A recent catastrophic accident at Terra Classic (LUNC; formerly LUNA) led to several bankruptcies.South Korean officials report 8 confirmed suicides due to this blow.
Stablecoins became a way for cryptocurrency investors to deposit funds to escape volatility. University of Science and Technology of China (formerly UST) It is one of the largest stablecoins by market cap and the largest single stablecoin on the Cosmos blockchain.
This is not the first time Algorithmic stablecoin falls below recovery point.so much that Managing Director of the International Monetary Fund Stablecoins that are not backed by physical assets are even considered akin to pyramid schemes.
However, a biblical crash like the UST was a first for a stablecoin. While history seems to suggest this is an obvious outcome, the utility of UST and the community around LUNC-UST suggest otherwise.
Death Spiral – Here’s the Problem
Stablecoins are digital assets whose value is pegged to fiat currency or other assets. USTC is one such stablecoin, pegged to the U.S. dollar and not backed by it.
LUNC algorithmically maintains the price of USTC using a minting and burning mechanism.When the University of Science and Technology of China Supply and demand The ratio is high, and more LUNCs are burned.On the contrary, when the University of Science and Technology of China supply and demand The ratio is high. This creates an arbitrage opportunity for traders, helping to keep the price of USTC around $1.
However, when the selling pressure became too high for the algorithm to keep up, LUNC began to expand viciously. As such, it plunges the entire ecosystem into a death spiral that ultimately leads to no recovery.Today, USTC costs less than $0.01, while LUNC is down more than 99% from its all-time high.
Decentralized Alternatives – The Way Forward
The failure of algorithmic stablecoins does not mean the end of all possibilities. Instead, they provide us with important lessons. One of them is avoiding centralization at all costs. So, here is a list of non-algorithmic, decentralized stablecoins for you to consider when entering the world of cryptocurrencies.
Dollar It is a collateralized, fiat-backed stable token receipt provided by METL, the first decentralized cryptographic entry solution native to the Avalanche blockchain.
since USD in METL Stablecoin receipts are collateralized 1:1 with USD and are not subject to unexpected selling pressure like LUNC and other algorithmic stablecoins.
The issuance mechanism of USDr tokens is designed to allow users to become the actual issuers of the tokens to interact with the DeFI ecosystem. This allows METL to bypass any MTL (Money Transmitter License) requirements and is exempt in all US states except New York.
METL does not host any wallets and therefore does not hold users’ funds on the balance sheet, which again protects them from bank runs. METL is currently building an SDK that will allow any developer to build a FIAT gateway using METL microservices and plug/play it into any DeFI platform that requires a native gateway. METL holds a 20-year patent for this technology issued by the United States Patent and Trademark Office.
Unlike USDC and USDT, DAI is an over-collateralized, crypto-backed stablecoin. This means that the collateral backing this stablecoin is other cryptocurrencies. Furthermore, its “overcollateralized” nature means that the value of the collateral backing DAI is greater than the value of DAI. For example, an ETH-based (ERC-20) token worth $1.50 returns $1 worth of DAI.
Immutable and tamper-proof smart contracts are not any centralized, destructible entity, but maintain DAI’s peg to $1 by increasing or decreasing the amount of collateral based on market dynamics.
Users can borrow EOSDT by staking their digital assets in smart contracts at a small interest rate of 1% APR.
Stablecoins also have an insurance mechanism called a “stable fund” to protect EOSDT and its holders from extreme market volatility.
Additionally, by incentivizing arbitrators, the price of EOSDT is maintained at $1. This is similar to the mechanism of the University of Science and Technology of China.However, unlike the University of Science and Technology of China, EOSDT is not an algorithm, and the current mortgage rate is 281%.
Dollar is an over-collateralized stablecoin backed by a cryptocurrency synthesizer, an ETH-based protocol that facilitates DeFi derivatives trading. sUSD acts as a bridge to trade these on-chain synthetic assets on the Ethereum network.
All synthetic assets on Synthetix are called “Synths” and are denoted by an “s” at the prefix. sBTC, sETH and sSOL are some examples. Likewise, sUSD is a synthetic stablecoin asset.
5. Respiratory syncytial virus
respiratory syncytial virus It is a collateralized stablecoin. However, unlike the other tokens mentioned here, RSV uses a hybrid collateral approach. Therefore, a combination of fiat and cryptocurrencies supports this stablecoin.
RSV is a product of Reserve, a protocol designed to provide citizens of high-inflation countries with a strong inflation hedge. Reserve Dollars (RSV) are the stablecoins that facilitate this.
prudence is wisdom
Obviously, you have multiple options for alternative stablecoins, such as UST. They are more robust, more reliable, and most importantly, more decentralized. But nonetheless, the importance of due diligence on these issues cannot be overstated.
Before investing in any stablecoin, you must do thorough research. Take a close look at the project team, their track record, and most importantly, the protocol architecture. This is sometimes difficult, but totally necessary. Especially since the crypto space is still in its infancy, with a lot of volatility and uncertainty.
New changes are taking place every day, and you must always be cautious about negative consequences. However, the storm will soon be over, and the future of finance will be bright by then. Stablecoins will define this future, and so can you.