On today's CoinMarketCap episode, we are taking a look at algorithmic,
stable coins.
You can easily navigate the video by checking the timestamps below.
We will cover the rise and fall of algorithmically stable cryptocurrencies.
This means we will of course talk about Terra USD
and what the future may hold for algorithmic, stable coin models.
Welcome to CoinMarketCap.
My name is Jett Gunther and let's just get right into it.
In the search for stability on the blockchain
a wide variety of stable coin models have emerged.
Each of which has its pros and cons, while Fiat backed stable coins remain
the most dominant.
A new wave of algorithmic, stable coins has emerged and in recent years,
each of which hopes to provide a more decentralized price.
Stable asset.
Algorithmic stable coins are different from simple asset
back stable coins, in that they generally rely on algorithms,
game theory and economic incentives to maintain their peg.
This means that they don't need to rely on centralized issuers and Treasuries
to maintain their value, but also leaves them potentially
vulnerable to economic attacks, making it easier to knock them off. Peg.
The Rise of Algorithmically Stable Cryptocurrencies.
As the cryptocurrency industry strives for further decentralized Asian
stable coins remain one of the last pieces of the puzzle
to be moved to a fully decentralized system.
Since almost all popular stable coins relied on centralized issuers
holding fiat reserves, this, some would argue, poses
a systemic risk to the cryptocurrency industry as a whole.
Since stable coins
are responsible for more than half of all cryptocurrency trading volume
and are crucial to the stability of the industry right now.
Algorithmic stable coins promise a myriad of benefits over
typical Fiat backed stable coins, including being fully decentralized.
Since these coins do not rely on traditional companies
and do not require a direct link with fiat currency.
This can make them more difficult to shut down, regulate or seize.
They're also much quicker to bootstrap and scale,
since any team with an idea and minimal resources and collateral
can build and deploy an algorithmically stabilized token in just days.
And since algorithmically stabilized cryptocurrencies are completely on chain.
They can also be considered more transparent than fiat backed stable coins
since only some of these published credible audits
of their reserves and relatively infrequently at that.
Nonetheless, despite these clear benefits, algorithmic stable coins only began
to pick up attention with the release of Terra USD or UST a dollar pegged
stable coin for the Terra Blockchain This in combination with the decentralized
saving platform known as Anchor Protocol, which provided a fixed 20% API,
proved to be incredibly popular and saw its uptake explode
between March of 2021 to May of 2022.
There is now a growing list of algorithmic stable
coins, with several now available on most popular smart contract platforms,
though most are still relatively obscure and poorly adopted.
Unlike typical Fiat backed stable coins, which can generally be redeemed
at a one to one rate for actual fiat held in reserves.
Algorithmic stable coins are not directly backed by a price stable asset.
Instead, they can vary quite widely in the mechanism they use to achieve stability.
While this can work out relatively well, in some cases, other times
it is a ticking time bomb just waiting to explode.
Since
most algorithmic, stable coins rely on an arbitrage mechanism
to maintain stability, they generally rely on a volatile secondary token.
At some point in their re pegging cascade
So if this secondary token becomes extremely undesirable
or has a strong selling pressure, it can cause the entire system to unwind.
This has left algorithmic stable coins vulnerable to black swan events
or intentional market manipulation, both of which can knock the stable
coin off peg and in some cases collapse it entirely.
The case of Terra USD Terra USD known
as UST is an algorithmic, stable coin designed to maintain its peg
through on chain arbitrage activity through the terror station wallet.
Users are able to swap 1 USD for $1 worth of Luna at any time.
Theoretically, if us t were to drop below
its $1 peg, users could simply exchange it for $1 worth of Luna,
which they could then sell for $1.
Meanwhile, the supply of us t would contract,
and demand for the token on secondary exchanges would increase
as users look to take advantage of the arbitrage opportunity
driving the value of us t back up to $1.
However, this system was put to the test
in May of 2021 when Terra USD experienced
one of the worst deviations from its peg in its short history.
After collapsing from $1 to $0.96
over a one week period, though USD eventually returned to its peg.
This event prompted concerns that its economic model was not viable
long term, especially if the market cap of USD exceeded that of Luna, or
if a sizable liquidation cascade occurred potentially leading to a runaway crash.
In order to address concerns and provide a backdrop for the USD price,
a non profit known as the Luna Foundation Guard or LFG,
accumulated $3.5 billion in reserves of various volatile assets,
including BTC and Avex But these funds were insufficient to stop
a cataclysmic series of liquidations which in May of 2022
sent the price of USD tumbling from $1
to as low as 4.4 cents.
Meanwhile, Luna saw its value collapse from over $80 to just a tiny fraction
of a cent, while its circulating supply expanded exponentially.
This event also saw its arbitrage mechanism falter
as a daily capacity limit and gradually increasing slippage
made it impossible to actually exchange 1 USD for $1 worth of Luna.
Not to mention the fact that there was typically a significant spread
between the Oracle price and the actual exchange price.
This event reverberated throughout the broader DeFi and stable coin space,
disrupting numerous terabytes protocols and even causing a collapse of USD X,
another stable coin that was partially collateralized by UST.
The sable coin fell to its all time lowest value of $0.45,
and it is still trading significantly below its soft peg.
Likewise, the algorithmic stable coin a day use of finances day
a stable coin has now been off peg for more than a week as well.
In the later stages of USD collapse, allegations also emerged that Do
Kwon was behind another previously failed algorithmic stable coin known as basis
cash, which collapsed into oblivion within weeks of launching.
It is now common consensus
that the UST stable coin is beyond the point of recovery
and it will go down as one of the biggest missteps in cryptocurrency history.
Even drawing attention from US lawmakers due to its potential for economic damage,
UST is now by far the largest failed stable coin project
and will serve as a blueprint for what not to do in future initiatives.
The Terra Saga Post Analysis ,Terra demonstrates
the fragility of some blockchain based economies and serves as a cautionary tale
for developers looking to tackle the algorithmic, stable coin opportunity
slash problem, as well as users who opt to use
these coins over more traditional fiat backed options.
Now, more than a week after its collapse, it is clear
that Terra, as it was once known, is beyond the point of recovery
And what emerges from the rubble will be built on several compromises.
Despite initial reports that the Zurich based investment
firm GAM had organized a $3 billion rescue package for Terra.
This was later proven to be fabricated.
A recent press release by GAM stated There is no truth in the story
and GAM did not issue a press release.
GAM has strict controls on the dissemination of press
releases, and we are investigating the source of this story
and how it came to be published.
Instead, the platform will need to complete a hard fork,
essentially splitting a new blockchain away from the original Terra chain
and a specific block renaming the old collapsed chain as Terra Classic.
While the new chain will go on as the main chain simply called Terra,
this will be similar to what happened to Ethereum in July of 2016
after the infamous DAO hack divided the Ethereum community
and led to a fourth that yielded two chains.
Ethereum Classic.
The original Ethereum and Ethereum that we know today.
According to recent tweets, Terra founder Do Kwon and the majority of the network's
validators are confident that the new Terra two point
chain will be able to maintain the support of the ecosystem and broader
development community while providing a viable route for recovery.
Though it is currently unclear if the new chain will retain the Luna,
Burn and Mint function, which was used to power its US
stable coin the new Luna Go Forward proposal is designed to incentivize
developers and make as many members of the community whole as possible.
It will include an airdrop of new Luna tokens to Luna Classic stackers,
Luna Classic holders, residual USB holders and app developers.
A large chunk of the new Luna supplied will be reserved
for developer alignments and minting programs.
The full token distribution is outlined in our Alexandria article.
You can find the link in the description of this video.
So despite the lack of transparency during the original Luna UST crash,
it now appears that the Luna Foundation Guard burned
the bulk of its reserves in an attempt to defend the UST peg.
According to its latest update, the nonprofit expended more than 80,000
BTC or $26 million USDT and 23
and a half million USDC in its failed strategy to restore the peg.
Its reserves now constitute just a small fraction of what they were a week ago.
And on a more somber note, there has now been more than a dozen
suicides, reportedly as a result of the Terra collapse,
and hundreds of thousands of investors have been left devastated.
Despite this, the original Luna and USD cryptocurrencies
can still be traded on a variety of exchange platforms,
though most derivatives trading platforms have closed.
Future contracts for these assets.
In the aftermath of the terror crash, founder Do
Kwon has been subject to more than a few legal threats,
and the South Korean Tax Service slammed both him and TerraForm Labs
with a $78.4 million tax bill for allegedly evading tax.
The news comes alongside reports
that three members of the TerraForm Labs legal staff left the company
possibly due to the legal mess the company is potentially embroiled in.
Things continue to go from bad to worse for Kwon who, despite
having a sizable following on social media, is now regularly
disparaged by the industry figureheads and the broader Luna community.
Meanwhile, how are other algorithmic, stable coins faring, though
Terra USD is by far the best known, algorithmically stabilized cryptocurrency.
It's actually part of a larger sector formed of a small
assortment of ideologically similar projects.
These projects all attempt to provide a stable unit of value
without resorting to fiat collateralization.
Though some believe that these solutions are inherently fragile
and are just a catastrophe waiting to happen,
a handful of algorithmic, stable coins have proven remarkable resilience.
One of the most prominent of these is Neutrino USD or USD in a wave
based stable coin that is collateralized by waves tokens
unlike USD, USD and has an adjustable supply
that can be expanded or contracted based on demand to meet USD
and users need to lock up waves tokens worth significantly more than the USD
and they want to receive and must first return their USD
in in order to retrieve their collateralize waves.
In the last month, the token has deviated from its peg significantly
on two occasions, dropping below $0.80 both times before sharply recovering,
demonstrating that its PEG restoration mechanism
is able to contend with significant deviations.
Other, arguably more daring, algorithmic stable
coin ventures have fallen spectacuraly flat.
This includes a slew of so-called rebase tokens
which inflate or contract the supply based on positive
or negative deviations from the peg to help stabilize its value.
By far, the best known of these is ample forth which attempted to use a rebase
mechanism to maintain the price of ample at the purchasing
power of the $2,019.
Since its launch more than a year ago.
The price of ample has been anything but stable and has touched as high
as for dollars and $0.04 and as low as $0.29 in this time.
A variety of other rebase tokens with an elastic supply
have also failed to pick up momentum or maintain their pegs.
The recent fiasco surrounding
Terra USD has not only increased scrutiny on the stable coin ecosystem,
but on the cryptocurrency landscape as a whole,
prompting lawmakers to increase regulatory oversight of the industry.
The ramifications of this could be significant.
This is indeed a welcome development for those who believe that regulators
will increase scrutiny and confidence in stable coins
and hence benefit the overall cryptocurrency ecosystem.
However, others believe that this opens the floodgates for a regulatory crackdown
which could reduce competition and increase centralization in the space.
Whatever the case, as it currently stands, the algorithmic stable
coin niche still contains several potentially viable candidates,
most of which have experienced at least one significant deviation from their peg.
Because of this, the industry is still far from dead.
There are even early signs that the now much maligned Terra
and its associated UST stable coin are gearing up for a comeback.
So what do you think?
Would you put your money in algorithmic stable coins?
Comment below.