Why True Decentralized Credit Requires Abandoning Peg Obsession

Decentralized credit is impossible with rigid pegs because they eliminate the fundamental price discovery mechanism for risk. A stablecoin that never deviates from $1.00 cannot signal the marginal cost of capital or the probability of default, which are the core variables for any lending protocol like Aave or Compound.

The peg is a subsidy that externalizes volatility onto the protocol's governance and reserves. This creates a systemic fragility evident in the collapse of Terra's UST, where maintaining the peg required unsustainable, centralized monetary policy that ultimately failed.

Native credit tokens must float. Their market price becomes the real-time oracle for creditworthiness and capital efficiency, a principle seen in the risk-adjusted vaults of MakerDAO. This allows protocols to scale without relying on centralized custodians or infinite-liquidity backstops.

Evidence: The $40B DeFi lending sector processes billions in loans but remains collateralized at over 200% on average. This proves that without a floating price for credit itself, the system defaults to overcollateralization, which is not credit at all.

Credit requires solvency, not stability. A stablecoin's peg is a market outcome, not a protocol guarantee. The core primitive for decentralized lending is a verifiable proof that assets exceed liabilities, a state independent of any external price feed.

Peg obsession creates systemic fragility. Protocols like MakerDAO and Aave anchor to the dollar, creating reflexive liquidation spirals during de-pegs. This design imports traditional finance's instability into a system capable of native accounting.

Overcollateralization is the wrong metric. 150% collateralization against a volatile oracle is meaningless during a black swan. The correct metric is real-time, proof-based solvency—demonstrating asset ownership exceeds debt obligations on-chain, without price assumptions.

Evidence: The 2022 UST collapse proved that algorithmic stability without solvency is catastrophic. In contrast, protocols like Euler Finance and Maple Finance now prioritize on-chain attestations and verifiable reserve proofs over maintaining a specific price peg.

Pegs are a UX crutch for users conditioned to centralized finance. They demand a stable unit of account because existing DeFi protocols like MakerDAO and Aave enforce it, not because it's a technical necessity.

True credit markets price risk, not stability. A decentralized credit protocol must allow the borrowing asset's value to float based on supply/demand and collateral quality, creating a transparent risk curve.

Liquidity follows utility, not promises. Protocols like Euler Finance demonstrated that sophisticated, risk-based lending pools attract capital without rigid pegs. The market will provide liquidity for assets that clear at fair value.

Evidence: The failure of algorithmic stablecoins like UST proves that enforcing a peg without real demand is unsustainable. A floating credit asset avoids this systemic fragility by design.