However, arithmetic stablecoins are different. It is a DeFi experiment in a stablecoin that does not tie itself to fiat money or hold assets as collateral for its stability of value. Instead, it’s usually backed up by a second token, in a pay-me-you-pull equation. Terra, for example, offsets the differences in the value of the stablecoin by increasing or decreasing the supply of Luna tokens through incentives; Investors can take advantage of these exchanges, which keeps them – in theory – trading the tokens in the amounts that the algorithm predicts they will. But a lot of this is magical thinking.
Long before the collapse of Terra, algorithmic stablecoins were generally understood to be less stable than regular coins. Even Sam Bankman-Fried, CEO of cryptocurrency exchange FTX and a prominent “crypto billionaire,” He argued on Twitter last week The two types of stablecoins are so different from both a functional and a risk perspective that “[r]In fact, we shouldn’t use the same word for all of these things.”
So why do stablecoins follow the algorithm at all? Because algorithmic stablecoins were supposed to be the holy grail of DeFi: a unit of constant value that corrects itself elegantly and independently, like water that naturally finds its level. They appeal to bitcoin holders because the algorithmic stablecoins are meant to avoid what regular stablecoins like Tether and USDC depend on to function: correlations with the real world and traditional markets. They work on the code alone – in addition to the human traders who, of course, are supposed to behave in a predictable manner by the system. If algorithmic stablecoins work as promised, they could prove that code is the future of finance, lending new credibility to the cryptocurrency worldview.
For a while, it looked like trying Terra might work. In February, Tira struck a multi-million dollar sponsorship deal with The Washington Nationals. A little over two months ago in March, its blockchain – the seventh most valuable network in the world at the time – became the No. 2 tethered network, beating Ethereum. But on Monday, May 9, things went off track. Perhaps someone pushed the value of the floor tanks to start declining, by working against the algorithm’s predictions. The currency then crashed to well below the one-dollar value it was designed to preserve, fueled by a very humane drive driven by fear.
When floor treasuries hit $0.37 on Thursday, the company that runs it, Terraform Labs, made one last call to pause transactions on its network to protect against further declines and then freeze them again overnight — preventing any token holders from taking what little they had left. And they ran. Since the network restart, Terra’s ground tanks have continued to fluctuate below $0.50; LUNA hovering above zero.
Every company in the crypto ecosystem has their own explanation for why they stumbled. Coinbase’s much-anticipated new NFT market had a disappointing launch at the end of April, potentially alienating investors and hurting its share price. Luna Foundation Guard, the non-profit organization that supports Terraform Labs, had hoarded $3.5 billion in Bitcoin by early May, then appeared to sell a portion of its stock in order to stay afloat as the price of ground-based treasuries began to fall; Both measures can help the value of bitcoin fall. Some Terra/Luna supporters have even accused BlackRock and Citadel of deliberate market manipulation to force underground tanks to collapse — common enough to induce companies to respond, asserting that they had no hand in the event. Then there is the issue of management. CoinDesk reports that the CEO of Terraform Labs was also behind a previous failed algorithm experiment; Perhaps his stewardship was another hole in the stablecoin boat.
Cryptocurrency is weathering a bitter storm. Some still cling to the dear life.
Source link Cryptocurrency is weathering a bitter storm. Some still cling to the dear life.