the recent Luna-Terra accident it has caused tens of billions of dollars in losses, drawing widespread criticism of “algorithmic stablecoins” as a category, with many viewing it as a fundamentally flawed product. Ethereum co-founder Vitalik Buterin has shared two experiments to test whether an algorithmic stablecoin (something) is sustainable. In a blog post, Buterin writes: “While there are many automated stablecoin designs that are fundamentally flawed and doomed to eventually collapse, and many more that can theoretically survive but are very risky, there are also many stablecoins that are very risky. solid in theory. and have survived extreme tests of crypto market conditions in practice. He adds, “what we need is not a stablecoin boost or stablecoin doomerism, but rather a return to principled thinking.” Here are some principles for evaluating whether or not a particular automated stablecoin is truly stable, according to Buterin.
1) Can the stable coin be safely reduced to zero users?
If any stablecoin project drops to zero, users should be able to extract the fair value of their liquidity from the asset, according to Buterin. He highlighted that the Terra coin did not allow users to extract fair liquidity due to its pegged structure with the Luna coin, which needs to maintain its price and user demand to maintain its parity with the US dollar.
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PremiumPremiumPremiumPremium “First, the price of volcoin goes down. So, the stablecoin starts to shake. The system tries to prop up the demand for stablecoins by issuing more volcoins. With little trust in the system, there are few buyers, so the price of volcoin falls rapidly. Finally, once the price of volcoin is close to zero, the stablecoin also collapses,” he wrote. Buterin notes that “in the non-crypto world, when a product is shut down or rejected, customers are usually not hurt as much.” However, he says that in the crypto world people take it too personally. “Certainly there are some cases of people going unnoticed, but in general the closures are orderly and the problem is manageable,” he adds.
2) What happens if you try to peg the stablecoin at 20 percent per year?
Buterin believes there are two scenarios if a stablecoin waives 20 percent interest for investing in his project. The project “will charge some kind of negative interest rate to holders that balances out to basically cancel out the dollar-denominated growth rate built into the index.” or “It becomes a Ponzi, giving stablecoin holders incredible returns for some time until one day it suddenly collapses with a bang.” “Obviously, there is no genuine investment that can earn anywhere near a 20% per year return, and there is definitely no genuine investment that can keep increasing its rate of return by 4% per year forever,” he wrote. He concluded by saying that “the crypto space needs to move away from the attitude that it is okay to achieve security by relying on endless growth. It is certainly not acceptable to maintain that attitude by saying that “the fiat world works the same way” because the fiat world is not trying to offer anyone returns that rise much faster than the regular economy, outside of isolated cases that should certainly be criticized. with the same ferocity.”