Drawback

Of course, while there are pros to this model, there are drawbacks as well.

Large Numbers

It’s easy for the coin to grow in value when it’s starting off at a lower collateral. But it would be very difficult to increase the value of the coin when both the collateral and circulating supply are 9, or even 10 figures (100 million USD, 1 billion USD). The amount of collateral required to increase the value per MUSD would be much, much larger.

We have some measures of control to incentivize the reduction of the collateral, but there could be unforeseen circumstances.

Collateral Risk

Our value is 100% dependent on the collateral we’ve chosen. For example, if we choose to keep all our collateral in USDB, and if USDB suddenly de-pegs, our MUSD value would also drop.

To hedge against this risk, we can look to diversify our collateral into multiple audited stablecoins, multiple currencies, and even collateralized gold as the collateral grows in size.

Geopolitical Risk

In line with collateral risk, while we are starting off with a US Dollar base, this works great when the USD is the global currency. Should another global power rise, we could ideally diversify and possibly reallocate part of our collateral into that. Or we can diversify away from USD-only holdings.

Possible currencies that are able to hold their value well are typically:

• CHF (Swiss Franc)

• SGD (Singapore Dollars)

Most major currencies typically face higher inflation rates or lesser economic stability to back their currency.

Hacking Risk

With a growing amount of collateral, it will definitely draw eyes on us; we should expect hackers to attempt to steal our collateral at all times.

To hedge against this risk, our contract should be pen-tested multiple times from multiple vectors. And if possible, seek insurance against the contract breaking.

To protect against internal hacking, no single party should be able to reallocate the collateral into another token. Even multi-sig wallets are risky, as we can see from multiple hacking incidents.