• Home
  • Cryptocurrency
  • Mining
  • Blockchain
  • NFT
  • Metaverse

Subscribe to Updates

Get the latest creative news from FooBar about art, design and business.

What's Hot

10 Reasons Why Bitcoin Is a Reasonable Long Term Investment

30.03.2023
What is DeFi staking

What is DeFi staking and how to profit from it right now?

04.11.2022
The biggest off-change Bitcoin whale keeps buying BTC

Some lessons you should’ve learned at the current crypto sell-off

02.11.2022
Twitter Reddit
cryptolife.report
SUBSCRIBE
  • Home
  • Cryptocurrency
  • Mining
  • Blockchain
  • NFT
  • Metaverse
cryptolife.report
Home » Vitalik Buterin explains Terra crash and rethinks ideal algorithmic stablecoin
Blockchain

Vitalik Buterin explains Terra crash and rethinks ideal algorithmic stablecoin

Kostiantyn TsentsuraBy Kostiantyn Tsentsura28.05.2022
Vitalik Buterin explains how an algorithmic stablecoin should work
Vitalik Buterin explains how an algorithmic stablecoin should work

Ethereum co-founder Vitalik Buterin commented on Terra’s UST crash and wrote his manual on how to distinguish a reliable algorithmic stablecoin token.

After the Terra UST token collapse, nobody believes in the power of algorithmic stablecoins anymore.

But one of the greatest minds in the crypto community Vitalik Buterin thinks the problem isn’t in the Terra stablecoin network itself, but rather in the way how the ecosystem is maintained.

Recently he wrote another big blog post about the problem of algorithmic stablecoins. And presented his formula for discovering a reliable token model.

“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,” Buterin claimed.

So Vitalik Buterin came up with two thought experiments to determine if an algorithmic stablecoin is ‘truly a stable one’.

First experiment: stablecoin liquidity

According to Vitalik Buterin, even if the market activity for a stablecoin project ‘drops to near zero’, investors should be always able to withdraw the fair value of their liquidity out of the asset.

As we had seen, the UST stablecoin didn’t match this criterion. The LUNA token was needed to maintain the UST dollar peg. In this case, Buterin calls LUNA the volume coin or the volcoin, which backs the UST price.

“First, the volcoin price drops. Then, the stablecoin starts to shake. The system attempts to shore up stablecoin demand by issuing more volcoins. With confidence in the system low, there are few buyers, so the volcoin price rapidly falls. Finally, once the volcoin price is near-zero, the stablecoin to collapses,” he wrote.

In comparison, Vitalik Buterin talks about Ethereum-collateralized RAI stablecoin that isn’t pegged to fiat currency and instead relies on algorithms to automatically set an interest rate.

Buterin calls it the pure ideal type of a collateralized automated stablecoin. Because within this model users should always be able to exchange RAI for the ETH locked in vaults.

Second experiment: negative interest rates

Terra platform proposed its users ‘a basket of assets’, a consumer price index, or some arbitrarily complex formula. It means growing by 20% per year, and Buterin talks about the negative interest rate option.

“There is no genuine investment that can get anywhere close to 20% returns per year, and there is no genuine investment that can keep increasing its return rate by 4% per year forever. But what happens if you try?” he said.

Vitalik Buterin thinks that such stablecoin ecosystems have only two outcomes.

The first scenario is the project ‘would charge some kind of negative interest rate on holders that equilibrates to cancel out the USD-denominated growth rate built into the index’.

The second is about the project going into a Ponzi scheme, ‘giving stablecoin holders amazing returns for some time until one day it suddenly collapses with a bang’.

“It could still be fragile for other reasons (eg. insufficient collateral ratios), or have bugs or governance vulnerabilities. But steady-state and extreme-case soundness should always be one of the first things that we check for,” Buterin concluded.

Sources: Cointelegraph

Blockchain Ethereum Stablecoin Vitalik Buterin
Share. Facebook Twitter Telegram Reddit Email
Previous ArticleIs USDT safe? Tether stablecoin may be loosing its dominance
Next Article Satoshi Nakamoto could well be a woman. Any objections?
Kostiantyn Tsentsura
  • Facebook

Staff writer at cryptolife.report. Kostiantyn is a Ukrainian journalist who has been covering the science-tech industry for five years. Started his career by writing articles about crypto-mining in Ukraine. Has his own experience in trading some coins. Convinced blockchain adept who thinks that crypto community will save the future of the world economy.


Related

What is DeFi staking

What is DeFi staking and how to profit from it right now?

04.11.2022
Cardano vs Ethereum battle is raging on

Cardano vs Ethereum: the battle rages on amid crypto crash

12.07.2022
How long will crypto winter last

How long will crypto winter last?

24.06.2022
Add A Comment

Comments are closed.

Highlights
Bitcoin is going as low as $8,000 Cryptocurrency

Bitcoin could go as low as $8,000 pretty soon. There is a reason for that

14.06.2022

Bitcoin is really low now, but it seems to have support at $23K. Analysts warn…

NFT to help Ukraine gain money

AI created the biggest NFT collection to support Ukraine

08.06.2022
Bitcoin vs gold

Bitcoin vs gold. Five reasons why you should prefer crypto during recession

06.06.2022
Wall Street can actually kill crypto market

Wall Street is killing crypto market and there is nothing you can do

27.05.2022
Follow us
  • Facebook
  • Twitter
  • Telegram
  • Reddit
Twitter Reddit
  • Home
  • Cryptocurrency
  • Mining
  • Blockchain
  • NFT
  • Metaverse

  • About Us
  • Get In Touch
  • T&C
  • Privacy Policy
  • California Notice
сryptolife.report is a media outlet about digital assets and decentralized finance. Our team gathered to build a strong community of crypto enthusiasts who are willing to change the future of the world economy. And the new decision as a decentralized digital economy is already here to come.

© 2023 cryptolife.report

DMCA.com Protection Status

Type above and press Enter to search. Press Esc to cancel.