The recent catastrophic accident of the Terra Classic (LUNC; formerly LUNA) left several people bankrupt. South Korean officials reported 8 confirmed suicides due to this coup.
Stablecoins emerged as a way for crypto investors to park their funds to escape volatility. USTC (formerly UST) was among the largest stablecoins by market cap and the largest stablecoin on the Cosmos blockchain.
This is not the first time that an algorithmic stablecoin has fallen below the recovery point. So much so that the IMF chief even suggested that stablecoins that are not backed by physical assets are akin to pyramid schemes.
However, such a biblical crash as UST was a first for a stablecoin. While history seemed to have indicated that this was an obvious outcome, the usefulness of UST and the communities around LUNC-UST indicated otherwise.
The death spiral: here’s what went wrong
Stablecoins are digital assets whose value is pegged to fiat currency or another asset. USTC is one of those stablecoins, pegged to the US dollar as it is not backed by it.
LUNC held the price of USTC algorithmically, using a mint and burn mechanism. When the USTC demand-supply ratio was high, more LUNCs were burned. Conversely, more LUNCs were minted when the USTC bid-ask ratio was high. This created an arbitrage opportunity for traders that helped keep the price of USTC around $1.
However, when the selling pressure became too high for the algorithm to sustain, LUNC began to hyperinflate. Thus, it sent the entire ecosystem into a death spiral, eventually bringing it to a point of no recovery. Today, USTC is under $0.01 while LUNC is more than 99% down from its all-time high.
Decentralized Alternatives: The Way Forward
The failure of algorithmic stablecoins does not mean the end of all possibilities. Instead, they provide us with crucial lessons. One of them is to avoid centralization at all costs. So, here is a list of decentralized and non-algorithmic stablecoins for you to consider when entering the world of cryptocurrencies.
1. US dollar
USDr is a fiat-backed and collateralized stable token receipt from METL, a first decentralized on-ramp crypto solution native to the Avalanche blockchain.
Since the receipt of METL’s USDr stable token is collateralized at a 1:1 ratio using USD, it will not be affected by unexpected selling pressures as is the case with LUNC and other algorithmic stablecoins.
The USDr token issuance mechanism is designed so that users are the actual issuers of the token, so that they interact with the DeFI ecosystem. This allowed METL to bypass any MTL (Money Transmitter License) requirements and receive exemptions in all US states except NY.
METL does not host wallets and therefore does not take user funds on their balance sheet, again protecting them from a bank run. METL is currently creating an SDK to allow any developer to build a FIAT gateway using METL microservices and plug/play it on any DeFI platform that wants a native gateway. METL holds a 20-year patent for this technology issued by the USPTO office.
DAI, a decentralized stablecoin, is a product of MakerDAO, an Ethereum-based peer-to-peer organization that facilitates collateralized loans.
Unlike USDC and USDT, DAI is a crypto-backed and overcollateralized stablecoin. This means that the collateral behind this stablecoin is other cryptocurrencies. Furthermore, its “over-collateralized” nature means that the value of the collateral backing DAI is greater than the value of DAI. For example, $1.5 in ETH-based tokens (ERC-20) returns $1 in DAI.
Instead of any centralized and corruptible entity, immutable and tamper-proof smart contracts keep the DAI pegged at $1 by increasing or decreasing the amount of collateral based on market dynamics.
EOSDT is a decentralized, overcollateralized crypto-backed stablecoin from Equilibrium, a cross-chain money market project in the Polkadot ecosystem.
Users can borrow EOSDT by collateralizing their digital assets in a smart contract with a small interest rate of 1% APR.
The stablecoin also has an insurance mechanism called “Stability Fund” to protect EOSDT and its holders from extreme market volatility.
Also, the price of EOSDT is kept at $1 by incentivizing referees. This is similar to the USTC mechanism. However, unlike USTC, EOSDT is non-algorithmic and currently has a guarantee rate of 281%.
sUSD is a crypto-backed stablecoin overcollateralized by Synthetix, an ETH-based protocol that facilitates DeFi derivatives trading. sUSD acts as a bridge to trade these synthetic assets on-chain on the Ethereum network.
All synthetic assets at Synthetix are referred to as “Synthesizers” and are indicated with an “s” in the prefix. sBTC, sETH and sSOL are some examples. Similarly, sUSD is a synthetic stablecoin asset.
RSV is a guaranteed stablecoin. However, unlike other tokens mentioned here, RSV employs a hybrid collateral method. Therefore, a combination of fiat currency and cryptocurrency supports this stablecoin.
RSV is a product of Reserve, a protocol that works to offer citizens of countries with high inflation rates a robust hedge against inflation. The Reserve Dollar (RSV) is the stablecoin that facilitates this.
caution is wisdom
It is very clear that you have several alternatives to stablecoins like UST. They are more robust, more reliable and, above all, more decentralized. But regardless, the importance of due diligence in these matters cannot be stressed enough.
You should do your research thoroughly before investing in any stablecoin. Take a close look at the project team, their history, and most importantly, the protocol architecture. Sometimes it is difficult, but absolutely necessary. Particularly because the crypto domain is still in its infancy, with a lot of volatility and uncertainty.
New changes happen every day and you should always beware of negative consequences. However, the storm will end soon, when the future of finance shines bright. Stablecoins will define this future, and so can you.
Image by succo from Pixabay
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