UST will Not Be the End of Stablecoins

Despite Terra’s collapse, the path of “Holy Grail” appears to continue unabated. The big questions at this point are, “What do we do about it?” and “Is this the end of stablecoins?”

Over the last two weeks, UST, the crypto asset that was designed to represent the value of USD 1, crashed with a thud. The stablecoin, which was once valued at USD18 billion in market cap, dropped to about 60 cents last week. Terraform Labs, the firm behind UST deployed USD3 billion in BTC, flooded the market with UST’s sister coin (LUNA), and even paused the blockchain but could not save the stablecoin.

The effort to fork the Luna Blockchain was blocked by the community, with about 90% of them voting against the idea.

Even Do Kwon, the principal UST architect, indicated that it was way beyond the level that could be salvaged. Now, they are working on a sort of repayment plan for its small token holders. 

So, Are All Stable Coins Doomed?

With the challenges facing Luna, does this mean that all other algorithmic stablecoins will hit a dead end on arrival? Should regulation be installed right away to prevent a similar disaster? 

According to Jonathan Wu, the head of growth at Aztec Network, a layer 2 network, the algorithmic stablecoins are not about to exit. “The algorithmic stablecoin is a holy grail. If you think about what an undercollateralized, algorithmic stablecoin is, it is printing money out of thin air. There will always be capital chasing that dream, in my opinion,” Wu said.

Wu pointed out that stablecoins are crucial to help smoothen the crypto volatility. If there is a better way of achieving this, people will go for it, 

There are two main types of stablecoins: uncollateralized and collateralized. Collateralized coins, such as USDC and tether, work by maintaining reserves with currencies or bonds in bank accounts. Therefore, coin holders can, in reality, redeem them in actual fiat. 

However, uncollateralized stablecoins maintain their pegs through other financial means. UST employed an on-chain type of redemption tool, LUNA, that was expected to prop UST value depending on the changing demand/supply. LUNA was burnt or minted when the value of UST rose or dropped. 

Writing the Rules, It is Impossible to Completely Cage Stablecoins

Before imploding, UST deviated significantly from its peg about twice: in December 2021 and May when it fell to 94 cents. To put it differently, Terra operated as it was expected until it could not do that anymore. 

Unfortunately for the crypto industry, they do not have the pen and paper to scribble their own rules. According to Bennett Tomlin, a crypto skeptic, the regulations are likely to look like governance tokens that are considered securities. 

However, the regulators also cannot create a crypto system. Although the US Securities and Exchange Commission (SEC) has started a crackdown on the crypto industry by issuing warnings and strengthening the enforcement wing for cryptos, some anarchists will still slip through. 

Nic Carter, a venture capitalist, agrees with Tomlin that stablecoins will still be around, and people will go back to them once the memory of UST fiasco ebbs out. Here is what Carter said: 

“I don’t think you can proactively regulate stuff like UST out of existence, any more than you can regulate plustoken or paycoin or onecoin or other similar schemes.”

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