While Terraform Labs and community members work to save the stablecoin TerraUSD, regulatory experts believe the collapse could spell the end of algorithmic stablecoins as we know them.
Adil Abdulali, the head of portfolio management at Securitize, declared: “It is a sad ending to this innovative algorithmic stablecoin experiment. Algorithmic incentives for stablecoin pegs remain an unsolved problem.”
According to CoinGecko, UST has dropped substantially this week, de-pegging its goal base-price of $1 and reached a low of $0.298 earlier today. LUNA, the token’s neighboring cryptocurrency, has dropped from $86 last week to roughly $1.27 at the time of writing.
According to US Treasury Secretary Janet Yellen, the situation is real-time proof that lawmakers’ concerns about the stablecoin business are warranted.
Jonathan Dharmapalan, the CEO of eCurrency, a company which worked with several central banks on their CBDC, declared:
“It’s quite common that we wake up to regulation only when we have a crisis. A ‘call to action’ is probably what I would call this situation.”
Regulators have promised measures to protect investors for months, but politicians from various government agencies can’t seem to agree on a course of action.
Dharmapalan added: “Stablecoins are a form of private money. The trouble with that is that stablecoin issuers make up their own rules, and nobody knows whether the rules are appropriate.”
Abdulali agreed that other stablecoin issuers can expect more regulatory scrutiny, but it’s also crucial to evaluate the sort of stablecoin. Reserve-backed tokens like Circle and Tether contain large stockpiles of safe-haven assets like cash and currency equivalents, at least according to the teams behind the coins. Smart contacts are used by algorithmic tokens like UST to keep the price stable.
Abdulali commented: “Algorithmic stablecoins still need work. None have worked.”
Wake Forest Law Review recently published a study that claimed algorithmic stablecoins are intrinsically built to fail. According to the paper, these tokens require a level of demand support for operational stability and rely on independent actors with market incentives to undertake price-stabilizing arbitrage.
The report mentions that: “None of these factors are certain, and all of them have proven to be historically tenuous in the context of financial crises or periods of extreme volatility.”