Several people were left bankrupt by the recent, cataclysmic collapse of Terra Classic (LUNC). According to South Korean officials, 8 suicides were confirmed by this tragedy.
Stablecoins were created to allow cryptocurrency investors to store their money and escape volatility. USTC (formerly UST), was the first stablecoin to reach the Cosmos blockchain and the market’s largest.
This is not the first instance of an algorithmic stabilizecoin falling below the point for recovery. The IMF’s head suggested that any stablecoin that is not supported by tangible assets could be compared to pyramid schemes.
A crash so biblically described as the one at UST is a rare event for a stablecoin. History seemed to suggest this would be the obvious result, but the utility of UST was and is a testimony to the contrary.
The Death Spiral – Here’s What Went Wrong
Stablecoins can be described as digital assets that are tied to fiat currencies or any other asset. USTC is one example of such a stablecoin. It’s pegged at the US dollar but it’s not backed.
LUNC maintained USTC’s price algorithmically, using a mint and burn mechanism. When USTC’s demand-to-supplyThe ratio was higher, so more LUNC were burned. Contrariwise, more LUNC was minted when USTC’s supply-to-demandThis ratio was extremely high. This created an arbitrage opportunity for traders which helped maintain USTC’s price at approximately $1.
LUNC started to hyperinflate when it became impossible for the algorithm’s selling pressure to maintain a steady pace. The entire ecosystem was plunged into an inexorable spiral that eventually led to no recovery. Today USTC is now less expensive than $0.01, while LUNC has fallen over 99% from its peak.
Decentralized Alternatives – The Way Forward
The failure of algorithmic stablecoins doesn’t mean the end of all possibilities. These lessons are crucial. It is important to avoid centralization wherever possible. So, here’s a list of non-algorithmic, decentralized stablecoins for you to consider while entering the world of crypto.
USDr, which is collateralized and fiat-backed, stable token receipt, was created by METL as a decentralized, first-of-its-kind, crypto-on-ramp solution for the Avalanche Blockchain.
Since METL’s USDr stable token receipt is collateralized with a 1:1 ratio using USD, it will not be affected by unexpected selling pressures like in the case of LUNC and other algorithmic stablecoins.
The USDr token’s issuance mechanism is designed to have users be the actual issuers of the token, so that they interact with the DeFI ecosystem. METL could bypass all MTL (Money Transmitter License) requirements to receive exemptions in every state in the US, except NY.
METL does not host any wallets and therefore does not take user’s funds on their balance sheet, which again protects them from a bank run. METL currently has an SDK that allows anyone to build a native FIAT gateway with METL microservices. This technology is protected by a USPTO 20-year patent.
MakerDAO’s Ethereum-based peer organization that facilitates collateralized loans, DAI is a decentralized stablecoin.
DAI, unlike USDC or USDT is a crypto-backed, over-collateralized stablecoin. The collateral backing DAI is made up of other crypto-backed stablecoins. Moreover, its “over collateralized” nature implies that the value of the collateral backing DAI is greater than DAI’s value. For example, $1 of DAI can be secured by $1.5 worth of ETH tokens (ERC-20).
Instead of any centralized, corruptible entity, immutable and tamper-proof smart contracts maintain DAI’s peg to $1 by increasing or decreasing the amount of collateral based on market dynamics.
EOSDT (an over-collateralized crypto-backed stablecoin) is created by Equilibrium and is part of the Polkadot money market.
EOSDT can be borrowed by users who have digital assets that are collateralized in smart contracts with a low interest rate of 1%.
The stablecoin also has an insurance mechanism called the “Stability Fund” to shield EOSDT and its holders from extreme market volatility.
Incentivizing arbitrators to maintain the EOSDT price at $1 also helps keep it low. This is similar to USTC’s mechanism. EOSDT, however, isn’t algorithmic. It currently has a collateralization rate of 281%.
sUSD, a stablecoin that is crypto-backed and overcollateralized by Synthetix. This protocol, which uses ETH, facilitates DeFi derivatives trades. These on-chain synthetic assets are traded on the Ethereum network using sUSD as the bridge.
All synthetic assets on Synthetix are referred to as “Synths” and are denoted by an “s” at the prefix. Examples include sBTC (sETH), sSOL, and sBTC. The synthetic stablecoin asset sUSD can be found in the same way.
RSV is a collateralized stabilitycoin. RSV, however, uses a hybrid collateralization technique, as opposed to other tokens. This stablecoin is supported by a mix of fiat currency and cryptocurrency.
RSV is an RTP product, which works in order to give citizens from countries that have high inflation rates an inflationary hedge. This can be done by the Reserve Dollar (RSV), which is a stablecoin.
Be prudent is wise
It’s abundantly clear that you have several alternatives to stablecoins like UST. They’re more stable, reliable, and most importantly, they are decentralized. But despite everything, one can’t stress the importance of due diligence enough in these matters.
Before investing in any stablecoin, you must thoroughly research the company. Look closely at the project’s team, their track record, and most importantly, the protocol’s architecture. It’s difficult at times but utterly necessary. The crypto industry is still in its early stages, and there’s a lot of volatility and uncertainty.
Every day new changes occur and it is important to be aware of potential negative effects. However, the storm is coming to an end soon and finance’s future will be bright. Stablecoins are the key to this future. You can be part of it.
Picture by succo via Pixabay