Indeed a lot can go wrong, custodian goes bust, contract goes haywire and doesn't rebalance properly, the size of positions one could take are also limited, which is a good thing I guess since you can't get to the size of USDT with a product like this

I don't really think there's an improvement on this idea just a different trade off, one is balanced channels, where the channel rebalances based on the fiat amount locked and another is something like fuji money where you collateralize your L-BTC to get a synthetic coin which has its own liquidity issues.

There are also stability pools proposed by Fedimint, again this is a custodian it is just a federated one that would function in the same way as stablesats, all about how you want to deal with the risk but there will always be risk

I see why people want these services, getting access to dollars, when your local currency is going tits up faster than you can decide where to put it is important and when you have very little you are more concerned with downside than any potential upside.

The issued stablecoin for all its problems is still the best option for many people that these stablesats kinda projects are targetting, sure it can be censored and all that but it doesn't pretend to be anything special just iou's with a hash on-chain, it USDT comes to taproot assets or RGB that could also eat into the value prop of stablesats

The only other option other than accepting the risks of these products is to keep a balance in Bitcoin where you can manage the vol or stay out of it until the vol is within a range you can stomach.