In 2017, MakerDAO launched Dai, the first decentralized, crypto-collateralized stablecoin, and with it, the concept of the vault (formerly CDP, or Collateralized Debt Position) was born. This model was nothing short of revolutionary. For the first time, anyone could lock crypto assets (like ETH) in a smart contract “vault” and mint a stablecoin (Dai) against it without any central authority. MakerDAO proved that a trustless, overcollateralized stablecoin could maintain a peg to the U.S. dollar through market forces alone. It became a foundational building block of DeFi, surviving brutal market cycles (the 2018 crypto winter, the 2020 Covid crash) and emerging as the oldest and most battle-tested decentralized stablecoin (dailyexpertnews.com). This resilience and early mover advantage made MakerDAO’s Dai (recently rebranded as USDS under the new Sky Protocol) synonymous with the DeFi ethos of self-sovereignty and decentralization.

Maker’s influence on DeFi is hard to overstate. Many early DeFi “degenerates” (and more conservative users alike) used Dai as a safe haven for yield farming or hedging, because it was perceived as decentralized money. The protocol’s governance, powered by MKR tokens, enabled the community to adjust risk parameters, add new collateral types, and steer the ship of what was effectively a crypto-native central bank. As Rune Christensen (Maker’s co-founder) noted during the project’s recent overhaul, the driving motivation has always been figuring out “how to scale DeFi to gigantic size” and grow a truly decentralized stablecoin. Dai’s success and the vault model’s innovation set the stage for countless other projects – if you’ve ever borrowed against your crypto, you likely have MakerDAO’s pioneering work to thank.

For all its decentralization ethos, those who use Maker vaults today tell an interesting story. The idealistic vision was a stablecoin used and minted by many everyday crypto users. In reality, the market is heavily concentrated in a few whales. Data shows that while many wallets have sufficient collateral relative to their debt, “most of the capital is held by a few” large vault holders (medium.com). The disparity between the average and median vault size paints this picture: the average Maker vault size is around $1.85 million, yet the median vault is only $25–50k. In other words, a handful of gargantuan vaults mint an outsized portion of Dai/USDS, while the vast majority are much smaller positions. MakerDAO’s decentralized stablecoin may be open to all, but its supply is largely driven by whales who can afford to lock millions in collateral.

Why does this concentration matter? For one, it implies a form of centralization of risk – if a few big vaults close or get liquidated, it can significantly shrink the stablecoin supply or even rattle the system. It also suggests that the barriers to entry (or staying in the game) push out smaller users over time, leaving mainly larger players or "insiders". Maker’s model arguably embodies decentralization in principle, but in practice, the usage skews heavily toward the crypto-rich. This dynamic has sparked debate: Is a stablecoin truly decentralized if only a few big holders effectively underwrite most of it? The ethos is intact (anyone can open a vault), yet the practical distribution and power are uneven.

Another critical issue surfacing in MakerDAO’s vault model is the high churn rate of vaults – in plain terms, users frequently close their positions. Since Multi-Collateral Dai’s launch, around 28,000 vaults have been opened in total, but only roughly 2,600–2,900 are active today. That means about 90% of all open vaults have been closed. Many users come to Maker, generate Dai, and later shut their vaults, resulting in a constant revolving door of borrowers. The median vault “tenure” before churn is strikingly short – about 4 months before a typical vault is closed or paid down. Such low retention suggests that using a Maker vault is often a temporary strategy (perhaps to leverage trade or farm yield) rather than a long-term financing solution.

Why the churn? Vaults are expensive and hard to maintain over long periods for most users. Maker vault borrowing isn’t free – you pay a variable stability fee (effectively an interest rate on the debt) that accrues continuously. On popular collateral types, this can range from low single digits to even double-digit APRs in volatile times. Over months and years, that cost adds up. There’s also the requirement to overcollateralize (often needing $1.5 of ETH to borrow $1 of Dai) and to monitor and maintain your position actively. If your collateral value falls, you must add more or risk liquidation. All of this means the cost of capital in MakerDAO is high. Smaller vault holders face the grind of accruing interest and worrying about sudden price drops triggering liquidations (with Ethereum’s notorious volatility). Unsurprisingly, many decide to close out, especially if the trade or yield they opened the vault for is no longer favorable.

While Liquity emerged as a distinct protocol with its own stablecoin, LUSD, it shares more in common with MakerDAO than is often acknowledged. Both protocols operate on a fundamental model of overcollateralized debt positions (CDPs) backed by Ethereum, with liquidation mechanisms that ensure peg stability. In both systems, users deposit ETH into a smart contract, mint stablecoins (DAI or LUSD), and maintain a minimum collateral ratio to avoid liquidation.

The key difference lies in how fees are applied and governance is structured. Liquity replaces Maker’s ongoing stability fee with a one-time borrowing fee and eliminates governance, relying on immutable code and a stability pool for liquidations. While this may offer predictability and algorithmic control, the underlying logic, in which users mint stablecoins by locking ETH, and the system maintains solvency through liquidation incentives, is essentially the same.

Despite Liquity’s tweaks, both models are constrained by the same core limitation: capital inefficiency. Since they require more value in ETH than the stablecoins minted, they inherently limit the potential stablecoin supply and user accessibility. This structural reliance on overcollateralization caps scalability and makes them heavily dependent on ETH price stability. And just like Maker, Liquity suffers from usage concentration and challenges in broad adoption.

Rather than being radically different models, Maker and Liquity are variations on the same foundational theme. The structure is trustless' CDPs enforce solvency through liquidation mechanics and overcollateralized positions. They both embody the DeFi spirit, yet remain locked within a framework that assumes overcollateralization is necessary for stability, which introduces inefficiencies and barriers to long-term adoption.

Understanding the structural similarities between Maker and Liquity makes a deeper critique even more pressing. Both rely on a model where users individually collateralize and manage debt, where stability emerges from the threat of liquidation, and where access is naturally limited by the capital required to participate. This model worked as a starting point for decentralized stablecoins, but the question is: can it scale sustainably?

The churn statistics in Maker are telling: With only ~2,900 active vaults out of 28,000 historically and a median life of just four months, we see how few users stick around. Liquity’s metrics, while less public, reveal similar concentration trends. These aren’t mass-scale financial systems—they’re tools for a narrow group of crypto-native actors. And because both models depend on users putting up excess capital to mint money, they are inherently expensive and fragile during downturns.

Vaults are not only costly to maintain but psychologically burdensome. Whether paying Maker’s ongoing stability fee or managing Liquity’s liquidation thresholds, users must stay engaged, often for little reward. The design encourages temporary usage for leveraged opportunities, not stable, long-term issuance. And in both cases, the system’s stability hinges on swift and effective liquidation.

Moreover, these models concentrate power and risk among a small set of large vault holders. The overcollateralized model claims to decentralize issuance, but in practice, it centralizes exposure, relying on a few to supply liquidity for the many. This contradiction, decentralized in principle, concentrated in practice, defines the current CDP paradigm.

Unless a fundamentally different approach is taken, both Maker and Liquity may continue to serve niche roles without ever achieving the scalable, capital-efficient, and inclusive stablecoin infrastructure that DeFi truly needs.

We believe the prevailing model for decentralized stablecoins – exemplified by MakerDAO’s DAI and Liquity’s LUSD – has fundamental limitations. These platforms use Collateralized Debt Positions (CDPs), where individual users open vaults and lock up assets worth significantly more than the stablecoins they mint (often requiring 150%+ collateral for every $1 issued). This over-collateralization does provide a safety cushion, but it comes at a steep cost in capital efficiency. Huge amounts of capital sit idle as extra collateral, making it expensive and impractical for users who don’t already have substantial assets. In practice, only those seeking to leverage their crypto (and able to tolerate volatility) mint these stablecoins, meaning supply grows primarily when speculators want loans, not necessarily when organic stablecoin demand exists.

This vault-by-vault approach also fragments risk. Each user manages their own position and bears the risk of liquidation individually. If the market crashes, collateral values can plummet across many vaults at once, triggering a wave of liquidations. Because these risks are isolated in hundreds of separate silos, there’s no unified defense against a cascading failure – the system relies on automated auctions or stability pools to clean up each failing vault. We’ve seen how this lack of coordination can make the whole system fragile under stress: a sharp downturn can force many positions to unwind simultaneously, straining liquidity and confidence. In short, the CDP model’s heavy collateral requirements and siloed risk management limit its usability, scalability, and resilience. It’s a solid first-generation solution, but we set out on a new path because we recognize its structural inefficiencies.

Instead of individual vaults, we operate $FUSD on a single, protocol-level balance sheet – essentially a unified decentralized bank backing the stablecoin. All collateral assets in our system contribute to one collective pool supporting all FUSD in circulation. This unified approach lets us manage risk and liquidity holistically, rather than leaving each user to fend for themselves. Most importantly, we embrace undercollateralization (a fractional reserve) as a design principle. Unlike MakerDAO or Liquity, we don’t insist on $1.50 of assets for every $1 FUSD – our reserve might be, for example, 80% or 50% of the outstanding $FUSD. By running a fractional reserve, we free up capital and can issue more FUSD against a given asset base, dramatically improving capital efficiency. This means our stablecoin supply can expand to meet demand without being handcuffed by collateral scarcity.

Of course, a fractional reserve is risky – how do we avoid becoming the next bank run? The answer is coordination and smart mechanisms in place of raw over-collateralization. In our model, issuance and redemption of FUSD are coordinated at the protocol level rather than driven by individual user whims. We (the community of The Fedz participants) collectively decide when to expand or contract the FUSD supply and by how much, guided by on-chain metrics and governance rules. For example, new FUSD isn’t just minted arbitrarily by anyone at any time; it’s introduced in a measured, sequenced way (as we explain in our Docs) to match real demand. Similarly, redemption of FUSD for underlying value is managed in an orderly fashion so that large outflows don’t hollow out the reserves in one swoop. By orchestrating these flows as a community, we ensure our fractional reserve remains sound. In essence, we’re building a decentralized central bank for FUSD – one with a unified balance sheet and algorithmic guardrails, in stark contrast to the fragmented vault model.

Our fundamentally different approach is made possible by several key mechanisms that maintain stability and trust in an undercollateralized system. Below are the core components (as our website outlines, each is explained in detail in our docs):

• Private Liquidity Pools (PLPs): We deploy Private Liquidity Pools to manage FUSD’s market liquidity in a controlled, resilient way. These are special liquidity reserves provided by our insiders (the Fedz NFT holders), which back $FUSD on exchanges. Unlike simple AMMs, where anyone can pull liquidity at will, PLPs are structured with rules to prevent panic draining. In normal conditions, PLPs offer deep liquidity and tight spreads for FUSD trading, reinforcing the peg. In times of stress, however, this liquidity can be temporarily locked or metered rather than everyone rushing to withdraw at once. By doing so, PLPs let us demonstrate our financial commitment: those providing collateral can’t just vanish in a crisis, which calms the market and prevents a death spiral. In short, PLPs align incentives and act as our first line of defense against bank-run dynamics, ensuring there’s always some liquidity for honest users even under duress.

• Sequenced Issuance: Rather than allowing instantaneous, unlimited printing of FUSD against collateral, we introduce new supply in discrete, sequenced steps. Practically, this means the protocol and consensus expand FUSD supply gradually and deliberately. For example, issuance now occurs in rounds. This sequencing ensures each increment of FUSD is backed by the current state of our collective collateral and risk parameters. If there’s high demand for FUSD (say the market price is inching above $1), we can schedule additional issuance in the next round to push the price back down to peg. If demand is soft, we pause issuance. By pacing supply expansions, we avoid flooding the market or overshooting the peg. Coordinated issuance also means creating FUSD is aligned with system-wide decisions – it’s a feature of coordination, not an ad-hoc user action. This approach keeps supply growth tethered to organic supply and demand signals and system capacity, rather than the unpredictable whims of individual borrowers.

By combining a unified balance sheet with these coordinated mechanisms, our approach aims to be far more efficient and scalable than the old CDP model, while enhancing stability through smart design. Undercollateralization allows FUSD to grow with the market’s needs – we aren’t bottlenecked by requiring massive collateral overhead for every dollar minted. This means our capital can work harder: the same pool of assets can support a larger volume of stablecoins, enabling us to scale FUSD’s supply in line with organic demand. When the DeFi market calls for more stable liquidity, we can answer that call quickly (via governed issuance) instead of waiting for arbitrage incentives to attract new collateral. Conversely, if demand contracts, we can gracefully scale back. This elasticity is built into our model, making FUSD responsive to real economic usage rather than solely to lending activity.

Crucially, we achieve this flexibility without sacrificing decentralization or transparency. Our protocol is governed by a community of Fedz NFT holders – a distributed collective of participants with skin in the game – rather than a central corporate issuer. All the parameters of issuance, reserve ratios, and PLP operations are executed via smart contracts and open governance processes. In other words, we’ve designed a system that behaves like a well-managed bank, but it’s run by code and community instead of bankers behind closed doors. We maintain decentralization at every step: no single entity can arbitrarily print FUSD or change the rules. The checks and balances (from on-chain governance votes to automated circuit breakers like sbFUSD limits) ensure that stability decisions are made out in the open and with consensus. Our goal is to prove that fractional reserve stability can be achieved in DeFi – improving efficiency and scalability while keeping faith with the core principles of openness and decentralization.

In summary, The Fedz’s model is a fundamentally different path for stablecoins. By moving from isolated, overcollateralized vaults to a cohesive, undercollateralized protocol, we aim to unlock greater capital efficiency and truly scale a decentralized stablecoin to meet global demand. Our coordinated issuance and redemption process – bolstered by Private Liquidity Pools, sequenced issuance schedules, and the sbFUSD buffer – aligns FUSD’s supply with real market needs and guards against runaway scenarios. We’ve rethought the paradigm of “backing” a stablecoin, choosing an active, community-driven balance sheet over static per-vault collateral ratios. The result is an approach we believe can deliver stronger stability through cooperation and intelligent design rather than brute-force over-collateralization. It’s a new path we’re excited to forge: one where stability, decentralization, and efficiency reinforce each other in the service of a more robust DeFi economy.

MakerDAO’s vault-based stablecoin issuance was a groundbreaking innovation that set the stage for decentralized finance. It brought to life the ethos of a bankless financial system, and its influence persists as Sky Protocol continues to evolve Dai into USDS. Yet, as we’ve seen, this model has clear drawbacks – heavy concentration among whale users, high upkeep costs, and relentless churn of vaults, which cast doubt on its long-term sustainability. Competitors like Liquity have demonstrated that tweaks to the model (no interest, lower collateral thresholds) can improve user experience. The question lingers: can an overcollateralized, user-driven stablecoin truly scale to serve everyone, or will it always end up serving a niche of power users and short-term speculators?

The answer may lie in reimagining the problem entirely. The Fedz’s novel approach, treating stablecoin issuance as a holistic, protocol-driven balance sheet problem rather than an individual debt issuance problem, is an attempt to rewrite the rules. It aligns with the same ethos that MakerDAO began with – decentralization, transparency, community governance – but dares to ask if we can achieve stability with far greater capital efficiency and flexibility. In doing so, it leans into organic market forces (much like how traditional banks and central banks operate, but without the centralized actors) to let supply and demand find equilibrium under algorithmic guidance. This could prove more sustainable in the long run if executed properly, as it might avoid the user churn and whale-dependence that Maker’s model faces.

Financially savvy DeFi users – the “degens” who ape into new protocols but also analyze the metrics – are right to be both excited and skeptical. MakerDAO and DAI (USDS) will not be dethroned easily; they have the first-mover advantage, deep liquidity, and a community that has weathered many storms. However, the very ethos that Maker encapsulated demands continuous innovation. DeFi is an experiment in real time, and even foundational ideas must compete with new ones. As we look to the future of decentralized stablecoin issuance, we should celebrate MakerDAO’s foundational role and critically examine its limitations. And we should keep a close eye on the likes of Liquity, and especially The Fedz, whose fresh approach could potentially overcome those limitations. The endgame (no pun intended) is a stablecoin that is truly decentralized, widely used, and economically sustainable. MakerDAO showed us the dream; now the DeFi community is iterating on that vision, and the next evolution in stablecoins might just be around the corner, born from the very critiques we levy today.

References:

1. Osolnik, Jan. “Vault User Research: Survival Analysis.” Block Analitica, 2023. Medium. (Data showing ~28,000 historical Maker vaults with only ~2,600 active (~9%), indicating ~91% churn; median churned vault lifespan ~4 months)

2. Osolnik, Jan. “Maker Vault Owners’ External Capital Analysis.” Block Analitica, Apr. 24, 2023. (Observation that most of the capital backing Maker vaults is held by a few large wallets, i.e. whale vaults dominate the supply) medium.com

3. Nguyen, Derrick. “Liquity Protocol vs MakerDAO (Part 1).” Medium, Jun. 8, 2021. (Comparison of borrowing costs: a 5.5% annual stability fee on Maker’s ETH-A vault vs. a one-time 0.5% fee on Liquity; Maker requires 150% collateral vs Liquity’s 110%, making Maker far more expensive and capital-inefficient over time) medium.com

4. DailyExpertNews (via Bloomberg). “DAI Emerges as King of Decentralized Stablecoins After Terra’s Collapse.” May 17, 2022. (Notes that MakerDAO’s DAI, founded in 2017, is the oldest decentralized stablecoin, having survived the 2018 crypto winter and 2020 Covid downturn – highlighting its foundational status and resilience) dailyexpertnews.com

5. Sandor, Krisztian. CoinDesk. “MakerDAO Is Now ‘Sky’ as $7B Crypto Lender Rolls Out New Stablecoin, Governance Token.” Aug. 27, 2024. (Rebranding of MakerDAO to Sky, introduction of USDS stablecoin and SKY governance token as part of the Endgame plan; Rune Christensen’s quote on aiming to “scale DeFi to gigantic size” via these changes)

6. ChainCatcher News (via The Block). “USDS supply has increased 135% since launch; DAI supply decreased 31.5%.” Feb. 1, 2025. (Reports that since Sept. 17, 2024, Maker’s new USDS stablecoin grew from 98.5M to 2.32B in circulation, demonstrating rapid adoption of Sky’s stablecoin pivot)

In 2017, MakerDAO launched Dai, the first decentralized, crypto-collateralized stablecoin, and with it, the concept of the vault (formerly CDP, or Collateralized Debt Position) was born. This model was nothing short of revolutionary. For the first time, anyone could lock crypto assets (like ETH) in a smart contract “vault” and mint a stablecoin (Dai) against it without any central authority. MakerDAO proved that a trustless, overcollateralized stablecoin could maintain a peg to the U.S. dollar through market forces alone. It became a foundational building block of DeFi, surviving brutal market cycles (the 2018 crypto winter, the 2020 Covid crash) and emerging as the oldest and most battle-tested decentralized stablecoin (dailyexpertnews.com). This resilience and early mover advantage made MakerDAO’s Dai (recently rebranded as USDS under the new Sky Protocol) synonymous with the DeFi ethos of self-sovereignty and decentralization.

Maker’s influence on DeFi is hard to overstate. Many early DeFi “degenerates” (and more conservative users alike) used Dai as a safe haven for yield farming or hedging, because it was perceived as decentralized money. The protocol’s governance, powered by MKR tokens, enabled the community to adjust risk parameters, add new collateral types, and steer the ship of what was effectively a crypto-native central bank. As Rune Christensen (Maker’s co-founder) noted during the project’s recent overhaul, the driving motivation has always been figuring out “how to scale DeFi to gigantic size” and grow a truly decentralized stablecoin. Dai’s success and the vault model’s innovation set the stage for countless other projects – if you’ve ever borrowed against your crypto, you likely have MakerDAO’s pioneering work to thank.

For all its decentralization ethos, those who use Maker vaults today tell an interesting story. The idealistic vision was a stablecoin used and minted by many everyday crypto users. In reality, the market is heavily concentrated in a few whales. Data shows that while many wallets have sufficient collateral relative to their debt, “most of the capital is held by a few” large vault holders (medium.com). The disparity between the average and median vault size paints this picture: the average Maker vault size is around $1.85 million, yet the median vault is only $25–50k. In other words, a handful of gargantuan vaults mint an outsized portion of Dai/USDS, while the vast majority are much smaller positions. MakerDAO’s decentralized stablecoin may be open to all, but its supply is largely driven by whales who can afford to lock millions in collateral.

Why does this concentration matter? For one, it implies a form of centralization of risk – if a few big vaults close or get liquidated, it can significantly shrink the stablecoin supply or even rattle the system. It also suggests that the barriers to entry (or staying in the game) push out smaller users over time, leaving mainly larger players or "insiders". Maker’s model arguably embodies decentralization in principle, but in practice, the usage skews heavily toward the crypto-rich. This dynamic has sparked debate: Is a stablecoin truly decentralized if only a few big holders effectively underwrite most of it? The ethos is intact (anyone can open a vault), yet the practical distribution and power are uneven.

Another critical issue surfacing in MakerDAO’s vault model is the high churn rate of vaults – in plain terms, users frequently close their positions. Since Multi-Collateral Dai’s launch, around 28,000 vaults have been opened in total, but only roughly 2,600–2,900 are active today. That means about 90% of all open vaults have been closed. Many users come to Maker, generate Dai, and later shut their vaults, resulting in a constant revolving door of borrowers. The median vault “tenure” before churn is strikingly short – about 4 months before a typical vault is closed or paid down. Such low retention suggests that using a Maker vault is often a temporary strategy (perhaps to leverage trade or farm yield) rather than a long-term financing solution.

Why the churn? Vaults are expensive and hard to maintain over long periods for most users. Maker vault borrowing isn’t free – you pay a variable stability fee (effectively an interest rate on the debt) that accrues continuously. On popular collateral types, this can range from low single digits to even double-digit APRs in volatile times. Over months and years, that cost adds up. There’s also the requirement to overcollateralize (often needing $1.5 of ETH to borrow $1 of Dai) and to monitor and maintain your position actively. If your collateral value falls, you must add more or risk liquidation. All of this means the cost of capital in MakerDAO is high. Smaller vault holders face the grind of accruing interest and worrying about sudden price drops triggering liquidations (with Ethereum’s notorious volatility). Unsurprisingly, many decide to close out, especially if the trade or yield they opened the vault for is no longer favorable.

While Liquity emerged as a distinct protocol with its own stablecoin, LUSD, it shares more in common with MakerDAO than is often acknowledged. Both protocols operate on a fundamental model of overcollateralized debt positions (CDPs) backed by Ethereum, with liquidation mechanisms that ensure peg stability. In both systems, users deposit ETH into a smart contract, mint stablecoins (DAI or LUSD), and maintain a minimum collateral ratio to avoid liquidation.

The key difference lies in how fees are applied and governance is structured. Liquity replaces Maker’s ongoing stability fee with a one-time borrowing fee and eliminates governance, relying on immutable code and a stability pool for liquidations. While this may offer predictability and algorithmic control, the underlying logic, in which users mint stablecoins by locking ETH, and the system maintains solvency through liquidation incentives, is essentially the same.

Despite Liquity’s tweaks, both models are constrained by the same core limitation: capital inefficiency. Since they require more value in ETH than the stablecoins minted, they inherently limit the potential stablecoin supply and user accessibility. This structural reliance on overcollateralization caps scalability and makes them heavily dependent on ETH price stability. And just like Maker, Liquity suffers from usage concentration and challenges in broad adoption.

Rather than being radically different models, Maker and Liquity are variations on the same foundational theme. The structure is trustless' CDPs enforce solvency through liquidation mechanics and overcollateralized positions. They both embody the DeFi spirit, yet remain locked within a framework that assumes overcollateralization is necessary for stability, which introduces inefficiencies and barriers to long-term adoption.

Understanding the structural similarities between Maker and Liquity makes a deeper critique even more pressing. Both rely on a model where users individually collateralize and manage debt, where stability emerges from the threat of liquidation, and where access is naturally limited by the capital required to participate. This model worked as a starting point for decentralized stablecoins, but the question is: can it scale sustainably?

The churn statistics in Maker are telling: With only ~2,900 active vaults out of 28,000 historically and a median life of just four months, we see how few users stick around. Liquity’s metrics, while less public, reveal similar concentration trends. These aren’t mass-scale financial systems—they’re tools for a narrow group of crypto-native actors. And because both models depend on users putting up excess capital to mint money, they are inherently expensive and fragile during downturns.

Vaults are not only costly to maintain but psychologically burdensome. Whether paying Maker’s ongoing stability fee or managing Liquity’s liquidation thresholds, users must stay engaged, often for little reward. The design encourages temporary usage for leveraged opportunities, not stable, long-term issuance. And in both cases, the system’s stability hinges on swift and effective liquidation.

Moreover, these models concentrate power and risk among a small set of large vault holders. The overcollateralized model claims to decentralize issuance, but in practice, it centralizes exposure, relying on a few to supply liquidity for the many. This contradiction, decentralized in principle, concentrated in practice, defines the current CDP paradigm.

Unless a fundamentally different approach is taken, both Maker and Liquity may continue to serve niche roles without ever achieving the scalable, capital-efficient, and inclusive stablecoin infrastructure that DeFi truly needs.

We believe the prevailing model for decentralized stablecoins – exemplified by MakerDAO’s DAI and Liquity’s LUSD – has fundamental limitations. These platforms use Collateralized Debt Positions (CDPs), where individual users open vaults and lock up assets worth significantly more than the stablecoins they mint (often requiring 150%+ collateral for every $1 issued). This over-collateralization does provide a safety cushion, but it comes at a steep cost in capital efficiency. Huge amounts of capital sit idle as extra collateral, making it expensive and impractical for users who don’t already have substantial assets. In practice, only those seeking to leverage their crypto (and able to tolerate volatility) mint these stablecoins, meaning supply grows primarily when speculators want loans, not necessarily when organic stablecoin demand exists.

This vault-by-vault approach also fragments risk. Each user manages their own position and bears the risk of liquidation individually. If the market crashes, collateral values can plummet across many vaults at once, triggering a wave of liquidations. Because these risks are isolated in hundreds of separate silos, there’s no unified defense against a cascading failure – the system relies on automated auctions or stability pools to clean up each failing vault. We’ve seen how this lack of coordination can make the whole system fragile under stress: a sharp downturn can force many positions to unwind simultaneously, straining liquidity and confidence. In short, the CDP model’s heavy collateral requirements and siloed risk management limit its usability, scalability, and resilience. It’s a solid first-generation solution, but we set out on a new path because we recognize its structural inefficiencies.

Instead of individual vaults, we operate $FUSD on a single, protocol-level balance sheet – essentially a unified decentralized bank backing the stablecoin. All collateral assets in our system contribute to one collective pool supporting all FUSD in circulation. This unified approach lets us manage risk and liquidity holistically, rather than leaving each user to fend for themselves. Most importantly, we embrace undercollateralization (a fractional reserve) as a design principle. Unlike MakerDAO or Liquity, we don’t insist on $1.50 of assets for every $1 FUSD – our reserve might be, for example, 80% or 50% of the outstanding $FUSD. By running a fractional reserve, we free up capital and can issue more FUSD against a given asset base, dramatically improving capital efficiency. This means our stablecoin supply can expand to meet demand without being handcuffed by collateral scarcity.

Of course, a fractional reserve is risky – how do we avoid becoming the next bank run? The answer is coordination and smart mechanisms in place of raw over-collateralization. In our model, issuance and redemption of FUSD are coordinated at the protocol level rather than driven by individual user whims. We (the community of The Fedz participants) collectively decide when to expand or contract the FUSD supply and by how much, guided by on-chain metrics and governance rules. For example, new FUSD isn’t just minted arbitrarily by anyone at any time; it’s introduced in a measured, sequenced way (as we explain in our Docs) to match real demand. Similarly, redemption of FUSD for underlying value is managed in an orderly fashion so that large outflows don’t hollow out the reserves in one swoop. By orchestrating these flows as a community, we ensure our fractional reserve remains sound. In essence, we’re building a decentralized central bank for FUSD – one with a unified balance sheet and algorithmic guardrails, in stark contrast to the fragmented vault model.

Our fundamentally different approach is made possible by several key mechanisms that maintain stability and trust in an undercollateralized system. Below are the core components (as our website outlines, each is explained in detail in our docs):

• Private Liquidity Pools (PLPs): We deploy Private Liquidity Pools to manage FUSD’s market liquidity in a controlled, resilient way. These are special liquidity reserves provided by our insiders (the Fedz NFT holders), which back $FUSD on exchanges. Unlike simple AMMs, where anyone can pull liquidity at will, PLPs are structured with rules to prevent panic draining. In normal conditions, PLPs offer deep liquidity and tight spreads for FUSD trading, reinforcing the peg. In times of stress, however, this liquidity can be temporarily locked or metered rather than everyone rushing to withdraw at once. By doing so, PLPs let us demonstrate our financial commitment: those providing collateral can’t just vanish in a crisis, which calms the market and prevents a death spiral. In short, PLPs align incentives and act as our first line of defense against bank-run dynamics, ensuring there’s always some liquidity for honest users even under duress.

• Sequenced Issuance: Rather than allowing instantaneous, unlimited printing of FUSD against collateral, we introduce new supply in discrete, sequenced steps. Practically, this means the protocol and consensus expand FUSD supply gradually and deliberately. For example, issuance now occurs in rounds. This sequencing ensures each increment of FUSD is backed by the current state of our collective collateral and risk parameters. If there’s high demand for FUSD (say the market price is inching above $1), we can schedule additional issuance in the next round to push the price back down to peg. If demand is soft, we pause issuance. By pacing supply expansions, we avoid flooding the market or overshooting the peg. Coordinated issuance also means creating FUSD is aligned with system-wide decisions – it’s a feature of coordination, not an ad-hoc user action. This approach keeps supply growth tethered to organic supply and demand signals and system capacity, rather than the unpredictable whims of individual borrowers.

By combining a unified balance sheet with these coordinated mechanisms, our approach aims to be far more efficient and scalable than the old CDP model, while enhancing stability through smart design. Undercollateralization allows FUSD to grow with the market’s needs – we aren’t bottlenecked by requiring massive collateral overhead for every dollar minted. This means our capital can work harder: the same pool of assets can support a larger volume of stablecoins, enabling us to scale FUSD’s supply in line with organic demand. When the DeFi market calls for more stable liquidity, we can answer that call quickly (via governed issuance) instead of waiting for arbitrage incentives to attract new collateral. Conversely, if demand contracts, we can gracefully scale back. This elasticity is built into our model, making FUSD responsive to real economic usage rather than solely to lending activity.

Crucially, we achieve this flexibility without sacrificing decentralization or transparency. Our protocol is governed by a community of Fedz NFT holders – a distributed collective of participants with skin in the game – rather than a central corporate issuer. All the parameters of issuance, reserve ratios, and PLP operations are executed via smart contracts and open governance processes. In other words, we’ve designed a system that behaves like a well-managed bank, but it’s run by code and community instead of bankers behind closed doors. We maintain decentralization at every step: no single entity can arbitrarily print FUSD or change the rules. The checks and balances (from on-chain governance votes to automated circuit breakers like sbFUSD limits) ensure that stability decisions are made out in the open and with consensus. Our goal is to prove that fractional reserve stability can be achieved in DeFi – improving efficiency and scalability while keeping faith with the core principles of openness and decentralization.

In summary, The Fedz’s model is a fundamentally different path for stablecoins. By moving from isolated, overcollateralized vaults to a cohesive, undercollateralized protocol, we aim to unlock greater capital efficiency and truly scale a decentralized stablecoin to meet global demand. Our coordinated issuance and redemption process – bolstered by Private Liquidity Pools, sequenced issuance schedules, and the sbFUSD buffer – aligns FUSD’s supply with real market needs and guards against runaway scenarios. We’ve rethought the paradigm of “backing” a stablecoin, choosing an active, community-driven balance sheet over static per-vault collateral ratios. The result is an approach we believe can deliver stronger stability through cooperation and intelligent design rather than brute-force over-collateralization. It’s a new path we’re excited to forge: one where stability, decentralization, and efficiency reinforce each other in the service of a more robust DeFi economy.

MakerDAO’s vault-based stablecoin issuance was a groundbreaking innovation that set the stage for decentralized finance. It brought to life the ethos of a bankless financial system, and its influence persists as Sky Protocol continues to evolve Dai into USDS. Yet, as we’ve seen, this model has clear drawbacks – heavy concentration among whale users, high upkeep costs, and relentless churn of vaults, which cast doubt on its long-term sustainability. Competitors like Liquity have demonstrated that tweaks to the model (no interest, lower collateral thresholds) can improve user experience. The question lingers: can an overcollateralized, user-driven stablecoin truly scale to serve everyone, or will it always end up serving a niche of power users and short-term speculators?

The answer may lie in reimagining the problem entirely. The Fedz’s novel approach, treating stablecoin issuance as a holistic, protocol-driven balance sheet problem rather than an individual debt issuance problem, is an attempt to rewrite the rules. It aligns with the same ethos that MakerDAO began with – decentralization, transparency, community governance – but dares to ask if we can achieve stability with far greater capital efficiency and flexibility. In doing so, it leans into organic market forces (much like how traditional banks and central banks operate, but without the centralized actors) to let supply and demand find equilibrium under algorithmic guidance. This could prove more sustainable in the long run if executed properly, as it might avoid the user churn and whale-dependence that Maker’s model faces.

Financially savvy DeFi users – the “degens” who ape into new protocols but also analyze the metrics – are right to be both excited and skeptical. MakerDAO and DAI (USDS) will not be dethroned easily; they have the first-mover advantage, deep liquidity, and a community that has weathered many storms. However, the very ethos that Maker encapsulated demands continuous innovation. DeFi is an experiment in real time, and even foundational ideas must compete with new ones. As we look to the future of decentralized stablecoin issuance, we should celebrate MakerDAO’s foundational role and critically examine its limitations. And we should keep a close eye on the likes of Liquity, and especially The Fedz, whose fresh approach could potentially overcome those limitations. The endgame (no pun intended) is a stablecoin that is truly decentralized, widely used, and economically sustainable. MakerDAO showed us the dream; now the DeFi community is iterating on that vision, and the next evolution in stablecoins might just be around the corner, born from the very critiques we levy today.

References:

1. Osolnik, Jan. “Vault User Research: Survival Analysis.” Block Analitica, 2023. Medium. (Data showing ~28,000 historical Maker vaults with only ~2,600 active (~9%), indicating ~91% churn; median churned vault lifespan ~4 months)

2. Osolnik, Jan. “Maker Vault Owners’ External Capital Analysis.” Block Analitica, Apr. 24, 2023. (Observation that most of the capital backing Maker vaults is held by a few large wallets, i.e. whale vaults dominate the supply) medium.com

3. Nguyen, Derrick. “Liquity Protocol vs MakerDAO (Part 1).” Medium, Jun. 8, 2021. (Comparison of borrowing costs: a 5.5% annual stability fee on Maker’s ETH-A vault vs. a one-time 0.5% fee on Liquity; Maker requires 150% collateral vs Liquity’s 110%, making Maker far more expensive and capital-inefficient over time) medium.com

4. DailyExpertNews (via Bloomberg). “DAI Emerges as King of Decentralized Stablecoins After Terra’s Collapse.” May 17, 2022. (Notes that MakerDAO’s DAI, founded in 2017, is the oldest decentralized stablecoin, having survived the 2018 crypto winter and 2020 Covid downturn – highlighting its foundational status and resilience) dailyexpertnews.com

5. Sandor, Krisztian. CoinDesk. “MakerDAO Is Now ‘Sky’ as $7B Crypto Lender Rolls Out New Stablecoin, Governance Token.” Aug. 27, 2024. (Rebranding of MakerDAO to Sky, introduction of USDS stablecoin and SKY governance token as part of the Endgame plan; Rune Christensen’s quote on aiming to “scale DeFi to gigantic size” via these changes)

6. ChainCatcher News (via The Block). “USDS supply has increased 135% since launch; DAI supply decreased 31.5%.” Feb. 1, 2025. (Reports that since Sept. 17, 2024, Maker’s new USDS stablecoin grew from 98.5M to 2.32B in circulation, demonstrating rapid adoption of Sky’s stablecoin pivot)