Stablecoins arose as a means for cryptocurrency investors to lodge their cash in order to avoid volatility. USTC (previously UST) was one of the most valuable stablecoins by market cap and the single most valuable stablecoin on the Cosmos network.
Several people have gone bankrupt as a result of the recent devastating crash of the Terra Classic (LUNC; formerly LUNA). South Korean officials reported eight suicides as a result of this trauma.
This is not the first time an algorithmic stablecoin has dropped below the point of no return. So much so that the IMF’s head indicated that stablecoins that aren’t backed by tangible assets are similar to pyramid schemes.
However, a crash as historic as UST’s was a first for a stablecoin. While history seemed to imply that this would be the case, the utility of UST and the communities surrounding LUNC-UST suggested otherwise.
The Death Spiral – Here’s What Went Wrong
Stablecoins are digital assets that have their value tied to a fiat currency or another asset. USTC is one such stablecoin that is tied to but not backed by the US dollar.
LUNC kept USTC’s price stable with an automated mint and burn method. More LUNC was burned when USTC’s demand-to-supply ratio was high. In contrast, when USTC’s supply-to-demand ratio was strong, more LUNC was issued. This generated an arbitrage opportunity for traders, which helped keep USTC’s price around $1.
When the selling pressure grew too much for the algorithm to handle, LUNC began to expand. As a result, the entire ecosystem went into a death spiral, finally leading to the point of no return. Today, USTC costs less than $0.01, while LUNC is down by more than 99%from it ATH.
The Future of Decentralized Alternatives
The failure of algorithmic stablecoins does not mean that all possibilities have been examined. Instead, they teach us valuable lessons. One is to avoid centralization at all costs. So, here’s a list of non-algorithmic, decentralized stablecoins to think about when you enter the crypto realm.
1. USDr
USDr is a collateralized, fiat-backed stable token receipt issued by METL, the Avalanche blockchain’s first decentralized crypto on-ramp solution.
Because METL’s USDr stable token receipt is collateralized by USD at a 1:1 ratio, it will not be influenced by unanticipated selling pressures like LUNC and other algorithmic stablecoins are.
The issuance process of the USDr token is intended to make users the actual issuers of the token, allowing them to interact with the DeFI ecosystem. This allowed METL to avoid MTL (Money Transmitter Licensing) requirements and secure exemptions in all states except New York.
METL does not host any wallets and hence does not include user funds on its balance sheet, protecting them against a bank run. METL is actively developing an SDK that will allow any developer to create a FIAT gateway using METL microservices and plug it into any DeFI platform that supports native gateways. METL possesses a USPTO-issued 20-year patent for this technique.
2. DAI
MakerDAO, an Ethereum-based peer-to-peer organization that facilitates collateralized loans, created DAI, a decentralized stablecoin.
DAI, unlike USDC and USDT, is a crypto-backed stablecoin with excess collateral. This indicates that the collateral for this stablecoin is made up of other cryptocurrencies. Furthermore, its “over collateralized” character indicates that the collateral supporting DAI is worth more than DAI itself. For example, $1.5 in ETH-based (ERC-20) tokens equals $1 in DAI.
Immutable and tamper-proof smart contracts, rather than any centralized, corruptible institution, maintain DAI’s peg to $1 by increasing or lowering the amount of collateral based on market dynamics.
3. EOSDT
EOSDT is an over-collateralized, decentralized crypto-backed stablecoin developed by Equilibrium, a Polkadot ecosystem cross-chain money market project.
Users can borrow EOSDT by collateralizing their digital assets in a smart contract with a 1% annual percentage rate.
In addition, the stablecoin contains an insurance mechanism known as the “Stability Fund” that protects EOSDT and its holders against significant market volatility.
Furthermore, arbitrators are incentivized to keep the price of EOSDT at $1. This is comparable to the mechanism used by USTC. However, unlike USTC, EOSDT is not algorithmic and has a collateralization ratio of 281% at the moment.
4. sUSD
Synthetix’s sUSD stablecoin is a crypto-backed, overcollateralized stablecoin that supports DeFi derivatives trading. On the Ethereum network, sUSD serves as a bridge for trading these on-chain synthetic assets.
On Synthetix, all synthetic assets are referred to as “Synths” and are designated by a “s” at the prefix. Some examples include sBTC, sETH, and sSOL. Likewise, sUSD is a fictitious stablecoin asset.
5. RSV
RSV is a stablecoin that has been collateralized. RSV, on the other hand, uses a hybrid collateralization technique, unlike the other tokens described here. As a result, this stablecoin is backed by a combination of fiat and cryptocurrencies.
RSV is a product of Reserve, a protocol that aims to provide residents of high-inflation countries with a strong inflationary hedge. The Reserve Dollar (RSV) is the stablecoin that makes this possible.
Conclusion
Caution is Wisdom. It is quite apparent that there are numerous alternatives to stablecoins such as UST. They are more robust, reliable, and, most importantly, decentralized. Regardless, the necessity of careful diligence in these areas cannot be overstated.
Before investing in any stablecoin, you must conduct extensive research. Examine the project’s staff, their track record, and, most crucially, the design of the protocol. It’s challenging at times, but it’s very vital. Especially since the crypto realm is still in its infancy, with significant volatility and unpredictability.
Every day, new developments occur, and you must always be wary of negative effects. The storm, however, will pass quickly, and the future of finance will shine brightly. Stablecoins will shape the future, and so can you.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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