Vitalik Buterin Discusses the Future of Algorithmic Stablecoins
Buterin believes that stablecoins require a return to basics to succeed in the future.
Vitalik Buterin, the founder of Ethereum and a crypto enthusiast, recently shared his thoughts on algorithmic stablecoins and their future. Saying that they should be scrutinized based on how they perform in extreme market conditions and whether they can safely wind down when the hype fades.
Vitalik Buterin writes in his thought piece that while the UST debacle has led traders to believe that algorithmic stablecoins are fundamentally flawed, he believes that some algorithmic stablecoin models are feasible and explains why.
Buterin cited MakerDAO’s stable token DAI and Reflexer’s RAI as successful automated stablecoins that have survived extreme market conditions.
Algorithmic stablecoins are intrinsically support by another cryptocurrency and use pre-programmed formulas to regulate the price. This differs from USDC, a fiat-backed stablecoin backed by actual dollars in the bank. The main challenge for all dollar-pegged stablecoins is maintaining their peg.
The first question investors should ask about a stablecoin, according to Buterin’s blog post, is “can the stablecoin safely wind down to zero users?” According to Buterin, a stablecoin’s market activity dropping to zero should not be fatal to investors. Instead, users should be able to obtain a reasonable price for their assets.
Buterin points out that this was not the case with Terra because the network relies on LUNA, which he refers to as a “volcanic” or volume coin, to keep the asset pegged. Buterin portrayed Terra’s tragedy as the result of hyperinflation caused by printing many violins. “First, the volcanic price falls,” Buterin writes. “The stablecoin then begins to shake. By issuing more violins, the system attempts to boost stablecoin demand. Few buyers with little trust in the system, and the volcanic price is falling rapidly. Finally, when the volcanic price approaches zero, the stablecoin will collapse.”
