Despite criticism from various quarters, the phenomenon of algorithmic stablecoins continued to gain popularity until recently. After the massive fall in $UST in value earlier this week, all attention is focused on the vulnerability of these code-based stablecoins.

Critically clouded algorithmic stable coins

In the past, questions have been raised about a lack of collateral supporting the delivery of stablecoins.

In September 2021, billionaire investor Mark Cuban expressed doubts about the stability of algorithmic stablecoins. He believed that stablecoins would be the first to be regulated, citing the variance in the definition by product. “What is an algorithmic stablecoin? Is it stable? Do buyers understand the risks? It needs standards.”

He made the comments against the backdrop of losing money in IRON token, which is partially backed by collateral like BUSD, USDT and partially algorithmically backed. FRAX, another algorithmic stablecoin designed to match its collateral levels to the demand for its native currency, is also partial collateral.

What are algorithmic stablecoins?

Algorithmic stablecoins are best explained by their inherent ability to balance their value, pegged to fiat currencies such as the US dollar. If the price of $UST falls below $1, traders will receive an incentive of $LUNA worth one dollar to reduce the supply of the stablecoin. $LUNA is the interdependent pairing cryptocurrency of $UST. Likewise, the traders are offered a dollar value of $UST for burning $LUNA in case the value of the stablecoin exceeds $1.

Tron recently launched its own algorithmic stablecoin USDD, which it plans to back with a $10 billion reserve. In the wake of turbulence in $UST, the Tron DAO Reserve announced it would commit $2 billion to fight the price action, in addition to buying 500 Bitcoins.

Most stablecoins, including USDT, USDC and BUSD, are strong and showing slight deflections amid the ongoing dump.

The content presented may contain the personal opinion of the author and is subject to market conditions. Do your market research before investing in cryptocurrencies. The author or the publication is not responsible for your personal financial loss.

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