Ethereum creator Vitalik Buterin says he hasn’t sold any ETH for six years unless it was going toward charity or boosting projects within the ecosystem. In response to rumors of him selling Ethereum, Buterin says that he hasn’t unloaded any ETH for personal gain. “I haven’t sold and kept the proceeds since 2018. All sales […]
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Ethereum (ETH) founder Vitalik Buterin is catching the attention of crypto sleuths after moving 500 ETH to an under-the-radar decentralized finance (DeFi) project. Blockchain security firm PeckShield first spotted the transaction and revealed that a wallet controlled by Buterin transferred the ETH stack to DeFi protocol Reflexer. Reflexer is a platform designed to enable users […]
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“What we need is not stablecoin boosterism or stablecoin doomerism, but rather a return to principles-based thinking,” Vitalik Buterin emphasized.
Ethereum co-founder Vitalik Buterin has shared two thought experiments on how to evaluate whether an algorithmic (algo) stablecoin is sustainable.
Buterin’s comments were sparked by the multi-billion dollar losses caused by the collapse of the Terra (LUNA) ecosystem and its algo-stablecoin TerraUSD (UST).
In a May 25 blog post, Buterin noted that the increased amount of scrutiny placed on crypto and DeFi since the Terra crash is “highly welcome,” but he warned against writing off all algo-stablecoins entirely.
“What we need is not stablecoin boosterism or stablecoin doomerism, but rather a return to principles-based thinking,” 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.”
His blog focused on Reflexer’s fully Ether (ETH)-collateralized RAI stablecoin in particular, which isn’t pegged to the value of fiat currency and relies on algorithms to automatically set an interest rate to proportionally oppose price movements and incentivize users to return RAI to its target price range.
Buterin stated that it “exemplifies the pure ‘ideal type’ of a collateralized automated stablecoin” and its structure also gives users an opportunity to extract their liquidity in ETH if faith in the stablecoin crumbles significantly.
The Ethereum co-founder offered two thought experiments to determine if an algorithmic stablecoin is “truly a stable one.”
In Buterin’s view, if market activity for a stablecoin project “drops to near zero”, users should be able to extract the fair value of their liquidity out of the asset.
Buterin highlighted that UST doesn’t meet this parameter due to its structure in which LUNA, or what he calls a volume coin (volcoin), needs to maintain its price and user demand to keep its USD peg. If the opposite happens, it then almost becomes impossible to avoid a collapse of both assets.
“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 too collapses.”
In contrast, as RAI is backed by ETH, Buterin argued that declining confidence in the stablecoin would not cause a negative feedback loop between the two assets, resulting in less chance of a broader collapse. While users would also still be able to exchange RAI for the ETH locked in vaults which back the stablecoin and its lending mechanism.
Buterin also feels it is vital for an algo-stablecoin to be able to implement a negative interest rate when it is tracking “a basket of assets, a consumer price index, or some arbitrarily complex formula” that grows by 20% per year.
“Obviously, there is no genuine investment that can get anywhere close to 20% returns per year, and there is definitely no genuine investment that can keep increasing its return rate by 4% per year forever. But what happens if you try?” he said.
He stated that there are only two outcomes in this instance, either the project “charges some kind of negative interest rate on holders that equilibrates to basically cancel out the USD-denominated growth rate built into the index.”
Related: Ethereum price dips below the $1.8K support as bears prepare for Friday’s $1B options expiry
Or": “It turns into a Ponzi, giving stablecoin holders amazing returns for some time until one day it suddenly collapses with a bang.”
Buterin concluded by pointing out that just because an algo-stablecoin is able to handle the scenarios above, does not make it “safe”.
“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.”
The bloody crypto market crash has seen the number of stablecoins on exchanges tag new all-time highs, but algorithmic stable token hodlers are suffering.
Centralized stablecoins have remained resilient during the crypto market downturn, with two stable tokens currently ranked among the top ten crypto assets by market capitalization.
Tether and USD Coin are currently ranked third and eighth respectively, having maintained a solid grip on their dollar-pegs despite the massive market downturn.
According to Coingecko, Tether and USDC currently represent 80% of the $100 million combined stablecoin capitalization. The total supply of all stablecoins has surged almost 190% over the past 90 days.
Top decentralized stable token project, MakerDAO’s DAI, also held its peg throughout the majority of the bearish price action, except for May 19 — when the token oscillated between $0.996 and $1.015.
However, algorithmic stablecoins have not fared so well, with some losing their pegs after the prices of underlying collateral assets tanked.
At the time of writing, Terra USD ($UST) has dipped to $0.92, with THORChain describing its downturn as a "stress-test":
“Terra is being stress-tested. $UST mint/burn creates price-reflexivity on $LUNA and discount is a measure of uncertainty.”
UST is created by burning its underlying LUNA coin. The value of UST is determined by the supply and demand but designed to be maintained by creating arbitrage opportunities for LUNA hodlers. When the price of UST rises above a dollar, LUNA holders can sell the tokens for UST at a $1 peg, allowing them to realize the opportunity and driving UST’s price toward $1.
LUNA hodlers can also mint the stablecoin in order to maintain peg stability, however, in times of extreme market volatility, this does not always have the desired effect. LUNA prices have dumped hard during the market downturn, shedding 70% since Wednesday last week when it traded as high as $16.
In a tweet on May 23, Terra co-founder Do Kwon admitted that the Terra economy and elastic supply protocol is experiencing extremely testing conditions. He added that none of the token’s fundamentals have changed, asserting the project has been “significantly de-risked for having survived one of the worst market crashes in crypto”.
The elastic supply Ampleforth (AMLP) token is also trading way down from its target of one dollar. AMPL hit its lowest level for over a year on May 23 at $0.48.
There are three states that the Ampleforth protocol can be in — expansion, contraction, or equilibrium, which depend on demand and dynamically change to adjust the supply. Likewise, in times of major market volatility, this mechanism can have an adverse effect on the token’s ability to maintain its peg.
The Ethereum-backed RAI stablecoin, which was launched to mainnet in February, has fared better than its rivals, hovering close to its algorithmically generated target price of $3 throughout the downturn. RAI algorithmically sets an interest rate that is used to proportionally counterbalance fluctuations in the price of RAI and incentivize traders to drive RAI toward its target price.
Tweeting on May 23, the founder of Global Macro Investor, Raoul Pal, commented on recent concerns regarding the capacity for stablecoins to maintain their peg during market conditions of extreme volatility, likening stable tokens to money market funds:
“I’m just not sure why the fascination with stable coin risks, they are extremely similar to money market funds except that they trade as a token. Neither have guarantees. [Market money funds] make the financial world go round. [Stablecoins] make the crypto world go round too.”
