- Vitalik Buterin has defended the concept of algorithmic stablecoins in a blog post today.
- According to Buterin, algorithmic stablecoins should seek resiliency over quick growth.
- His comments come three weeks after the Terra collapse.
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Vitalik Buterin has shared his thoughts on algorithmic stablecoins in a blog post, arguing that protocols should strive for resiliency above all else.
Withstanding Extreme Market Conditions
Creator and co-founder of Ethereum Vitalik Buterin took to his blog today to address the criticism algorithmic stablecoins have faced since the collapse of Terra’s UST stablecoin.
While he welcomed the “greater level of scrutiny on DeFi financial mechanisms” that Terra’s meltdown had brought, he pushed back on the idea that automated stablecoins were flawed by design.
Pointing to protocols such as MakerDAO’s DAI and Reflexer’s RAI, both of which have survived extreme market conditions as successful automated stablecoins, Buterin offered two thought experiments to help judge the resiliency of a stablecoin.
The first was to calculate whether the “stablecoin [could], even in theory, safely ‘wind down’ to zero users” without collapsing the way Terra had and hurting users. He argued that RAI offered such a system, explaining that RAI’s last holder would still get a fair price for their coins even if all other demand for the token suddenly evaporated.
The second thought experiment would be to evaluate whether the stablecoin’s protocol contained the “possibility of implementing a negative interest rate.” In other words, the algorithm should be capable of canceling out the potential growth rate of whichever index the stablecoin is pegged to. Buterin suggested this was a critical factor that, over time, makes the difference between a reliable protocol and a Ponzi.
Buterin’s remarks come three weeks after Terra’s UST token dramatically lost its $1 peg, sending its LUNA token from $77 to $0.00014, endangering the Terra blockchain, and wiping out more than $42 billion from the crypto market.
Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.