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Stablecoins are cryptocurrencies whose price is tied to a stable asset, most often the US dollar. The total capitalization of the stablecoin market exceeds $ 153 billion, and they themselves have long been an integral part of the crypto market. However, problems in collateral, principles of operation, hacker attacks or risky investment schemes sometimes lead to the loss of stability with the US dollar (“depegu”) by stablecoins or the collapse of their rate.
Only recently, the rate of the stablecoin of the cryptocurrency exchange Huobi (HUSD) lost its peg to the dollar, and the price of the stable coin of the DeFi platform Acala as a result of hacking fell by 95%. The May collapse of the Terra ecosystem and the TerraUSD (UST) stablecoin was the trigger of a bear period in the crypto market
Depending on the type of stablecoin, possible problems that can lead to a dump differ, explains the head of Letit Rustam Burkeyev. If we are talking about a stablecoin secured by fiat currencies (for example, USDT), information and even just rumors about the lack of necessary reserves in the accounts of tether standing behind it can lead to its decoupling from the dollar. If we are talking about algorithmic stablecoins, then usually the depegue occurs at a time when the algorithm does not cope with the sharp imbalance between supply and demand. This may be the result of the active use of crypto-landing DeFi-protocols and platforms, the expert explains.
The collapse of UST and similar algorithmic stablecoins is due to the fact that these coins were actively used in landing protocols, which offered a very high percentage of profitability. “Anchor offered almost 20% per annum. Users put money on deposit, then took a loan for this deposit and re-mortgaged it again. So the bubble inflated, “explains the chronology of the UST collapse, the founder of TerraCrypto Nikita Vassev. According to the expert, such schemes are doomed to failure. As soon as the flight of investors begins, the protocols are faced with the fact that they are not able to fulfill the obligations.
Critics of cryptocurrencies use the collapse of TerraUSD as an argument to attack stablecoins and the crypto industry as a whole, often overlooking the root cause of the ecosystem collapse. So any decentralized stablecoins fall into question, but there is an opinion that they have technological advantages compared to those behind which a particular issuing company stands.
According to miles Jennings, general counsel of the a16z venture capital fund, the problem is not so much with the code as with the collateral and the assets that projects use to maintain the value of their stablecoins. In a column for the FT, Jennings stresses that this is what should be considered when developing legislation to prevent future UST-level collapses.
a16z crypto is a division of Andreessen Horowitz for investments in web3 startups. The fund has assets of 7.6 billion dollars. The Foundation supports developments in the segments of play-to-earn (P2E), DeFi, decentralized social networks, as well as L1 and L2 solutions, bridges, DAO, NFT and many other areas of the crypto industry.
“If lawmakers blame algorithms, they risk adopting counterproductive, innovation-suppressing regulations,” Jennings wrote. In his opinion, this can disrupt the work of markets and reduce the democratization of a decentralized economy.
Stablecoins differ in the type of collateral, Burkeyev explains. Some are provided with reserves in fiat currencies and securities, others – in cryptocurrencies or goods (gold, oil), and there are algorithmic stablecoins, essentially not backed by anything, but maintaining a peg to the dollar due to mathematical calculations that allow balancing supply and demand.
There are decentralized, over-collateralized stablecoins that hold a large number of tokens as a reserve to issue fewer stablecoins. This provides a buffer against price fluctuations. This is how the DAI stablecoin works or, for example, the recently announced GHO from the decentralized Aave protocol.
According to Jennings, in the face of market volatility, the vast majority of decentralized stablecoins backed in BTC or ETH have shown “excellent results” by coping with “extreme price fluctuations and unprecedented redemptions.” Risks, in his opinion, come from those assets that serve as collateral for the coin. For example, among the least reliable decentralized stablecoins, he calls those that are provided by tthe DAO management behind the issuance of new coins. When the price of a token falls, the cascading liquidation of the collateral for repayment triggers a “death spiral”, as was the case with ust.
Noting that regulation in some form is necessary to prevent large-scale collapses of crypto assets, Jennings believes that excessively restrictive regulations can harm the market. Nevertheless, in his opinion, additional targeted regulation could be useful. “While it is difficult to pinpoint exactly where regulators need to set collateral requirements, it is clear that without safeguards, stablecoin issuers could once again assume undue risk,” an a16z spokesperson wrote.
Thoughtful legislation can provide support for the cryptocurrency ecosystem and protect consumers, Jennings said. According to him, a complete ban on the use of algorithms and the provision of digital assets will be a “huge burden” for the DeFi industry, disrupt the work of the digital asset market and hinder innovation in web3.
The collapse of algorithmic stablecoins is associated not so much with the lack of collateral, but with the “frankly pyramidal” scheme of operation of most crypto-landing platforms, Burkeyev believes.
According to Vassev, the regulation of stablecoins is inevitable. In the US, most likely, until the spring there will be legislation regulating companies issuing stablecoins, the expert believes. If for companies such as Tether or Circle, quite obvious requirements for financial disclosure and reserves will be applied, then possible measures for decentralized stablecoins are still in question.
According to Jennings, due to high liquidity and transparency, decentralized stablecoins may eventually prove to be more stable than centralized ones. With more efficient systems, algorithmic stablecoins provide “a unique opportunity to add value to any asset class” and can drive digital commerce around the world, and standards for securing coins can help unlock that potential.
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