Vitalik: How to make algo stablecoins that do not turn into ponzis or collapse

Vitalik: How to make algo stablecoins that do not turn into ponzis or collapse – Mail Bonus

Ethereum co-founder Vitalik Buterin has shared two thinking experiments on how to assess the viability of the algo stablecoin algorithm.

Buterin’s comments were sparked by the multibillion-dollar loss caused by the collapse of the Terra (LUNA) ecosystem and its algo-stablecoin TerraUSD (UST).

In a blog post on May 25, Buterin noted that the increased amount of cryptocurrency and DeFi checks since the Terra crash was “very welcome,” but he warned against writing off all algo-stablecoins altogether.

“What we need is not a stablecoin incentive or stablecoin doomerism, but a return to basic thinking, “he said:

“While it’s full of automated stablecoin designs that are fundamentally flawed and doomed to collapse eventually, and many more that can survive theoretically but are very risky, there are also many stablecoins that are very strong in word and have survived of extreme cryptographic testing market conditions in practice. “

His blog focused fully on Ether (ETH) secured RAI stablecoin specifically, which is not tied to the value of fiat currency and relies on an interest rate-adjusting algorithm to be proportionately against price changes and encourages users to return RAI to its intended range .

Buterin said that it “shows an example of pure” idealization “of an automatic stablecoin with collateral” and its structure also gives users the opportunity to withdraw their liquidity position in ETH if the belief in stablecoin crumbles significantly.

Co-founder Ethereum offered two thought-provoking experiments to determine if the stablecoin algorithm is “truly stable.

1: Can stablecoin ‘wind’ down to zero users?

According to Buterin, if market activity for stablecoin projects “drops to almost zero”, users should be able to deduct the fair value of their liquidity from the asset.

Buterin pointed out that UST does not meet this parameter due to its structure as LUNA, or what he calls volcoin, needs to maintain its price and user demand to maintain a USD connection. If the opposite happens, it will be almost impossible to avoid the collapse of both assets.

“First, the price of volcoin is falling. Then the stablecoin starts to shake. The system tries to strengthen the demand for stablecoin by issuing more volcoins. With low confidence in the system, there are few buyers, so the volcoin price drops rapidly. Finally, when the volcoin price is close to zero, stablecoin also collapses.

On the other hand, since RAI is supported by ETH, Buterin argued that declining confidence in stablecoin would not lead to negative feedback between the two assets, which would lead to a lower probability of a broader collapse. Although users would also still be able to swap RAI for ETH locked in domes that support stablecoin and its lending system.

2: Negative interest rate option required

Buterin also considers it important for algo-stablecoin to be able to implement negative interest rates when it comes to tracking a “portfolio of assets, a consumer price index or some arbitrarily complex formula” that grows by 20% per year.

“Of course, there is no real investment that can achieve a return of close to 20% per year, and it is indeed no real investment that can continue to increase the rate of return by 4% per annum forever. But what happens if you try? ” he said.

He said there were only two results in this case, either “the project demands some kind of negative interest from owners that equates to basically stopping the growth rate of the USD built into the index.”

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Or “:” It turns into Ponzi, which gives stablecoin owners an incredible return for some time until one day it suddenly collapses with a bang. ”

Buterin concluded by pointing out that just because algo-stablecoin is capable of dealing with the above situation, does not make it “safe”.

“It could still be fragile for other reasons (eg inadequate insurance ratios) or have shortcomings or weaknesses in administration. But stability and extreme loyalty should always be one of the first things we look for. “