TerraUSD’s crash transpired an unprecedented level of scrutiny on DeFi’s financial mechanisms and inevitably brought the feasibility of algorithmic stablecoins into question. Co-founder of BLOCKv and the popular stablecoin Tether said that UST’s debacle is “probably be the end” of so-called algorithmic stablecoins.
Trust in Algo-stablecoin Teeters
At the World Economic Forum in Davos, Switzerland, Reeves told CNBC that the collapse of Terra’s stablecoin isn’t surprising. He went on to add that algorithmic stablecoins are unlikely to survive.
“It’s unfortunate that the money … was lost, however, it’s not a surprise. It’s an algorithmic-backed, stablecoin. So it’s just a bunch of smart people trying to figure out how to peg something to the dollar.
And a lot of people pulled out their money in the last few months because they realized that it wasn’t sustainable. So that crash kind of had a cascade effect. And it will probably be the end of most algo stablecoins.”
Terra’s fall from grace led to many speculating about the death of other stablecoins, but these notions are overblown. The big ones, such as USD Coin (USDC) and Tether (USDT), haven’t been immune to criticism either but have been around long enough to be widely used and trusted.
Additionally, all stablecoins are built on different fundamentals and backed by different reserves. Hence, many believe that its implications on the centralized stablecoin ecosystem will be limited.
Many experts had earlier revealed foreseeing the fall of TerraUSD. Jeremy Allaire, co-founder, chairman, and CEO of Circle, the issuer of USDC, said that UST was a very high-risk framework for a stablecoin.
Despite the high-profile support for Terra and UST, the exec was surprised to see the rapid death spiral and the subsequent violent destruction of value. Allaire noted that this cohort of stablecoins represents the “holy grail” of decentralized digital currencies.
On a contrary, Ethereum co-founder Vitalik Buterin does not believe that algorithmic stablecoins are defective by design. He said,
“While there are plenty of automated stablecoin designs that are fundamentally flawed and doomed to collapse eventually, and plenty more that can survive theoretically but are highly risky, there are also many stablecoins that are highly robust in theory, and have survived extreme tests of crypto market conditions in practice.”