According to a report from Messari, algorithmic stablecoins are continuing to decline in popularity after the reputational damage that they took in light of the collapse of UST.
The Terra collapse tainted algorithmic stablecoins
The collapse of Terra’s UST was a huge taint for the industry of algorithmic stablecoins, as many people lost faith in the sector.
However, there are many who believe that this loss of faith was largely unjustified, particularly when one considers that not all algorithmic stablecoins have the same architecture.
There are several different types of algorithmic stablecoin, and they come in all sorts of different shapes and sizes. The main problem with UST was that it wasn’t backed by anything at all – for this reason many people were pointing to the project months before it crashed and rightly labelling it as a ponzi scheme that was a market failure at best and at worst an outright scam that many large industry players were sucked into after not bothering to do their due diligence and believing that 20% “risk free” yield on stablecoins was sustainable.
Vader Protocol winding down its algorithmic stablecoin
According to the report from Messari, Vader Protocol is a project that has decided to wind to its operations because the market is more likely to reward stablecoins that have more “proven” fundamentals.
However, this isn’t a plight that affects all algorithmic stablecoins: in the case of the Vader Protocol, their specific stablecoin had huge similarities with Terra’s UST.
EU regulations support more centralised stablecoins
A series of EU regulations have recently come out which highlight the importance of centralised stablecoins, and make it far more likely that centralised stablecoins are to prosper in the future.
The EU have issued a series of licenses that are required for entities to be able to legally issue stablecoins and stipulated that there are types of backing that are acceptable and types that aren’t: government bonds with 1:1 are deemed appropriate collateral, whereas other crypto assets are not.
Until this point, in which interest rates have been extremely low (and lower in the Eurozone than in the US) there has been little demand for euro-based stablecoins and very small opportunity for issuers to create viable companies by creating them, since the profits generated by companies like Circle is derived from the interest on government bonds, and this doesn’t create a feasibly business environment when interest rates are so low (or potentially negative, as was being discussed only a couple of years ago).
Some algorithmic stablecoins continue to flourish
Some algorithmic stablecoins, such as DAI, have continued to flourish and continued to be vitally important for the sector, and there are many reasons for this.
First and foremost, the Maker team aims to ensure that DAI is the most censorship-resistant stablecoin, which is hugely important when one considers the worrying degrees of centralisation in other stablecoins.
DAI, RAI, LUSD, and many other algorithmic stablecoins that are backed by collateral have continued to flourish recently despite the entropic market conditions, precisely thanks to the fact that their stability wasn’t based on vapourware.
Many asset allocators feel far more comfortable with holding such assets, given that they are able to verify the value of their collateral at all times. Even one compares a stablecoin like LUSD to some of the most transparent alternatives such as Circle’s USDC, it becomes obvious that Liquity is far more transparent: one can check their reserves every second rather than waiting for reserve reports every month.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.