To defend stablecoins | Finance times

The author is General Counsel and the head of decentralization at the risk capital fund A16Z Crypto, A risk capital fund that is part of Andessen Horowitz

crypto -critic uses the collapse of the virtual currency terrausded to the dollar as ammunition to attack stable coins and the crypto industry as a whole.

The lost conversation is the real cause of the turbulence. A better understanding of what went wrong - and why - could help protect consumers and at the same time secure innovations.

First of all, it is important to clarify the terms. A stable coin is a cryptocurrency, the price of which is nominally "coupled" to a stable asset such as the dollar. People blame people for the latest explosion in general so -called "algorithmic stable coins", which are typically programmed in such a way that they automatically create incentives for the creation and destruction of coins to maintain price binding.

The attack on her is wrong. Apart from the fact that Terrausd should never have been seen as a "stablecoin", the actual problem has little to do with computer code and everything with a concept that is as old as the finance itself: conservation or the use of assets for the support of values.

This is a crucial point that political decision-makers around the world have to take into account when designing laws to prevent future terra-like collapse. If the legislator attributes the guilt to the algorithms, he risks to issue counterproductive, anti -innovation regulations. Poorly designed laws could disturb markets, promote regulatory arbitrage and reduce the influence of western democracies in the up -and -coming, decentralized internet economy, known as Web3.

The promise of decentralized financing - Defi - is largely based on the groundbreaking ability of blockchains, transparent, algorithmic contracts with immediate final.

In the middle of the recent market volatility, the vast majority of the "decentralized" stable coins, which are covered by blockchain assets such as Bitcoin and Ether, have easily developed and without any problems. In general, algorithms are not the problem with modern stable coins. Instead, all risks from their collateral design now result.

The most risky stable coins are easy to see: they are significantly underground (less than $ 1 in collateral are required to shape $ 1 of stablecoins) and they rely on "endogenous" collateral (collateral created by issuers such as governance token, which give the owners a voice authorization). Make about the rules and procedures of a blockchain).

Endogenous collateral enable dangerous, explosive growth: If an issuer gives the governance token to value, users can shape a lot more stable coins. That sounds good until you look at the downside: If the price falls - as is practically guaranteed during a bank run - cascading liquidations of collateral to meet repayments trigger a death spiral. See Terrausd as an example.

Regulation is necessary to prevent similar breakdowns, but not excessively restrictive rules. The truth is that enforcement measures in the context of existing securities laws and laws to fight fraud could have contained the spread of almost all previously failed stable coins.

Nevertheless, an additional, targeted regulation could be useful. While it is difficult to determine exactly where the supervisory authorities should determine conservation requirements, it is clear that stable coin emitters can again take inappropriate risks without guardrails.

A well-tailored regulations could support the crypto ecosystem and protect consumers. Comprehensive changes-such as the ban on the use of algorithms and digital assets as security as a whole-would put enormous burden on the burgeoning defi industry that disrupt digital assets and hinder web3 innovations.

stablecoins can indeed be stable if they properly manage their collateral. In the case of "centralized" stable coins covered by real assets, the liquidity and transparency of the reserves can be low, so the collateral should include fewer volatile assets such as cash, government bonds and bonds. Supervisory authorities can define parameters for these types of collateral and request regular exams.

For "decentralized" stable coins, the almost exclusive use of blockchain assets such as Bitcoin or ether compromises. Digital assets are often volatile, but also highly liquid and can be managed transparently and algorithmically. Removements can be done almost instantly, which enables much more efficient systems. As a result, decentralized stable coins could ultimately be more resistant than centralized.

algorithmic stable coins offer a unique opportunity to produce all types of assets productive and to promote digital trade around the world. The setting up of guidelines for your collateral could help to release this potential.