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Luna-Terra fiasco has raised several questions about the future of algorithmically designed stablecoins. The Terra-Luna crash could be the end of the algo stablecoins, according to Tether cofounder Reeve Collins.
There are three types of stablecoins: crypto-backed, where the token is collateralised by cryptocurrencies; fiat-backed, in which the token is pegged to either USD or Euro; and algorithmic coins that rely on algorithms to maintain their supply and demand, and maintain their price to a dollar. A common notion is that stablecoins are not subject to wild price fluctuations and overall crypto volatility, making them a more secure investment.
In an interview with CNBC at the World Economic Forum in Davos, Switzerland, Collins said that “It’s unfortunate that the money … was lost, however, it’s not a surprise.”
He believes that an algorithmic-backed, stablecoin is “just a bunch of smart people trying to figure out how to peg something to the dollar,” adding that “a lot of people pulled out their money in the last few months, because they realized that it wasn’t sustainable. So that crash kind of had a cascade effect. And it will probably be the end of most algo stablecoins.”
Meanwhile, Ethereum co-founder Vitalik Buterin has shared two experiments on evaluating whether an algorithmic (algo) stablecoin is sustainable.
In a blog post, Buterin writes, “While there are plenty of automated stablecoin designs that are fundamentally flawed and doomed to collapse eventually, and plenty more that can survive theoretically but are highly risky, there are also many stablecoins that are highly robust in theory and have survived extreme tests of crypto market conditions in practice. ”
He adds, “what we need is not stablecoin boosterism or stablecoin doomerism, but rather a return to principles-based thinking.”
Earlier, Billy Markus, creator of meme coin Doge said that he is “triggered “every time he reads about Terra and Luna stablecoin crash. “It’s quite literally the stupidest thing I have ever seen in my life,” said Markus, in the Twitter thread. In a string of tweets, Markus called the founders of Terra and Luna “tech bro hubris” and “degenerate gamblers.”
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