to freeze your DAI balance, which is not the case with USDC.

But would you rather use a centrally managed stablecoin where every smart contract update is behind a timelock or a decentralized stablecoin where you need to trust the votes of an unpredictable DAO, which ownership may by centralized among a small set of voters?

Apart from rare exceptions which are able to do without any centralized backing to keep a tight peg, there is also a degree of censorability in every decentralized stablecoin.

Circle could freeze the USDC in the DAI backing and this would leave all DAI holders with an asset that is only worth a fraction of the value it's supposed to be worth.

And if you look into the systems that try to do without a centralized backing, they have to deal with other tradeoffs. For instance, while LUSD tends to keep its peg, it is hardly thriving in a high interest rate environment.

While censorship resistance is an important ideological and practical aspect,on the UX side it does not necessarily contribute to making the DeFi experience financially better for its participants.

Every market comes with its set of inefficiencies. How many times a day do the exchange rate between ETH and USDC differ by more than 1bp on Uniswap and Balancer? Or how often do you notice a significant difference in the USDC lending rate on Compound and Aave?

Reducing these inefficiencies, and hence leaving money off the hands of arbitrageurs require lubricants.

Pooling systems are systems that "pool" funds from various participants in order to perform specific operations and to achieve a better outcome for all participants than what would be achievable individually.

One of the first pooling examples in DeFi was that of Yearn which pools funds from users to lend them across various lending venues, hereby arbitraging the yield they propose.

One day, you might find that you can lend USDC on Compound at a rate of 4%, and on Aave at 4.2% ; the other day, it's 3.8% on Aave, and 4.5% on Compound. Remaining on Aave would be suboptimal here. Automated pooling systems like Yearn can arbitrate these rates, erase market efficiencies and ensure you get the best of what you can.

In most cases, decentralized stablecoins are forms of pooling systems. This typically applies to reserve-backed stablecoins, but you could also argue that purely Collateralized Debt Position (CDP) stablecoins with redemption features or stability pools are also pooling systems.

This means that like pooling systems, stablecoins can:

• make products more accessible for individual users

• contribute to erasing market inefficiencies

Let's take some examples of where these pooling properties apply or could apply:

Making RWAs and Tokenized Assets more accessible

Many bond products or RWAs are inaccessible to the average user. You need a KYC to buy them, the minimum amount that you can buy is high, the induced fees are significant, and you cannot buy or sell them during weekends or bank holidays.

With a dedicated protocol pooling users' liquidity, it could be far easier to access these products. A pooling solution wrapping a money market fund can match users going out with users going in. By doing this, it can abstract entry fees and offer lower entry costs. Similarly, it can get rid of the limitations of having to wait for the weekend and bank holidays to be over to offer exit liquidity.

Stabilizing Borrowing Costs

On the borrowing side, most lending platforms provide a variable yield for lenders and similarly volatile borrowing costs. Pooling systems in lending platforms, as they're a permanent and major lender of their asset, can deepen the available liquidity to borrow, arbitrage interest rates between platforms and reduce the overall interest rate volatility.

As a borrower, this makes the experience more predictable as you know how much your loan is going to cost.

This experience is magnified in the CDP modules of stablecoin protocols with a single lender (the protocol) as they provide fixed borrowing costs. This ensures that no one ever borrows above an accepted cost of capital.

Reducing slippage

You may find similar facilitation dynamics in trading with the example of price stability module of stablecoin protocols. On top of being excellent diversification tools, they provide the ability to go atomically from one asset to another with sometimes little to no fees (e.g USDC->DAI->GUSD). The structural reason why they can offer this is that they may only need to rebalance their reserves once in a while, face lower borrowing costs or simply because they can match trades from two sides taking place asynchronously (someone may swap USDC-> GUSD in the morning when someone takes the opposite side in the afternoon). Today's price stability modules are a very simple example, but we could imagine systems going way further on this idea and providing statistically better trade prices for some pairs than what an AMM could offer.

Smoother bridging experience

Many inefficiencies come with bridging systems. You cannot always burn an asset on one chain to mint on another chain, and in many cases you have to swap against liquidity provided by other market makers who are fine waiting and taking the time it needs before settling and earning some fees. Some carefully thought pooling or stablecoin systems (not only decentralized by the way) provide this ability to burn on one chain and mint on the other chain thereby removing the man in the middle taking fees.

Everything that was mentioned above could deserve a single protocol. A single protocol (e.g Yearn) can arbitrage the lending rate across platforms, enabling the cost of capital to remain the same. Another can pool users looking to acquire RWAs to provide them with a savings yield at a lower cost than what they would be able to get alone. A system can work like an index to enable people to diversify their exposures. Other systems can facilitate bridging and reduce the friction for users going from one chain to another or from one asset to another.

By leveraging a decentralized stablecoin system, you can simultaneously access all these benefits. As a user, you gain a streamlined tool within a single asset/protocol to eliminate the frictions typically encountered elsewhere.

Like most smart contract systems, a decentralized stablecoin remains a highly composable standard, in which you can enshrine the properties of your choice.

Having this standard stable with respect to a currency is like a cherry on the cake, but it should not be the primary objective. The main focus should rather be on enhancing the DeFi experience for everyone.

Decentralized stablecoins primary goal should be applying the advantage of being pooling systems across various verticals in order to make people's lives easier in DeFi. It all comes down to finding these verticals and being good at them while managing the risk that comes with each of them.

But not working to be a facilitator means that you are most likely more extracting value by fragmenting liquidity and attention than you are leaving the space better off with a new primitive.

In an upcoming article, I’ll discuss how decentralized stablecoins are currently standing with respect to this vision of being lubricants and how Angle can take advantage of this.