However, algorithmic stablecoins are different. They are DeFi experiments with stablecoins that don’t pegg themselves to fiat currencies or hold collateral assets to stabilize their value. Instead, they’re usually backed by a second token, in a push-me-pull-you math equation. Terra, for example, balances changes in stablecoin value by incentivizing increasing or decreasing the supply of Luna tokens; investors can profit from these exchanges, which allow them to theoretically trade tokens in amounts predicted by algorithms. But it’s mostly magical ideas.
Before Terra crashed, algorithmic stablecoins were Often considered far less stable than conventional. Even Sam Bankman-Fried, the CEO of cryptocurrency exchange FTX, famous “crypto billionaire”, Arguing on Twitter last week From a functional and risk perspective, the two types of stablecoins are so different that “[r]Actually, we shouldn’t use the same word for all of these things. ”
So why pursue algorithmic stablecoins? Because algorithmic stablecoins should be the holy grail of DeFi: a stable unit of value that can self-correct independently and gracefully, just as water naturally finds its own level.They Attract Bitcoin Purists Because of Algorithmic Stablecoins designed to avoid A function that regular stablecoins like Tether and USDC rely on: a connection to the real world and traditional markets. They only operate on code—except, of course, that the system assumes that human traders will behave in predictable ways. If algorithmic stablecoins perform as promised, they can prove that code is the future of finance, providing a new level of credibility to the crypto worldview.
For a while, it looked like Terra’s experiment might work. In February, Terra closed a multi-million dollar sponsorship deal with the Washington Nationals.Just over two months ago in March, its blockchain — at the time the seventh most valuable blockchain in the world — became Second Staking Network, replacing Ethereum. But on Monday, May 9th, things went awry. Someone could push the value of UST to start falling by going against the algorithm’s predictions. Then, fueled by a very human, fear-driven “run on the bank,” the coin fell well below the $1 value it was designed to sustain.
When UST hit $0.37 on Thursday, Terraform Labs, the company that manages it, even called temporarily as a last resort. stop trading on its network to prevent further drops, then freeze them again overnight – preventing any token holders from taking what they have left and running away. Terra’s UST has been oscillating well below $0.50 since the network restart; LUNA is hovering above zero.
Every company in the crypto ecosystem has its own explanation for why it falters. Coinbase’s highly anticipated new NFT marketplace impressive launch At the end of April, that could put off investors and hurt its stock price.The Luna Foundation Guard, a nonprofit that supports Terraform Labs, has stockpiled Bitcoin worth $3.5 billion by early May then it seems A large stash was sold to make ends meet As the price of UST begins to fall; both actions could lead to a drop in Bitcoin value.Some Terra/Luna supporters even accused BlackRock and Citadel of deliberately manipulating the market to force the UST to collapse — a vicious rumor enough to prompt the companies respond, claiming they had nothing to do with the incident. Then there are management issues. Terraform Labs CEO also backs CoinDesk Previous failed algorithm experiments; maybe his leadership is another hole in the stablecoin ship.