Without them, DeFi grinds to a halt. We’ve experienced that promise – and that peril – firsthand. Circle’s IPO to $9 billion success certainly signals faith restored, no question, but does that automatically make anything with a “stablecoin” label in it gold? Absolutely not. What about the AI stablecoin? Here's what I truly think.

AI-Backed Pegs: Really That Stable?

The allure is strong: AI tokens and the GPU power driving them, now backing stable value? Projects such as Maitrix, Gaib and Permian Labs (USDAI) are paving the way. They are reputedly to offer clarity and stability amidst the fast-paced, ever-changing Web3 AI landscape. Maitrix aims to focus on AI token volatility using overcollateralized AI USD. Gaib aims to tokenize GPU revenue. And USDAI? It’s gunning for a tasty 15-25% annualized return by collateralizing its stablecoin with real world hardware assets.

The concept of using AI to autonomously manage a stablecoin is incredibly fascinating in and of itself, but c’mon. Peg mechanisms are already pretty fragile even with conventional assets. Just because we throw in some AI tokens or GPUs, or even dummy treasury bonds into the mix doesn’t mean it suddenly becomes less unsafe. In reality, it creates layers of complexity that are just as likely to develop into systemic weaknesses.

Think about it. USDAI is targeting a 15-25% return. That's aggressive. Where is that yield coming from? Loan guarantees collateralized by GPUs, telecom gear, and solar panels? Sounds an awful lot like subprime mortgages to me. What happens when the AI bubble bursts, GPU prices crash, and those loans go south on them. De-pegging event incoming.

And along those lines, how do you expect to de-peg in the event that these AI-supported stablecoins run into an eventual conflict? Are the liquidation protocols solid enough to prevent a nasty short squeeze on AI tokens, or worse, a GPU short sell-off? I have serious doubts. We’re all familiar with what happened when the first algorithmic stablecoin went bust. Terra Luna, anyone? This seems like history crying out to repeat itself.

GPU Tokenization: Solving a Real Problem?

Gaib is trying to solve a real problem: financing GPU expansion for AI. While the tokenization of future GPU revenue cash flows is certainly groundbreaking, its underlying principle is not entirely new. Rather than debt finance, blockchain allows data centers to instantly monetize future revenue streams by selling them to investors. That's all good on paper.

Here's where the "unexpected connection" comes in. It reminds me of mortgage-backed securities (MBS) leading up to the 2008 financial crisis. Structuring and selling cash flows yet-to-be-produced, particularly from a speculative and highly-volatile asset such as GPUs, adds significant complexity and opacity. If the GPU revenue streams are not secure, the whole house of cards may come crumbling down. The AID token, backed by graphic card financing and treasury bonds, sounds nice until the graphic card financing goes bad.

The key difference is scale. The traditional finance market dwarfs the AI-stablecoin market, which remains minuscule in comparison. The opportunity for explosive growth is there. Should things go awry, this is compounded by the danger of swift contagion.

  • Volatility: AI tokens are inherently volatile.
  • Liquidity: Many AI tokens suffer from thin liquidity.
  • Complexity: AI-backed stablecoins introduce complex peg mechanisms.
  • Regulatory Uncertainty: The regulatory landscape is still unclear.

Regulators Are Watching, Closely

The most poorly understood aspect of all of this is regulation. How will regulators treat these AI-backed stablecoins? Will they be classified as securities? If so, will they be held accountable to the same rigorous standards as legacy financial institutions?

I suspect regulators are observing this space extremely, EXTREMELY closely. As with Circle’s IPO, this would arguably generate momentum for institutional adoption of traditional stablecoins. AI stablecoins are a different, much bigger challenge altogether. Yet given their novelty and complexity, they’ll probably be the subject of a high level of scrutiny.

Remember the SEC’s recent enforcement efforts against crypto projects. They’re not shy about going after anything that looks to them like a security offering in sheep’s clothing. If these AI-backed stablecoins were to be classified as securities, they would be subject to heavy compliance burdens, threatening to suffocate innovation.

At the end of the day, AI stablecoins are a high-risk, high-reward proposition. They can cut through the chaos and unlock the Web3 AI ecosystem’s true potential, bringing essential stability and liquidity in spades. With that opportunity comes the risk of significant, catastrophic failure, systemic risk, and regulatory whiplash. Proceed with extreme caution.

The lure of AI-powered finance is very appealing. Do be cautious, and defend your hard-earned dollars. Don’t let the hype blind you to the inherent risks.