Will UST be the end of algorithmic stablecoins?
Once an $18 billion market cap stablecoin, UST now trades for less than 20 cents and is heavily decoupled from the U.S. dollar.Terraform Labs Deployed approximately $3 billion worth ofBitcoinThe UST is a sister token of the UST, which has been heavily injected into the market LUNA . However, these all ended in failure, even Terraform Labs CEO Do Kwon also said that it was impossible to save the network that was once there.
All of this raises two very important questions for the industry: Are all algorithmic stablecoins coming to an end? Should regulations be put in place to prevent a similar disaster?
Jonathan Wu is the head of growth at Aztec Network, a Layer 2 network, and he doesn't think it's the end of algorithmic stablecoins.
Algorithmic stablecoins are the holy grail," he said on the "Unchained" podcast. You think about what an under-collateralized algorithmic stablecoin is, it's printing money out of thin air. In my opinion, there will always be capital to chase this dream.
Stable coins are necessary to eliminate the volatility of cryptocurrencies, and if there is a cheaper way to do this, people will try it.
There are basically two stablecoin models: collateralized and non-collateralized. Like USDC or Tether Such collateralized stablecoins keep financial reserves such as currency or bonds in assets such as bank accounts to ensure that the holder can exchange them for actual currency at some point.
Algorithmic stablecoins attempt to maintain their pegs through other financial means. uST uses an on-chain redemption tool and an associated token, LUNA, to support the value of UST based on changing supply and demand. As the UST rises or falls against the USD, LUNA is burned or minted.
The goal is to create a "crypto-native" dollar - with all the benefits of blockchain, such as resistance to censorship and cheaper than full or partial collateral.
Jonathan Wu combines it with the MakerDAO Maintained blockchain-based stable coinsDAIA comparison was made between the stable coin, which holds an over-collateralized cryptocurrency reserve, and the cost of using it, which is $2.
Now, if I were a venture capitalist or a capital provider, and I was working on this, I would say that I could create a monetary system that was 10 times more capital efficient," he said. I would chase that dream over and over again."
Prior to last week's collapse, the UST had only seen two significant decouples, one in December 2020, when it fell to about 85 cents, and the other in May 2021, when it fell to 94 cents.
However, along the way, figures like University of Calgary professor Ryan Clements have been sounding the alarm. clements wrote a well-thought-out article claiming that all algorithmic stablecoins are doomed to fail.
These assets have as much value as legal tender, and the question is thatTerra The user base is not large enough.
In addition to the demand issue, Clements notes that Terra relies on "self-interested" investors who can profit from its algorithm when it starts to fail. As we saw last week, the sell-off was exacerbated by "herding" selling pressure.
Clements believes that other algorithmic stablecoins - such asMIMFRAX and USDN - far from immune. He writes that they are "in a state of permanent vulnerability" because they are backed by volatile assets and prone to herding behavior.
Just today, Deus Finance's algorithmic stable coinDEIIt fell to 54 cents in the European trading session, in part due to the volatility of stablecoin trading. kwon's previous projects Basis Cash and the algorithmic stablecoin IRON is experiencing similar problems - which has prompted investors to Mark Cuban Calls for regulation of stablecoins.
Cuban tweeted in September last year, "What is an algorithmic stable coin? Is it stable? Do buyers understand what the risks are? It needs standards."
If if the on-chain mechanism is unable to maintain its own price control, then some other entity will step in to set the standard.
Unfortunately for the crypto industry, they don't necessarily get to make their own rules - even if they could be involved in the drafting process.
For regulators, anyone can create a crypto system - a process that means the financial police have been and could continue to play whack-a-mole with issuers. Even though the SEC has begun cracking down on the industry, issuing broad warnings and doubling the size of its crypto enforcement unit - even with clear rules - there will still be anarchists like Kwon willing to rebel against the system.
Venture CapitalistNic CarterI don't think you can actively regulate something like UST, just like you can't regulate plustoken, paycoin or onecoin," he said, adding that UST never fit the term stablecoin because its real goal was to drive LUNA.
So the questions of 'how do we regulate USDC' and 'how do we deal with UST/Luna' are quite different," he said. The latter is more about how to stop large-scale financial fraud from happening. Rules for stablecoins are coming to make them look and function more like banks. Similar rules could be self-enforcing in the crypto industry. Even with algorithmic stablecoins, users may need strong reserves."
Whether such a system would work and whether authorities would use tokens that increasingly resemble securities are open questions. But the lesson for many investors may be to choose a secured stablecoin in the future.
How long that preference will hold, or how long the memory of the UST implosion will last, is another tricky question. As Tomlin says, "I think the main reason people will continue to try is the availability of free money."
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