Terra Collapse could mean the end for algorithmic stable coins

Terra Collapse could mean the end for algorithmic stable coins

While Terraform Labs and Community members strive to save the Stablecoin Terrausd, regulatory experts say that the collapse could be the end of the algorithmic stable coins as we know them.

"It is a sad end of this innovative algorithmic stable coin experiment," said Adil Abdulali, head of portfolio management at Securitize. "Algorithmic incentives for stablecoin pegs remain an unsolved problem."

UST collapsed dramatically this week, according to Coingecko, solved its desired base price of $ 1 and used to reach a low of $ 0.298 today. The neighboring cryptocurrency of the token, Luna, crashed from $ 86 last week to about $ 1.27 at the time of publication.

According to US Finance Minister Janet Yellen, the Situation is a real-time evidence that the legislators' concerns about the StableCoin industry are entitled.

"It is quite common for us to wake up with regulations only in a crisis," said Jonathan Dharmapalan, CEO of Ecurrency, the technology for central banks to output and distribute digital central bank currencies or CBDCs. "I would probably call this situation a 'call to action'."

The supervisory authorities have promised for months that rules will come to protect investors, but the legislators of all government agencies do not seem to be able to agree on one way.

"Stable coins are a form of private money," said Dharmapalan. "The problem is that stable coin emitters set up their own rules and nobody knows whether the rules are appropriate."

other stable coin issuers should expect more government control, but it is also important to take the type of stablecoin into account. Reserve backed tokens like Circle and Tether have, at least according to the teams behind the coins, robust reserves on Safe-Haven-Assets such as cash and payment-equivalent. Algorithmic tokens like VAT rely on intelligent contacts that put incentives to keep the price.

"Algorithmic stable coins still need work," said Abdulali. "Nobody worked."

A recent research From Wake Forest Law Review went even further and claimed that algorithmic stable coins were naturally designed in such a way that they fail. These tokens require a level of support for the demand for operating stability and are dependent on independent actors with market incentives in order to carry out price -stabilizing arbitrage, the report.