{"id":158448,"date":"2022-05-28T21:03:46","date_gmt":"2022-05-28T21:03:46","guid":{"rendered":"https:\/\/precoinnews.com\/?p=158448"},"modified":"2022-05-28T21:03:46","modified_gmt":"2022-05-28T21:03:46","slug":"vitalik-buterin-reveals-how-to-identify-a-ust-like-algorithmic-stablecoin-following-terras-collapse","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/crypto\/vitalik-buterin-reveals-how-to-identify-a-ust-like-algorithmic-stablecoin-following-terras-collapse\/","title":{"rendered":"Vitalik Buterin Reveals How To Identify A UST-Like Algorithmic Stablecoin Following Terra\u2019s Collapse"},"content":{"rendered":"
Stablecoins are having the roughest patch in their entire existence with investors viewing the asset class with skepticism. Amid the uproar, Vitalik Buterin has proffered two thought experiments to help investors gauge the risks associated with algorithmic stablecoins.<\/p>\n
In a blog post titled \u201cTwo Thought Experiments To Evaluate Automated Stablecoins\u201d,<\/em> Ethereum\u2019s co-founder Vitalik Buterin offered a ray of hope for algorithmic stablecoins. Buterin\u2019s post focused on Reflexer\u2019s RAI stablecoin because it wholly relies on algorithms to set the peg and not fiat currencies or other cryptocurrencies.<\/p>\n The first question for investors to ask about a stablecoin is \u201ccan the stablecoin safely wind down to zero users?\u201d For Buterin, the event of market activity for a stablecoin dropping to zero should not be a fatal blow for investors. Instead, users should be able to get a fair value for their assets.<\/p>\n Buterin notes that this was not the case with Terra as the network relies on LUNA, which he calls a \u201cvolcoin\u201d or volume coin to maintain the asset\u2019s peg. Buterin painted Terra\u2019s tragedy as caused by hyperinflation from printing lots of volcoins.<\/p>\n \u201cFirst, the volcoin price drops,\u201d <\/em>writes Buterin. \u201cThen, the stablecoin starts to shake. The system attempts to shore up stablecoin demand by issuing more volcoins. With confidence in the system low, there are a few buyers, so the volcoin price rapidly falls. Finally, once the volcoin price is near-zero, the stablecoin to collapses.\u201d<\/em><\/p>\n Buterin noted that for algo stablecoins to pass the test, they should be able to peg to \u201ca basket of assets, a consumer price index, or some arbitrarily complex formula.\u201d If the stablecoin is tracking an index fund that appreciates 20% annually, Buterin states that the stablecoin would either turn into a Ponzi scheme that will implode on users or charge a form of negative interest.<\/p>\n \u201cIt charges some kind of negative interest rate on holders that equilibrates to basically cancel out the USD denominated growth grate built into the index,\u201d <\/em>he wrote. Buterin argues that RAI has the potential to charge negative interests but UST does not have that capability.<\/p>\n He notes that negative interest rates can be achieved by having a \u201cfloating target that can drop over time if the redemption is negative\u201d or by having balances that drop in the future.<\/p>\n Buterin concludes the essay by stating that even if a stablecoin passes this test, there might still be underlying issues like bugs, and governance issues that threaten the survival of the project. However, \u201csteady-state and extreme-case soundness should always be one of the things that we check for,\u201d <\/em>he wrote.<\/p>\nCan the stablecoin track a basket of assets that climbs 20% per year?<\/strong><\/h2>\n