Price of algorithmic stablecoin UST drops 2% below dollar peg (opens in new tab)

(theblockcrypto.com)

11 pointstobltobs4y ago12 comments

12 comments

Such is the risk of algorithmic stablecoins. The only ones that seem to work well have actual full collateral backing them (either some cryptocurrency, or actual dollars in a bank.)

Traster4y ago

I don't understand how you can use cryptocurrency as backing for a stable coin. Just as a matter of definition, if your stable coin is meant to be worth $1USD then your backing fluctuates with the price of the crypto that backs your stable coin. And to make matters worse, when BTC drops in value that's likely because there's a net outflow from BTC back into fiat, which is going to occur at the exact time that people want to redeem their USDT for their actual USD. So at the time that you're most in need of liquid collateral, you're least well collateralized. The only way I see this working is if you're not net long crypto, which I guess is possible but gives you heaps of market risk.

linschn4y ago

See for example : https://docs.synthetix.io/synopsis

Basically you mint only a fraction of your collateral (typically 15%), so even a huge downturn of the price won't leave anybody hanging, and you provide a set of incentives for the owners of the collateral to adjust their staking depending on the price you are trying to follow.

It's not too complex, and seems to me way better than trusting tether and Co.

Traster4y ago

Ok, so fundamentally it's heavily discounting the collateral. I guess that makes it safer, but doesn't that mean you need way more collateral to support it and therefore you're paying a really high cost of capital?

I can support $1Bn of stablecoin if I have $1Bn of USD in reserve, but to support $1Bn of stablecoin in this case I'd need $6.7Bn of BTC in reserve. Sounds expensive surely?

1 more reply

omegalulw4y ago

How is backing for stablecoins not regulated to kingdom come yet? Seems so asinine?

thebean114y ago

DAI has worked pretty well though

chizhik-pyzhik4y ago

Yeah, exactly. DAI is fully collateralized. I guess what I mean is non-fully-backed algostables like ust and frax

thebean114y ago

Right but DAI is mostly backed by things that aren't pegged to USD like ETH and wBTC.

lgats4y ago

official twitter update from terra https://twitter.com/terra_money/status/1523749536379793408

j / k navigate · click thread line to collapse

12 comments

chizhik-pyzhik4y ago

Such is the risk of algorithmic stablecoins. The only ones that seem to work well have actual full collateral backing them (either some cryptocurrency, or actual dollars in a bank.)

Traster4y ago

linschn4y ago

See for example : https://docs.synthetix.io/synopsis

It's not too complex, and seems to me way better than trusting tether and Co.

Traster4y ago

I can support $1Bn of stablecoin if I have $1Bn of USD in reserve, but to support $1Bn of stablecoin in this case I'd need $6.7Bn of BTC in reserve. Sounds expensive surely?

1 more reply

omegalulw4y ago

How is backing for stablecoins not regulated to kingdom come yet? Seems so asinine?

thebean114y ago

DAI has worked pretty well though

chizhik-pyzhik4y ago

Yeah, exactly. DAI is fully collateralized. I guess what I mean is non-fully-backed algostables like ust and frax

thebean114y ago

Right but DAI is mostly backed by things that aren't pegged to USD like ETH and wBTC.

lgats4y ago

official twitter update from terra https://twitter.com/terra_money/status/1523749536379793408

j / k navigate · click thread line to collapse