But you could have that upside by owning the collateral.

If I own the collateral, I own the upside and downside of the collateral. If I own a stablecoin pegged to the collateral, I own the upside and downside of the collateral, plus the risk of the stablecoin collapsing.

The stablecoin doesn't offer me any upside compensating for the risk, so we are left arguing that the risk of collapse is negligible, or arguing that there is some other benefit of owning the stablecoin to compensate for the additional risk of owning stablecoins instead of owning the collateral.

You can do other things with the stablecoin. You own the upside and downside of the collateral, and you also own the downside of the collateral, and the upside of whatever you bought with the collateral.

Stablecoins are not meant to be an investment; they're for leverage. I agree it is probably a terrible idea to borrow a bunch of stablecoins and then just sit on them.

But by borrowing against the collateral (in this manner), you get some optionality along with the collateral's upside: if it crashes, you get to keep the amount you borrowed[1], thus hedging the loss. Plus any interest earned on it.

[1] Depending on the stablecoin's dependencies you might want to have converted it to dollars outside their platform first.

Sometimes you can't buy the same collateral e.g. if the basket has many elements/currencies/stocks.

Very true, that case parallels non-crypto assets like index funds. You own the upside and downside of the collateral, and you are also exposed to some risk that the company managing the funds does something extremely stupid and/or malicious.

I said above:

> we are left arguing that the risk of collapse is negligible, or arguing that there is some other benefit of owning the stablecoin to compensate for the additional risk of owning stablecoins instead of owning the collateral

In the case of an index fund, the typical purchaser is motivated by both a belief that the risk is negligible based on the reputation and track record of the fund manager, plus the "other benefit" of the convenience of investing in a single mutual fund rather than trying to purchase the same basket of stocks at small scale.

I agree that an automated stablecoin might offer sufficient convenience to be attractive to some investors, provided they consider the risk of collapse to be negligible.

You're right and my above comment is wrong, but I still think the downside risk is bigger than the upside risk. It's ETH with 100% leverage, except beyond the risk of collapse of ETH there is also the risk of the collapse of RAI. Either of those happening would result in severe losses.