Are algorithmic stablecoins a castle on a cloud? After the crash of UST, their future doesn't seem too clear, and their real stability is in question.
TerraUSD is an algorithmic stablecoin that is pegged at $1.00. But, on the evening of May 19, it wasThis isn’t supposed to happen, of course, but last week UST, along with its affiliated coin Terra , performed a sort of death spiral that “wiped nearly $50 billion of investor wealth in a few short days,” according to NYDIG’s May 13 newsletter.
Pure algo stables, which put up no collateral at all, are “inherently fragile,” according to Ryan Clements, assistant professor at the University of Calgary Faculty of Law. They “rely on numerous assumptions for operational stability, which are neither certain nor guaranteed.” As he further explained to Cointelegraph:
Kyle Samani, co-founder of Multicoin Capital, largely agreed. “The problem with UST wasn’t the algorithm, but the lack of collateral.” What is more certain is that UST was using a flawed model, insufficiently stress-testing and lacking in circuit breaking mechanisms to break the fall when the death spiral began, said Harvey.Are algo stables even needed?
What he can’t understand, however, is how decentralized assets get around this conundrum: Decentralized assets are invariably more volatile than traditional assets, and so to pledge that their assets will hold a stable value — and not back them with stable assets like U.S. dollar but with other decentralized assets, like LUNA, or an arbitrage mechanism — is ultimately just asking for a UST-type scenario.
Clements already sees some changes in the stablecoin environment. “In light of Terra’s failure and the contagion that it caused across crypto markets, demand has moved to fully or over-collateralized forms.” Longchamp predicted that “algorithmic stablecoins will be under pressure and are unlikely to be part of coming regulation” in Europe — which is not a good thing for algo stables because in Europe, regulation is tantamount to acceptance. “My prediction would be that only audited asset-backed stablecoins will be regulated and encouraged.”
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