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Uncertainty around algorithmic stablecoins

The Banxe Team
5 min read 24.06.2022
Blog

It is a well-known fact that the crypto market is not regulated. On one hand, it's an excellent opportunity to exponentially increase profit, while the market is volatile and if you’re a professional trader. On the other hand, people who are loosely familiar with cryptocurrency and are trying to get into the crypto market, can lose enormous amounts of money, which can be explained by the lack of regulations. Very often, cryptocurrency charts look promising, but at that very second, the price could drop, or the project you believed in could disappear and liquidate itself. 

 

Recently, multiple countries attempted to create digital currencies. Their main reasoning is to generate crypto adoption, meaning they intend to simplify the entry into the market for those who are new to crypto. With this attempt, they would also protect people from crypto market crashes. For example the Luna coin crash - if a similar situation occurred on the stock market, the party responsible for the collapse would simply go to jail. However, in the crypto market, the blockchain developer Terra merely created a new coin, called Luna 2.0. If these countries are successful, it would decrease the likelihood of such situations; digital currencies would become fully regulated and in turn, this would bring more regulations to the crypto market...



Today, there are over 100 stablecoins on the crypto market that are tied to USD. Imagine, if we had over 100 variations of USD circulating in the real world - that sounds absurd, right? Well, that's why there is a theory that the new crisis in crypto was created primarily to clean up the market, removing the excessive supply of scams and failing projects, and bring the monopoly and regulation into the crypto market, as it was done with the stock market. 

 

The idea is that in order to make such a drastic change to a previously developing market, something terrible should happen to a substantial part of its participants, for example, a significant economic loss or tragedy. This way, the thought of being protected by the regulations to avoid being a victim of a market crash, is implemented into the public's mind. The show should be grand enough for people to sacrifice their financial freedom. 

 

To evaluate the reality, let’s take a look at what really occurred with UST (Terra, LUNA). On May 7, 2022, the price of the then-$18-billion algorithmic stablecoin terraUSD (UST), which is supposed to maintain a $1 peg, started to wobble and fell to 35 cents on May 9. The companion token, LUNA which is meant to stabilize UST's price, fell from $80 to a few cents by May 12. On that day, the cost of another stablecoin, USDD, unpegged from the dollar value and is yet to get back to its value, even now. UST was a decentralized asset, and its destruction was created to show that decentralization and lack of regulation is unsafe. It is believed that USDD, Tron’s decentralized stablcoin, will repeat the fate of UST and crush similarly. Even though the team does everything to back up their currency (including purchasing USDC and BTC), it is believed that decentralized projects will collapse or be banned. Why you may ask, decentralization is not beneficial for the government! 

 

Tron’s token, USDT, is also under pressure. One USDT should equal one USD. However, at the beginning of May, USDT had a small dump in its value and untied from USD. Its value is now approximately 0,997 USD. Though it is not a significant difference, it puts additional pressure on the USDT users. 

 

There are currently five major USD stablecoins:

 

USDC

USD Coin is managed by a consortium called Centre, which was founded by Circle and included members from the cryptocurrency exchange Coinbase and Bitcoin mining company Bitmain, an investor in Circle. To maintain USDC's stable value of $1, USDC is backed by cash and short-term U.S. government bonds as collateral. For every USDC token in circulation, $1 is held in collateral. That allows USDC to be the most secure stable currency as it is literally "backed by the government." It is also a fully centralized coin. 

 

BUSD

BUSD is a 1:1 U.S. dollar-backed stablecoin regulated by the New York State Department of Financial Services (NYDFS) and issued by Paxos, a regulated blockchain infrastructure platform. 

 

USDT

USDT tokens are issued by the Hong Kong company Tether Limited, which the owners of Bitfinex control. Both Tether's USDT and Circle's USDC are backed by tangible assets and issued by a centralized entity, but the critical difference between them is in the composition of reserves. USDC only holds cash and short-term U.S. government bonds, according to its monthly report.

 

DAI 

Dai is maintained and regulated by MakerDAO, a decentralized autonomous organization (DAO) composed of the owners of its governance token, MKR, who may vote on changes to specific parameters in its smart contracts to ensure the stability of Dai.



USDD

USD Digital (USDD) officially made its debut on May 5, 2022, as a stablecoin on Tron, BNB Chain, and Ethereum blockchains. Tron, a blockchain-based decentralized digital platform, developed USDDto replicate the success of Terra UST, which was the third-largest stablecoin by market cap (lagging only behind USDT and USDC). However, we all know what happened on May 7… 

 

To conclude, governments are only interested in centralized assets. DeFi takes away the power to control and creates a threatening environment as the assets cannot be traced. It is believed that the Luna coin fall was carefully planned (why else would Luna's founder Do Kwon cash out 80 million USD right before Luna fell?) and that it is only the beginning of a massive market recession that will continue until 2024 (according to The Economist magazine). We can expect to see the fall of USDD and USDT as they unpeg themselves from USD value and will likely not get back until May 2023. With more Bills (like C-11) and other regulations being implemented in the digital space, it is fascinating to see how the market will develop. One thing is for sure, the world will never be the same. 

 

This is not financial or investment advice. This article was written for discussion purposes only.

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