Algorithmic stablecoins; the future of stablecoins?

algorithmic stablecoins

Following the recent tragic developments in this space; ‘algorithmic stablecoins’ must be a huge caveat for you. Maybe there are exceptions such as when they have a 60% APY attached. I’ll always say it; cryptocurrency’s biggest achievement is, capturing human greed. When the yield is great, anything goes. In absence of tangible returns like this, most investors will pass up on anything involving stablecoins backed by algorithms and computerized economic policies.

Commodity-backed stablecoin projects are having a good time currently. The big argument used to be how Tether is backed ‘by air’ and should be cracked down. Taking a look at it again, it’s amazing how it managed to retain its dollar peg to date. We might have to re-calculate the strength of ‘air’.

I’m still not a fan of Tether or other shady stablecoins backed by unverified commodities and fiat though.

Terra blockchain’s Luna was on course for some incredible growth — price-wise, the ecosystem itself was booming. The foundation had billions in its reserves and the project founder was beaming with some serious ego. I’d recommend his interview on the fate of cryptocurrency projects as a reminder that nothing is too big to fail. That aged very badly and too fast, in my opinion.

It was going great until Terra’s stablecoin lost its dollar peg and caused a ghastly downward spiral for the Terra ecosystem. The whole crypto space was caught in the crossfire as bitcoin briefly traded below $26,000. Recovery hasn’t been easy and Terra’s LUNA and UST have since lost hope of a comeback.

In contrast to commodity-backed stablecoins; algorithmic stablecoins are programmed to respond to presiding supply and demand forces in order to maintain a pre-defined peg; most popularly, the US dollar. Stablecoins’ algorithms might have tangible differences in their core functionalities but a major similarity is that they are backed by ‘mathematics’ and logic rather than real assets. As long as the logic controlling the functionality of the coins works, the supply and demand continue to vary and the price stays relatively stable and around the value of the pegged figure.

The failure of Terra’s UST casts a shade on the growth of algorithmic stablecoins; but prior to this event, this concept was growing and was on track to pose a huge challenge for stablecoins backed by air and an efficient printer…pun intended.

But despite the unfortunate events, algorithmic stablecoins still have a place in the crypto space and still have good chances of being the preferred medium of value preservation in the crypto space. If not for any reason, the fact that they are backed by the same concept that powers the whole space — logic, makes them more traditional.

Tether, the most used stablecoin remains one of the blurriest operators in this space. Regulatory attempts have been channeled towards it but this hasn’t really resulted in a tangible breakthrough in at least making it a more transparent system. Popularly termed ‘cryptocurrency’s doomsday’, Tether’s stablecoins have reached a market capitalization of over $70 billion. Thanks to incessant and unexplained emission, billions of tokens pegged to the value of the United States dollar has filled the space. During this time, the value of cryptocurrencies has seen incredible growth as well. Yet, it will be hard for the most experienced crypto enthusiast to explain how exactly this stablecoin works and if it is fully backed.

Commodity-backed stablecoins have become prominent figures in the crypto space. In addition to vague backing and conformation to legal specifications, they are controlled by one entity and are grossly centralized. The issuing organization controls the supply and distribution. Consider these issuing institutions the new Central Banks. They have since minted billions of dollars and are trading on the most reputable exchanges.

Algorithmic stablecoins present a more transparent and decentralized alternative to these institutionalized and centralized stablecoins. With emission and distribution controlled by the community; and the peg maintained by a well-explained algorithm, they present a competent system for the preservation and transfer of stable value.

When the heat settles and algorithmic stablecoin projects develop a sustainable stablecoin system, decentralized stablecoins will take their rightful place in the crypto space. There are no perfect systems and just like every new concept, algorithmic stablecoins are prone to early days inconsistencies; we have seen one of the most terrible instances in UST’s failure. If we are being realistic, there might be even more coming, but this does not mean that algorithmic stablecoins are dumb…at all.


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