Do algorithmic stablecoins have a future?

Moritz Draht: “Algorithmic stablecoins fulfill the core requirement of decentralization”

As soon as the stablecoin UST was on the ground, the concept of algorithmically secured stablecoins was collectively entered. That is understandable. Investors have wasted a lot of money with Terra. But does the Terra demise justify scrapping the concept of algorithmic stablecoins forever?

No: The idea of ​​not securing stablecoins with fiat reserves or a basket of cryptocurrencies still has many advantages that are worth saving. Unlike fiat-backed stablecoins like Tether’s USDT, algorithmic stablecoins fulfill the core imperative of decentralization. With USDT, investors have to trust an intermediary, but not with algorithmic stablecoins. They are transparent, the code can be viewed by everyone. Since there is no central administrator, they also evade regulation and government access. Nobody can simply freeze reserve accounts of algorithmic stablecoins.

In addition, they are highly scalable: Algorithmic stablecoins constantly adapt to demand and thus react immediately to market dynamics. Algorithmic stablecoins are actually predestined for 24/7 crypto trading. Actually. Not only Terra has shown that in practice the concept is still immature in many areas. NuBits, Ampleforth or Basis Cash are also grandiosely failed algorithmic stablecoins.

It becomes particularly problematic when stablecoins themselves become objects of speculation. Ultimately, at Terras UST, it was arbitrage trading that rocked the ecosystem. Algorithmic stablecoins seem to have burned out at the moment, but if the crucial adjustment screws are readjusted, they could form an important pillar for the crypto market.

David Scheider: “It’s better not to experiment with stablecoins”

Anyone who parks their hard-earned money in stablecoins expects one thing above all: stability. The debacle surrounding Terra (LUNA) and the ecosystem-connected stablecoin TerraUSD (UST) showed that things are not far off in the crypto sector.

In the course of the price chaos of the past few weeks, the value of the stablecoin had fallen from its target value of one US dollar per UST token within hours, more than almost any asset-backed coin before it. Since the mechanism provided for the automatic minting of LUNA tokens when decoupling from value, the algorithm had also rendered this token completely worthless through uncontrolled dilution.

Terra is the best proof that you shouldn’t dare to experiment with stablecoins.
What is the advantage of an algorithmically backed stablecoin over a physically backed one? Why should investors accept the extra risk if they can’t win at all? Because UST should never trade higher than one US dollar anyway. The risk of total loss is therefore not offset by any prospect of profit.

Stablecoins are not objects of speculation, but rocks in the surf, which one should be able to rely on in stormy times. The Causa Terra has shown that you can’t do that. Anyone who still puts their money in algorithmically secured stablecoins after the UST decoupling is unteachable.

Disclaimer: The article already appeared in the June issue of our BTC-ECHO magazine. This way to the shop.

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