Luna, the sister cryptocurrency of controversial stablecoin TerraUSD, has dropped to $0. The collapse of the algorithmic stablecoin TerraUSD has raised questions about the future existence of similar crypto assets.
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Algorithmic stablecoins like terraUSDThe co-founder of the digital currency tether told CNBC, which has collapsed and sent shock waves through the crypto market, is unlikely to survive.
A stablecoin is a cryptocurrency that is typically pegged to real-world assets. TerraUSD or UST, is an algorithmic stablecoin that is supposed to be pegged to U.S. dollar.
While stablecoins like tether and USD Coin are backed by real-world assets like fiat currencies and government bonds to maintain their dollar rates, UST is governed by an algorithm.
UST lost its dollar peg and that also led to a sell-off for its sister token luna, fell to $0.
The crash led to warnings that algorithmically stablecoins may have no future.
“Unfortunately the money… was lost, however, that’s not a surprise. It’s an algorithm-backed stablecoin. So it’s just a bunch of smart people going on. trying to figure out how to fix something to the dollar,” Reeve Collins, co-founder of digital token company BLOCKv, told CNBC at the World Economic Forum in Davos, Switzerland, last week.
“And a lot of people have pulled their money out in the last few months, because they realize it’s not sustainable. So that kind of crash has had a cascade effect. And it will probably be the end of the world for most of them. all exceptional stablecoins.”
Collins is also a co-founder of tether, which is not an algorithmic stablecoin. But the issuer of tether claims it is backed by cash, corporate bonds, and corporate bonds. During the crypto market turmoil last month, tether also briefly lost its dollar rate before regaining it.
Jeremy Allaire, CEO of Circle, one of the companies behind the release of the USDC stablecoin, said he thinks people will continue to work with algorithmic stablecoins.
“I’ve compared algorithmically stable coins to the Fountain of Youth or the Holy Grail. Others call it financial alchemy. And so there will continue to be financial alchemists who will continue to have financial alchemists. working on potions to create these, and to find… the Holy Grail of a digital currency of stable value. So I fully look forward to continuing to pursue that.” , Allaire told CNBC last week.
“Now, what happens to the regulations around it is another question. You know, there will be clear lines drawn as to what might interact with the market. What could be the future? dealing with … the financial system, with risks embedded,” he added.
Pre-Regulations
The crytpo industry is expecting tougher regulation of stablecoins, especially after the demise of terraUSD. Bertrand Perez, CEO of the Web3 Foundation and former director of the Facebook-backed stablecoin project Diem, expects regulators to require such cryptocurrencies to be backed by real assets. .
“So I would expect that once we have clear regulation of stablecoins, the basic rules of regulation will be that you have a clear reserve with a strong set of assets, and you have to often regularly check those reserves,” Perez told CNBC last week.
“So you can have an audit firm come in on a regular basis to make sure you have the proper reserves, that you also have the proper processes and measures in place to deal with bank runs. stock and other negative market conditions, to make sure that your stocks are actually safe, not just when things are going well.”
